'Dangerously Close' To A Market Bottom (Part 2)

Jun. 27, 2022 11:44 AM ETAA, AR, ARKK, COIN, FCX, QQQ, RBLX, RIVN, RRC, SMLP, TSLA, UAN, X, XOM31 Comments


  • Stock had a great week last week, and have rebounded smartly off their mid-June 2022 lows. Deeply oversold tech stocks have rebounded as commodity stocks sold off sharply.
  • Pessimism and fear reached fevered pitch levels and hedge fund selling, ahead of the June 15th meeting, reached April 2008 levels.
  • On June 16, 2022, Credit Suisse's technical team put out a research note showing less than 5% of S&P 500 stocks were then trading above their 50-DMA, similar to COVID lows.
  • This idea was discussed in more depth with members of my private investing community, Second Wind Capital . Learn More »

Standing out in a crowd 3d render

studio-fi/iStock via Getty Images

I originally wrote 'Dangerously Close' on the morning of May 12, 2022, before the opening bell. As it turns out, the morning of May 12, 2022 was indeed a fantastic trading opportunity and a prime time to get long many deeply oversold technology stocks. As often happens in bear markets, you can get these fierce rallies, from deeply oversold conditions.

For example, on the morning of May 12, 2022, shares of Coinbase Global, Inc. (COIN) briefly traded as low as $40.83 and within 24 hours, shares rebounded as high as $74.25 (that is an 81.8% rally, trough to peak, in 48 hours). Roblox Corporation's (RBLX) May 12th low was $22.61 and its May 16, 2022 high was $36.43. That is a 61.1% move, trough to peak, in three trading days. Rivian Automotive, Inc.'s (RIVN) May 12th low was $21.68 and by May 19th its high was $30.41. That is a 40% move, trough to peak, in six trading days. There are dozens of other examples.

As it turns out, the May 12, 2022 lows were indeed a fantastic trading opportunity. However, as we know now, 11,689, the then 52 week low on the Nasdaq Composite (QQQ), was later taken out, at 11,037, on June 16th. The June 16th low was made after a selloff, the day after the Federal Reserve hiked its Fed Funds rate by 75 Bps and signaled a series of raises were on the horizon, at upcoming meetings, as Fed chair Powell and his committee were laser focused on arresting the breakneck pace of inflation.

Speaking of June 16, 2022, a good buy side friend, who is the Chief Investment Officer of nearly a $1 billion family office in NYC, sent me this technical note, from the team over at Credit Suisse.

The team at Credit Suisse created this chart to show the deeply oversold technical condition got, as of June 16, 2022. They highlighted that, as of June 16, 2022, only 5% of companies in the S&P 500 were trading above their 50 DMA. The last time this happened was in late 2018 and at the March 2020 Covid-19 lows. On both occasions, stock go on to 'rip' higher from those deeply oversold conditions.

Credit Suisse Technical Team (June 16, 2022)

Credit Suisse Technical Team (June 16, 2022)

Some Of The Hedge Fund Great Are Short And Super Bearish

Stan Druckenmiller - "The Bear Market Has a Ways to Run"

Incidentally, some of the most well-known hedge fund managers are super bearish and out on prowl, freely sharing these bearish viewpoints.

On June 9, 2022, at the Sohn Conference, the great Stan Druckenmiller was sharing his bearishness.


Seeking Alpha News

Jim Rogers - "Worst Bear Market of his lifetime"

Another former great, Jim Rogers, has been all over the news proclaiming this will be the 'worst bear market' of his lifetime.

Bill Ackman - "Stocks could Collapse if the Fed isn't Aggressive"

In late May 2022, Bill Ackman was out with another one of his biblical warnings, that 'if' the Fed didn't act aggressively and raise rates faster and aggressively then the market would collapse. If anyone is a serious investor/trader/speculator, then everyone will remember Bill Ackman's March 18, 2020, 'Hell Is Coming'. As it turns out, the S&P 500 bottomed, at 2,280, on March 18th, and then went on to 'rip higher'.

Ray Dalio - Is Aggressively Short European Stocks

There was a June 23, 2022 report that Ray Dalio and his team at Bridgewater Associates were super short European stocks.

Per Goldman Sachs - The Most Aggressive Selling (and Aggressive Short Selling), ahead of the June 15, 2022 Fed Meeting, since April 2008

Here was a June 14, 2022 article in Bloomberg - 'Hedge Fund Stock Selling Was Never More Furious Than In The Last Two Days'

Here is one excerpt.

Hedge funds tracked by Goldman Sachs Group Inc. offloaded US equities for a seventh straight day Monday, with the dollar amount of selling over the last two sessions exploding to levels not seen since the firm’s prime broker began tracking the data in April 2008.

Also, the article goes on to say there was aggressively short selling across the board by many of its hedge fund clients.

What Happens When Nearly Everyone Is Bearish

Early last week, as I am frequently in touch with a few good friends, folks that currently work on the buy side and folks that are retired, really wealthy, and savvy investors, all of them were bearish to super bearish. As of early last week, I was the only bull in small circles that I move in.

My thought process was and is simple. The Nasdaq was down 32% through June 16, 2022. No question the Fed was late to the party as way too much Kool-Aid was served, the music and atmosphere rivaled a Great Gatsby gala, and this led to the big market drawdown. However, the police (the Fed) did arrive on the scene and they are now acting aggressively. This and the fact that President Biden's plunging approval ratings mean that government has made it job number one to arrest inflation.

Also, as the boost from the three rounds of stimulus finally wears off, supply chains get caught up as the acute semi-conductor shortage gets resolved, as companies slow down hiring including some lay-offs in technology, and as the government works to brings down oil, gas, and commodity prices, we have probably witnessed peak/peaking inflation. After the 10 year got as high as 3.47%, when the market feared that the Fed was behind the curve, 10 year yields since receded, and the market seems to be signaling that the Fed might be able to manage a tough land.

The 10 year is probably a good proxy for how well the Fed is doing, in the collective wisdom of the extremely deep U.S. Treasury market.

Yes, during that landing, many suitcases will fall out from the overhead bins, drinks will fly wildly though out the cabin, and people will be nearly scared to death, but the Captain Powell will (most likely) successfully land this Boeing 747 on the Hudson.

Big Rotation Out Of Commodities Back Into Technology?

Incidentally, back on April 25, 2022, I wrote an article Commodity Supercycles and The Role of Luck, published exclusively here on SA.

With the exception of oil and gas stocks (both upstream and especially downstream names have done well), the April 25 call has proven to have had relatively good timing.

Before we look at that, let's look at six charts, as a broad proxy. Let's face it, we could look at twenty charts, but that is too many charts for one article and would be too distracting.

Alcoa Corp. (AA)

Alcoa shares are down 26.6% since April 25, 2022 and down 49.7% from its March 25, 2022 all-time high of $98.09. Incidentally, as I was long Alcoa, in late September 2021, around $48ish, it is amazing how wildly bullish the sell side became by February and March 2022. If we go back and look, a majority of sell-siders were tripping over themselves to increase their Alcoa price targets.



U.S. Steel Group (X)

U.S. Steel shares are down 39.1% since April 25, 2022 and down 49.5% from the April 1, 2022 52-week high of $39.25.



CVR Partners LP (UAN)

CVR Partners units are down 27.8% since April 25, 2022 and down 40.9% from the April 20, 2022 all-time high of $179.74. Incidentally, on November 3, 2020, UAN units traded as low as $5.70. Excluding distributions, that is 30X (from trough to peak) in less than a two year span. Generally speaking, it is harder to make money buying stocks after they are up 30X and in less than two years!



Freeport-McMoRan, Inc. (FCX)

Freeport shares are down 25.6% since April 25, 2022 and down 40.4% from the March 25, 2022 52-week high of $51.99.



Range Resources Corp. (RRC)

Range Resources shares are down 13% since April 25, 2022 and down 29.8% from the June 8, 2022 52-week high of $37.44.



Exxon Mobil Corp. (XOM)

Exxon Mobil Corp. shares are up 6.7% since April 25, 2022 and down 17.6% from the June 8, 2022 all-time high of $105.57. The reason Exxon has bucked the trend is because the company has tremendous upstream and downstream businesses. And as I'm sure many actively engaged readers have been closely reading the news, there hasn't been a large scale greenfield refinery built in the United States since the 1970s. Moreover, as 25% of refining capacity was either mothballed, shut in, or converted to much lower output renewable fuels (think renewable diesel), to meet ESG mandates, downstream profits have been amazing this cycle.



ARKK Innovation ETF (ARKK)

ARKK is probably the best proxy for whiz bang technology stocks. Everyone knows this ETF is down from its all-time high of $159.70, set back on February 16, 2021. And everyone should also be well aware that ARKK is down 51.6% YTD through June 24, 2022, as it started the year at $94.59. However, and the bears will say I am grasping at straws here, notice how ARKK held its May 12th low of $35.20, even though the Nasdaq cascaded through its May 12th low, in mid June. Believe it or not, ARKK shares are actually up 30.2% since that May 12, 2022 low.

Cathie Wood is a great marketer and she made an amazing call on Tesla (TSLA), but I would argue a good stock picker can play the beaten down technology sector and outperform ARKK.

The 64K question remains, though, is this is a real rotation out of commodities and back into beaten down technology stocks?



And when we are thinking about commodity bulls, again, if you are paying attention and have been actively engaged in markets for a number of years, then you probably know Jeff Currie (from Goldman Sachs) has constantly been an uber bull, through thick and thin. As recently as mid May 2022, Jeff was making the rounds and he called for $150 as 'highly probable' and $175 to $200 as very likely.

If we take a step back, as an investor, in any case anyone has forgotten, the idea is to buy low and sell high. If you are buying good companies at good prices or mediocre companies at great prices that is a formula to generate superior long-term returns. The time to buy E&P oil and gas stocks was when front month oil went negative, in 2020. No question, the unexpected war in Ukraine, the first time there was war on Continental Europe since 1945, created a blow-off top and was the icing on the cake for this super cycle.

However, buying really high (chasing) commodities stocks in hope of a greater fool buying your shares at nose bleed heights, and at a tidy profit, isn't a great formula for generating superior returns. And let's face it, when it comes to commodities, demand isn't inelastic and demand destruction is real. That said, out of all the commodities, I am most bullish on natural gas, as replacing Russian gas in Europe is a huge longer term demand tailwind. That said, I am playing it, in a second derivative way, via Summit Midstream Partners (SMLP). By the way - a few weeks ago, I spent an hour on the phone with Summit's CFO. And SMLP is the only commodity stock that I currently own. No question, the fundamentals are great for natural gas, but the E&P natural gas names have moved up so much, notably off their May 2020 lows, which I chronicled here on SA. For example, see Antero Resources (AR): A Potential 5-Bagger Or A Zero (April 7, 2020) and Range Resources: Wall Street and Cognitive Dissonance Theory (April 22, 2020). I'm just not sure they offer great risk/reward.

Putting It All Together

I am not declaratively calling the bottom per se, but there is a lot of money that can be made buying stocks that are down 75% to 90% from their 52 week highs. And ground zero for the huge selloff is technology and technology related stocks. In fact, over the past few months, I have spent most of my time synthesizing and digging in on stocks in the technology sectors that are 'on sale' and hated. I love to invest and speculate as a contrarian and love it when fear and pessimism are fevered pitched. I have learned via the school of hard knocks that momentum isn't my game and this is a very hard way to make money. The exception is if you are a very good and a very disciplined momentum trader, but again, that just isn't my game.

Although, at times, it can feel like catching falling knives, so you have to scale into your positions. I would argue that much more money is made buying good companies at good prices or mediocre companies at great prices than paying a very rich price for what's hot and in vogue. In other words, most of the time, I want to do the complete opposite of what the crowd, conventional wisdom, and even what hedge fund Masters of the Universe are doing. As for commodities, this trade got really crowded in late March 2022 and mid April 2022, hence why I wrote the Supercyles piece. And, if you go and look at my writing history, I very rarely write about macro articles or make broad sector tops and bottom calls. That just isn't my game. That said, no question, oil and gas stocks, since April 25, 2022, have surprised me a bit.

We shall find out if this is a real sustainable rotation out of commodities stocks and back into beaten down technology stocks or just a head fake. Either way, there is a lot of money to be made, even tactically, from just trading around the edges of core positions.

Second Wind Capital is a value oriented investment service with a strong recent track record of exceptional outperformance. The focus is mostly small cap value, but opportunistic and open minded towards special situations. In 2020, the total return of the portfolio was +93%. In 2021, the total return of the portfolio was +55%. During the Q1 2022, the total return of portfolio was +3.2%. Depending on market conditions, I might raise my marketplace rates soon. 

This article was written by

Idea generation, value investing, small caps and under the radar stocks.
A career wanderer and journeyman, with a passion for deep value and contrarian investing. I spent five years on the buy side in investment grade bonds on a team that managed $50 billion of assets, 3.5 years as an energy credit analyst for an energy company, and had multiple stints in corporate finance, most recently as a strategic financial analyst. I have an undergraduate degree in Finance (UMass Amherst) and earned an MBA (Babson College).

I actively invest my own capital and for a few family members.

Favorite quotes:

“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: Your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great and wonderful world. Dormant forces, faculties and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.” (Author - Patanjali)

“Tentative efforts lead to tentative outcomes. Therefore, give yourself fully to your endeavors. Decide to construct your character through excellent actions and determine to pay the price of a worthy goal. The trials you encounter will introduce you to your strengths. Remain steadfast...and one day you will build something that endures: something worthy of your potential.” (Author - Epictetus)

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"When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, 'I used everything you gave me." (Author - Erma Bombeck)

Disclosure: I/we have a beneficial long position in the shares of SMLP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long CVNA and VRM and a number of other stocks.

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