A Moment of Truth
Demark buy signals lighting up
A Moment of Truth
It’s a bloodbath. You do not need me to tell you that. The S&P down 13.5% and the Nasdaq down 22% in 2022. Snowflake grew revenues 124% in fiscal 2021 and 106% in fiscal 2022 with growth expected to slow to 66% this fiscal year. The stock is down 62% from its highs. Yes, slower growth and higher interest rates have “hurt” the stock. But let’s face it. 20x sales now or 50x sales at the highs, neither makes any sense. Great, you should try and know which company’s growth is fast and recurring. We agree. But, do the math on CASH FLOW a few years out and discount it back. You won’t find many that deserve more than 10x sales, excluding the diamond in the rough. They all eventually become $CRM, a $16 billion revenue behemoth in 2019 ($30 billion in 2022 including acq) that has 20% growth for many years ahead. $CRM in its stellar 20% mature mode gets a 5x price to sales now. They generate decent free cash flow of $5-6 billion per year, but unfortunately give away a lot of shares (dilution) to keep employees happy. Back to reality. The sellside price target sucker game is over. The relative valuation game ship has sailed.
Speaking of ships & boats, earlier in the year, I used the analogy that finding a real bottom requires everyone in their boats (portfolios) to throw overboard as much weight (stocks) as needed for them to feel calm that their ship won’t sink (their respective account balances). No hope. No prayer. Just disgust to reach a bear market bottom. You can get ferocious rallies even during bear markets that take on a narrative of their own. For example, the March 2022 rally. On March 7th, the S&P 500 hit a Demark (price exhaustion system) red 13 to buy around $420. The $QQQ signaled then as well around $325. You had to take some pain in both, another 1-2%, but each had a respective bounce of 9% and 16% in the coming 2-3 weeks. Then, the Fed was hawkish, but not quite as hawkish as now. Oddly, inflation stats haven’t gotten worse since then. Even the elephant on your screen, oil, is flat since then. As Marty Zweig said in his youth, “Don’t fight the Fed”. Always been true. The key is to figure out when peak Fed expectations are priced in, everyone has thrown their stocks off the boat and the market has reached a selling crescendo.