A Brief Market Update

On Friday January 21, 2022, the Nasdaq shed roughly 2.72%, marking the end of one of the worst weeks in nearly two years and a clear indicator of abnormality in the market. With earnings reports and growth outlooks not living up to the ridiculously ambitious estimates spewed by Wall Street analysts, valuations have been rapidly collapsing and will likely continue to do so.

As stated by Jerome Powell of the Federal Reserve, interest rate hikes are imminent and necessary to ease the inflation that many were deluded to believe was “transitory”. December CPI data revealed inflation was up 7% in the past year, the highest increase in nearly 40 years. Substantial tapering, marking the end of excessive quantitative easing, has undeniably begun to be priced into equities.

Goldman Sachs recently revealed that they believe four interest rate hikes will occur in 2022, damaging the efficiency of the market and reducing liquidity. The main concern for investors should be the possibility of a triple threat, in which the Fed hikes interest rates, tapers MBS and Treasury bond purchases, and shrinks their balance sheet(quantitative tightening). If performed abruptly and nearly simultaneously, these three Fed moves could further push equities downward and potentially incite a massive crash.

Now, I’m no chartist but shown on the left, the Nasdaq has clearly broken through essential support levels and could be entering a nasty free fall. The all-time chart, which you should check out on TradingView, looks even scarier, with a striking resemblance to the dot-com bubble as I mentioned in The Everything Bubble.

Speaking of the dot-com bubble, investment banks are beginning to come clean about the state of the market, with Morgan Stanley warning that stocks are more overvalued than during the dot-com bubble. Analysts, who have been sporting absurd price targets are beginning to lower their estimates and turn underweight in an attempt to prevent their reputations from being tarnished.

With elevated margin debt, any selloff is accelerated. As the market crumbles, margin debt will continue to retract as margin calls rise, quickening what has already been a lightning fast drop.

The valuations of numerous tech companies, which should’ve never been achieved in the first place, have been collapsing since the beginning of 2021. Meanwhile, the major indices, notably the S&P 500 and Nasdaq, continued to tread higher throughout the year, causing a positively distorted view of equity performance. With indices now turning red and unveiling the ugly truth, investors are becoming increasingly frightened. In the last two weeks alone, the VIX (volatility index) has almost doubled to 29 from 16. The likes of Block (SQ), TheTradeDesk (TTD), Cloudflare (NET), and Shopify (SHOP) have fallen significantly from their highs yet still remain richly priced by historical standards. Thus, I wouldn’t be surprised if this selloff turns into a crash as the tech bubble bursts.

To effectively play this, consider liquidating your tech holdings and bolstering your cash position to take advantage of future opportunities. If in search of a bolder play, consider shorting Tesla (TSLA) or the Ark Innovation ETF (ARKK).