DEAD MONEY: 2021 PLAYBOOK – ANNIHILATION!

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On March 20th of this year, the NASDAQ 100 bottomed at 6,994 points. This was the same level it hit in January 2018. Investors who bought and held for two years cleared all gains from their books if they panic-sold at the height of the pandemic scare.

From March 20th till present day, only nine months have elapsed. The NASDAQ 100 has appreciated by 77%! For the year, the NASDAQ 100 is up by 40%, which is not normal for it whatsoever. In 2019, the NASDAQ 100 also appreciated by 35.23%!

In 2017, which was another tremendous year for tech companies, the NASDAQ 100 ROSE BY 28.24%, which means that in the past four years, the index is up by 100%!

Since the 2009 bottom, the index has surged by 1,000%. Had tech companies also improved their underlying businesses by such proportions, there would be nothing wrong with the rise in price since it would have followed a similar path to fundamentals, but that’s not the case.

These types of charts aren’t sustainable:

Courtesy: Zerohedge.com

What is the best way to navigate a boom in any asset class?

One important guideline is to take profits. It’s impossible to know when a boom actually peaks based on excitement and not fundamentals, so you’ll be forced to give up gains (no one calls the top, until after the fact), but you’ll also have cash, ready to capitalize on the market survivors in the aftermath.

  1. The first step to take is to look at all of your indexed positions and think about the historical fact that indices fall in every market top by between 25% and 50%, sometimes by even more than that.

In today’s indices, six companies comprise a weighting that is the highest in history. Those companies are not cheap, either. The FAANMG group of stocks is priced with high multiples, even on a forward-looking basis of 2021 and 2022.

This is to say that if these suffer any pullback, the overall index is sure to fall.

There’s immense scrutiny over the monopoly-like dominating market share of Facebook, Google, Microsoft, Apple, and Amazon in their respective industries and antitrust lawsuits are likely.

This is going to serve as pressure for the indices.

We will not be adding any exposure to an index unless it pulls back by 5% or more. Even then, we will be looking trickle in, not rush.

Courtesy: Zerohedge.com

Right now, investors feel like the markets are invincible. They look at charts like these and think to themselves that it’s a BUYING OPPORTUNITY for some reason or another. The sentiment is that weakness equals a short breather before continuing higher, but what awaits them at the end of the road?

Does return originate from buying high and selling higher? Is that a tried and tested strategy?

The whole art and science of investing concentrates around the notion of owning a business for a price that justifies the purchase. This is not what most people are utilizing at the moment.

  1. There are millions of people, who first opened trading accounts in March 2020. These young investors have literally never suffered through any gut-wrenching period, and that is cause for concern.

We believe that they’ll lack the emotional wiring to sail through a tough year. These same investors, along with much older and more mature households, have seen their options to spend money shrink during 2020. There are no restaurants, malls, sports events, concerts and venues, travel, and tourism, and this means that households chose to dump money into markets as a default.

Again, this is unsustainable.

  • The fear of higher rates is not yet entering the mind of Wall Street. The FED has not warned of bubbles and the president is celebrating new highs.

Wait until Jerome Powell begins to mention the possibility of cooling off the euphoria and couple that with talks of higher corporate rates (28% instead of 21%) and raising capital gains tax and you’ll see that while all of the positives have certainly been priced in, the negative has not.

2021 may not end up being a year of a crash, but it could be remembered as a long breather and a dead money period.