via Marc Faber:
Last month’s report concluded that, “by holding an overweight position in resource and precious metals, Hong Kong shares and value stocks around the world, I am taking the view that going forward these positions will outperform growth and perceived growth stocks such as FAANG, and related companies, semiconductors, social media, cloud computing, SPACs, meme stocks, and whatever else the Robinhood and Reddit community chased after.”
In fact, Robinhood is an interesting case because it epitomizes the gullibility of a new crop of investors. The stock went public in July 2021 at $38. Right away, it shot up to $85 with extremely heavy volume. From the high the stock has now declined by 85% and from the new issue offering price by 67%. Investors trade on the Robinhood platform because they believe that they are trading free of charge and investors bought the stock because they believed that the “trading-free-of-charge-business model” would work.
However, as is usually the case with new issues in the late stages of a bull market, Robinhood was a disaster for the investors in its stock, and I am sure, also for most of the people who used its trading platform.
I need to add an observation about the phase of the stock market during which weakness emerges: in the early stages of a bear market, quality stocks tend to hold up because developing weakness in some stocks is dismissed by the bullish investment community as company specific events. Frequently, the bear market’s initial phase is hidden by strength in just a few stocks, which manage to push the major indices to new highs. This was the case in 1973 before the 73/ 74 bear market. In 2021, we had a similar situation. The SPAC Index and most meme stocks peaked out early in the year. In the case of the SPAC Index, the high occurred in February 2021. By now this index is down 42% from the high. At the same time, the New York FANG+ Index (NYFANG) continued to move up until November 2021. But even within this narrow group of stocks there were divergencies. Alibaba (BABA) topped out already in October 2020, Baidu (BIDU) in late February 2021, the FANG Index itself on November 4, 2021, Amazon (AMZN) on November 19, and Apple (AAPL) on January 4, 2022. Currently (as of January 31, 2022) the FANG Index is down 20% from the November high. When I look at the charts of its individual components, I come to the conclusion that a rebound aside, there is the risk of a much deeper downside move.
Still, I also want to make clear that an investment scenario could be unfolding whereby unloved sectors and asset perform reasonably well while the most over-owned and over-hyped sectors remain under pressure for a long time – just as occurred in Japan after 1989.
I remember the Nikkei top very well because I rightly forecasted in the late 1980s that the Japanese stock market would drop at least 50% from its high. About that I was right. But what I got wrong was that I thought that a Japanese share market collapse would drag down other markets around the world as well. However, this did not happen. Money flowed out of Japan into other markets. The US stock market and in particular the NASDAQ performed superbly in the 1990s, and Latin American markets rose from depressed levels in the late 1980s to their peak in the 1990s by between 20 and 30-times.
I am bringing up the fact that money can flow from one sector to another or from one stock market to another because we need to entertain the idea that money could flow out of US financial assets into other markets around the world.
At the same time, we should not forget the words of the “dean” of technical analysis, Bob Farrell, who opined that, “There are no new eras – excesses are never permanent. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. The public buys the most at the top and the least at the bottom. Fear and greed are stronger than long-term resolve.”
With kind regards
Yours sincerely
Marc Faber