Hi, All.

Six days ago, I wrote about the POWcycle, a dangerous meta-pattern that has been the primary determinant of stock market behavior since mid-Feb 2021.

The POWcycle is a THREAT to YOUR WEALTH

Virtually every time that the POWcycle's wheel turns, growth stocks, in particular, have been pushed down. I cautioned that we would likely get a meaningful discount in the “run-down” (the opposite of a run-up) to the final day of the current POWcycle, Wed 4 May, after the JPow holds his press conference. That's now happening.

The POWcycle is especially harmful to growth stocks, but it's affecting the entire stock market. This is just a quick post to remind everyone that although we can't predict the future, we can clearly see the effects of the POWcycle in action, so I'd like to offer some suggestions to both investors and traders.

• The POWcycle Grinds Share Prices Down: The POWcycle lasts approximately six weeks. Its two main events are the monthly release of the CPI and the every-six-week (two-day) FOMC meeting where the JPow speaks on the second day. Some POWcycles are shorter and some are longer, because these events don't align perfectly, and there are also Fed speeches and meeting minutes to worry about. If you want to invest or trade, make sure that you create a spreadsheet of these events and their dates and times, and take into account lead time, as market participants react in an anticipatory manner, not necessarily on the day of the event (although that happens, too). The important point is that within a given POWcycle, there are periods of greater and lesser danger. Take advantage of the crashes—wait for them—to dollar cost average (slowly and cautiously) into stocks that you like.
• Growth Stocks Will Be Disproportionately Affected: Their cost of capital goes way up when interest rates are increased. This makes them even more unprofitable. Worse, if they're not able to borrow money to grow, their growth rates will plummet, along with their share prices. And if they have to issue new shares to stay afloat, anyone holding those shares will be significantly diluted; the share price will drop.
• Be Patient: Sometimes you literally shouldn't do anything because market conditions are terrible, and this can go on for a very long time. You might be wondering, “Just how low can stock S possibly go!?” Or you might think, “Stock S can't possibly go any lower!” and decide to buy shares, only to find yourself immediately in the red, and getting redder. No one knows how low any individual stock, or the market as a whole, might go. One clue comes from major support levels, but these can easily be breached. But more importantly, heed the POWcycle. Buy when there's a discount, not just because you think that a stock's share price is desirably low. Don't buy shares of stock before a major event within the POWcycle, such as the release of the CPI. Sure, the market could rally. But there are many more reasons for it to drop than rally. Don't get caught on the wrong side. It's better to be late and safe rather than early and sorry.
• Don't Be Fooled by Relief Rallies: There will be relief rallies. Don't be fooled by them, or the institutions will fool you and take your money away. Institutions pay a lot of money to brokerages (Schwab, E*TRADE, TD Ameritrade, Robinhood, WeBull, et al.) for retail trading (and investing) data. That means that they know what's being purchased, when, which stop losses are most common, and everything else. They have statisticians and data analysts that pass their results onto executives who make decisions about how their institution's algos should trade. They have a lot of data that we don't, and they take full advantage of it. Don't try to invest or trade against the (down)trend. Don't be fooled by very temporary rallies. I expect the POWcycle to continue to determine market conditions for many months to come, and possibly the entirety of 2022.
• Track the CPI (which is released monthly) and Other Economic Indicators: Macroeconomic effects are “swamping” (dominating) all other conditions. Inflation and the measures that the Fed will need to take to combat it are the fundamental drivers of the POWcycle. It doesn't matter very much how strong of a ship you're on at sea if a devastating hurricane comes through. You'll be at risk, although being on a kayak would be far more dangerous than being on a destroyer (FB). Look at trends more than individual data points. We want to see signs that inflation has peaked. Market participants are future-directed and when they believe that inflation won't go up further, the market will stabilize and rally before the numbers show that we've turned the corner.
• A Recession Looks Likely: At first, the Fed didn't raise interest rates when it should have. Then, it said that it would raise rates by 25 basis points. Wall Street didn't believe the Fed, and the financial press started worrying about 50 basis point rate increases. At least one member of the Fed's Board of Governors has publicly mentioned 75 basis points. In his two speeches yesterday, the JPow said that the Fed could get a lot more aggressive to combat inflation. No one, apparently including the Fed, knows exactly what the Fed is going to do, but there are going to be multiple rate increases throughout 2022, and at the end of it. No one knows just how high rates will go because no one knows how high inflation will go. The higher those rates go, the more downward pressure there will be on growth stocks. Corporate earnings will likely drop.
• Follow the JPow (and the LBrain, and Other Members of the Board of Governors) Like a Hawk: Whenever the JPow speaks, or he trots out one of the other members of the Board of Governors of the Fed to speak, there's systemic danger to the market, and there will continue to be until an equilibrium point is reached, where it will have finally priced in the upcoming rate increases. Again, since no one knows how bad things will get, we can't predict how low any given type of stock might go, but growth stocks are by far the most vulnerable. Don't think that the risky periods are just during the JPow's formal press conferences after the FOMC meetings that occur roughly every six weeks. Speeches before Congress and other bodies can be just as dangerous, and don't forget about the FOMC's meeting minutes, which are released three weeks after the second day of the two-day FOMC meetings. To avoid a potential mini-crash in the market, it is imperative to watch the JPow and other speakers from the Fed like a hawk. Know the dates ahead of time and avoid them. (Don't go long on stocks before these important dates, because you wouldn't want to be on the wrong side of whatever might happen, and even if there's a relief rally, it won't last, because the fundamental picture won't change.)
• Growth Stock Investors Will Have Opportunities: All of this feels as if it will never end. After all, the POWcycle has been active and swinging primarily at growth stock investors like a hammer for fourteen months, with no signs of stopping. But it really will eventually end, just not as soon as everyone would like. I don't think that this will go into 2024, but how long it might actually last is anyone's guess. At some point, many growth stocks will go as low as they're going to go and simply stagnate (flatline). Those who are trapped in them will have dead money until there's a systemic improvement in market conditions, but they won't change soon. With that in mind, there are reasonable opportunities to consider. I would focus on researching and dollar cost averaging into: ONDS, MELI, DOCN, UPST, JMIA, STNE, SQ, CDNA, SE. Remember to distribute your money. Don't concentrate it into any single stock in these market conditions. And when you buy, buy slowly and patiently. If you want to be more cautious, FB looks attractive.
• Some Growth Stocks Could Go Bankrupt: Please don't think that this can't happen. No one imagined that FUBO or NVTA could possibly drop as low as they have, for example. While I don't expect either to go bankrupt, some growth companies will. Be very careful to research companies thoroughly before investing in them. Don't throw money at companies that you've heard of just because the market cap seems very low and looks undervalued. It's usually that way for a good reason. If you pick the right ones, though, you could 10x your money within five years.
• Learn Options: Although this is a stock trading subreddit and many people are scared of options and believe that they're a mechanism for gambling, and that they're too complicated to learn, in any case (these are all opinions that I once held, too), it's important that you learn how to trade options in these market conditions, because they enable you to greatly increase the odds of making money, as compared to a long-term buy-and-hold approach (which is great if you buy the right companies at a low price, and financially ruinous if you bought growth stocks near their all-time highs in 2020). I haven't been buying shares of stock, myself. Instead, I've been shorting (selling) puts slowly on the growth stocks that have shown the greatest buoyancy (relative strength) that I believe are trading lower than they should be due to widespread panic, which in some cases seems to be an overreaction driven by pessimism that market conditions will never turn around for many years; but I don't believe this to be the case.) When you short puts, you have the potential to either make some cash outright, or buy shares at a lower cost basis than you might have had you bought them immediately. The devil is in the details, but I like to teach, so if you'd like to learn (for free), feel free to join our Discord server. (More below.) Don't try to short puts if you don't truly understand what you're doing, and never use more than 50% of available margin.
• Don't Panic-Sell Existing Positions: Please don't make this mistake. If you panic-sell below your cost basis, you will delete money, as if it had never existed. If you pay $100 for a book and sell it for $75, $25 of your capital will have been deleted. The same applies to shares of stock. Unlike with textbooks, when you own shares (in good companies), you own something that should appreciate in value, not decay. Unless the fundamentals deteriorate because of a deleterious foundational change in the company or its market, hold patiently, for years if necessary.
• Learn DCF Valuation: Take this time to enhance your skills by learning to construct a DCF model, so that you can figure out how much a company is really worth. (Yes, this depends on various assumptions, but it doesn't involve wild guessing. You'll be shocked by how much higher than the fair value a company usually trades, but the degree of shock, relative to market conditions, should keep you grounded and aware of what looks like a good opportunity and what looks like a major risk.) I recommend two courses on Udemy that will help you to learn the needed skills. (I have nothing to do with Udemy or the courses.) They are: The Complete Financial Analyst Course 2022 and The Complete Financial Analyst Training & Investing Course 2022. They should be taken in sequence.

The current POWcycle will end in twelve days, on Wed 4 May, after the JPow speaks. Learn to recognize the POWcycle. If you want to invest, invest at the right time, aligned with the POWcycle, not against it, or you'll effectively be trying to drive through a concrete barrier to get onto the highway rather than taking an onramp.

Finally, if you're interested in joining our learning community on Discord, feel free to private message me. I can't post the link here or a bot will delete it.

I hope that this will help to tilt the odds in your favor and inhibit Wall Street's ability to take advantage of retail traders and investors. Be patient and don't worry. When we finally exit the POWcycle, there will be a great deal of money to be made.

Be Careful,

Artem, MBA