Daniel X. Bustamante, Co-Founder And Lead Coach
The final quarter of the year is here already and so I thought it an apt time to put together a market outlook article. I think most of us are glad we are in the final quarter of 2020… what a year it has been! Covid-19 has impacted every country across the globe. We have all taken different approaches, but most have us have communicated via Zoom! More on that in a bit…
To round it off, we have the upcoming Presidential election. Election years are never dull, especially when it comes to the financial markets. Hopefully we can all keep our friends over the next month!
Looking back over the past few months, I honestly don’t believe that what we saw in March with the markets is very likely ever to occur again. At least not in my lifetime. It created both opportunity and fear all within about a 90-day time span.
The Fed pulling out all stops has got us to where we are now in the markets. So where are we now? As we head into Q4, my market outlook has me looking at a few key industries.
The tech industry is one of them. Specifically, tech names that have been ‘covid-positive.’ What do I mean by that? Companies that have experienced, and are still experiencing, a dramatic increase in their share price. For example, Zoom.
It’s been a wild time for tech names. Back in April, SoftBank Group, announced an astounding one-year loss of $16.5 billion on their tech-focused vision fund. The biggest loss in their 39-year history.
Fast forward to last month and SoftBank Group were unmasked as the ‘Nasdaq whale’, snapping up options in big tech stocks and creating an accelerated market rally and specifically a rally in the tech names.
Another interrelated industry I’m looking at is the world of online e-commerce stores. Due to the lockdown orders, many of these have rallied well. Shopify, being one of them. As we all found ourselves stuck indoors, shopping online, learning online, and interacting online, the online retailers benefited. I believe it is a fad, and like all fads, they tend to fade.
Fads, frauds, and failures is an idea I discuss in our Short Selling Pro course??? As we move deeper into Q4, names like Shopify and Zoom are at the top of my list for fads.
I don’t believe that we are close to the end of Covid-19 but I do believe that the increases in shares for those online retailers will level off. I personally have a strong affinity for betting against asset prices (sometimes for the worse) but I’m looking for a price adjustment in tech names and online stores.
This pandemic has undoubtedly shifted how we think about our work and shopping environments. It has also had a major impact on the travel sector and travel stocks. Airlines have collapsed. Just last week United And American Airlines sent notice to 32,000 employees telling them they are now on furlough.
Right now, things do look dire for this sector and it is in a complete inverse to the tech industry in that it is completely beaten down right now. I am optimistic that we will start to see some recovery. When exactly? I’m not sure but I think it begins after the Presidential Election.
For that reason, as part of my Q4 market outlook I am looking at purchases in the travel industry. I am looking at airlines, select cruise ship companies, and very select hotel names.
That’s a good segway into the fact that we can’t ignore that we are in an election year. I have always found election years to be extremely volatile. I remember the 2016 election well. The night of the election, the swings in the futures market were incredible. They carried on for weeks afterward.
Based on technical analysis, I do see the market pulling off the highs into this election. I see that as a larger buying opportunity, even with the Fed and the idea that the government may inject more capital into the economy.
Do I agree with it? No, not really. However, while I do rely on my experience, I also trade what the market provides. We have to stick to our rules as traders or we won’t be successful.
We can have a macro or fundamental thesis and that will help plant the baseline for ideas but overall, especially for us here at StockAbility, it comes down to price-action and technicals on the chart.
This is the reason we teach the 70-30 approach in our FoundationalAbilities Course. 70% technicals, and 30% fundamentals. When you overlay them together, it gives you a much better grasp and understanding of the markets and the way they move.
As I mentioned, I do stick to my trade plan and rules. In that I have my years of experience built into it. I know that names like Zoom and Shopify are fads that will see a large +30% price correction from their current highs. I intend to be there for the short-sided trade.
On the inverse, for those who like to be bullish, the travel industry will come back; it just may take longer to show in the tape of the stocks. It is definitely something to keep an eye on. One thing is certain in Q4: This election will have a large effect on the markets and we adjustments in portfolios.
I want to finish off my Q4 market outlook by saying that I feel that the end of the year will present us with many opportunities. However, the markets will be volatile. The novice trader will need to be careful to not get whipped with all the volatility that is to come. Even the most experienced traders can come unstuck if they aren’t careful and don’t have a good set of rules that they follow. If you want to learn more about how to maximize Q4, then please do register for one of our complimentary StartUp Sessions.
Thanks for reading.