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Cestrian Capital Research’s Alex King is concerned about not being bullish enough. Markets from a technical analysis perspective, using Elliott Wave and Fibonacci (2:25). Taking advantage of AI, tech sector (6:00). This is an abridged conversation from a recent Investing Experts podcast.

The Future: Potential and Uncertainty

Alex King: My instinct is we’re going to see a continued run up in markets through 2024, certainly up until the presidential election. And we’ll see what happens after that.

And if that happens, then there is a possibility that actually the low that you should be measuring from is the COVID crisis low. And if you measure from that low, again, using many tech analysis methods, but certainly ours, then it says actually, the NASDAQ and the S&P could run up quite a long way from here, numbers that sound silly right now.

So, if I looked at the (NASDAQ:QQQ), and I took our bull case and it is our bullish case, you’d say it could run up to 650, but that sounds silly now and there’s not really much point saying that. But then the start of large bull markets, if you come up with any price targets, it always sounds silly at the time. So the best thing to do is see how it goes.

So the work for us is, again, in the NASDAQ, look at what happens when it gets into the low 400s on the QQQ. If there’s strength through there, if it’s really powering up, well, then I think we’ll think, well, our base case is a bit too visible. And if it’s hard going and it’s faltering and thinking about turning over and hitting resistance levels, then I think we’ll think, okay, the cycle is done, and then we’re back into a bear market.

And I don’t have a religious opinion on that. I think we’ll just let the market tell us what it’s going to do. You know if the market is going to dump and you know how you know it? Because it starts dumping. You don’t have to be any kind of rocket scientist here, it tells you.

So, that’s a long answer. But in essence, I think, base case expectation here is it’s going to run up some more. And if I look at where could we be wrong, I think, where we could be wrong is, and what I’m most concerned about is turning to sell too soon.

I’m not concerned about the bottom is going to fall out of the market tomorrow and oh, dear, I didn’t sell anything, because you always get time to hedge or to sell. My concern is that we’re too cautious. And then in my own personal holdings and our callings in our research, we’re too bearish. And we say, “Okay, time to step aside and the market keeps on running up.”

Because that’s what’s happened to an awful lot of people since this time last year. They didn’t believe that the bull market was real and they just cost themselves a ton of money as a result needlessly. Whereas if they just watched the market and reacted as opposed to try and predict it, they’d have done much better.

Charting the Path Ahead

We did two kinds of analysis. We do technical analysis, we do fundamental analysis and never the two should meet. If they coincide, it’s quite interesting and it reinforces the one and the other. But for price analysis, we start with technical analysis.

From a technical analysis perspective, we use this Elliott Wave and Fibonacci method. There’s nothing revolutionary about it. Lots of people use it. Many folks on Seeking Alpha use it. But if I just talk you through it, starting from the 2018 lows, as I just mentioned, suggests that we’re now in a wave five up. That’s a final run-up before a big sell-off.

But it doesn’t feel to me that that’s true because the U.S. economy is in pretty good shape. Inflation is coming down. It’s unlikely rates are going to go up. They might come down. Consumers in good health. Poor people aren’t in good health, but they never are.

Rich people are in very good health and rich people drive the market, poor people don’t. May not be nice, but it’s true. And it doesn’t feel like that technical analysis calling for a rollover soon is right.

But if you start those charts, the same method, the same Elliott Wave and Fibonacci charts from the COVID lows, then the sell-off in 2022 looks like what’s called a wave two down. So basically a big correction after initial run-up.

Whereas if you start at 2018, it looks like a wave four down, which is a final sell-off before the final run-up. Now, the 2022 sell-off was so deep in both the NASDAQ and the S&P, that it’s a perfectly righteous wave two, which tends to be pretty deep.

And so what that might mean maybe is that the S&P and the NASDAQ are currently in a wave three up. And if so, wave threes are really powerful and go a lot longer and a lot further and a lot further up than anyone expects them to.

And so, it’s on purely technicals. So, if you want to get into some very, very boring detail and it is boring. If we look at the base case on QQQ, then 2022 more or less all the year was a 0.618 retrace from the wave three high struck in the end of ‘21. That’s if you start at the 2018 lows, I appreciate this is incredibly boring.

Whereas if you start at the COVID lows, March 2020, and you say that the move up to the end of ‘21 was a wave one, then 2022 was a 0.618 retrace of that move, which again is a perfectly valid wave two. So there’s every chance, I think, that we’re in a wave three right now, not a wave five.

And when that becomes not boring is because if it’s a wave five, well, it’s going to roll over soon and sell, and we all need to be on our toes and ready for that. But if it’s a wave three, it’s got a ton of time to go.

And the mistake people will make is getting out too soon. And that is just giving away money for absolutely no reason. And that’s why I think it, because the chart pattern says it.

And if you look, just look outside the window for a moment, does it look like – does it look and feel like 2021, when a – it’s pretty obvious a big sale was coming at the end of that year. It doesn’t look and feel like that. It looks like the early innings of a bull market, I think. And so, that’s why I think that.

AI and Tech Sector: A Snapshot

Rena Sherbill: AI and all the mania it’s seen in this past year, what would you advise investors in terms of trying to take advantage of that? Is it worth getting into Microsoft (MSFT), NVIDIA (NASDAQ:NVDA)?

Palantir (NYSE:PLTR) is a stock that’s bandied about a lot, it’s a favorite from a few analysts on this podcast. Curious your thoughts on the bigger players and then just the general approach to that part of the sector.

AK: Yeah, sure. I think the first thing to say is, well, the first thing to say, of course, we don’t give any advice, make sure to say that. So, I shan’t be giving any advice.

But the first thing to say about AI is, what it isn’t is a bubble. Obviously, some of the

The surge in stock prices makes it seem like the AI narrative is skyrocketing, but AI isn’t a bubble. The recent boom in stock prices revolves around a refresh cycle happening in data centers and the tech industry. This pattern is nothing new; it’s part of a decade-long cycle, typical in the tech industry.

In the late 1990s, businesses realized the need for a strong online presence, which led to hefty IT investments. Subsequently, the 2000s saw the internet becoming an essential tool, leading to another round of IT investments and data center expansions. And now, we’re on the cusp of a new phase—one that requires improved networking to complement the enhanced computing power in data centers.

The Upcoming CapEx Refresh Cycle

This next phase is expected to trigger a significant CapEx refresh, affecting various components such as data center networking, wide area networks, fiber connections, home and office networks, and security. Even individual devices at home may feel the strain as software demands increase.

Stocks and Investment Opportunities

NVIDIA has been a frontrunner in this space, experiencing significant growth due to the ongoing CapEx spending. Despite the meteoric rise in stock prices, the company’s fundamentals suggest that it’s not unreasonably priced.

While other smaller-cap stocks may have surged, NVIDIA remains a prominent player in the AI-driven tech industry. Moreover, gaining exposure to AI doesn’t necessarily require diving into obscure stocks; simply being invested in the NASDAQ can potentially reap the benefits of the AI CapEx refresh.

The discussion about AI investments extends to stocks like Palantir, which, while showing promise, may not be the ultimate AI investment. Its position in the market, coupled with the stock selling trends of the founders, raises questions about its potential as a long-term high-margin business.

The Long-term Importance of Technology Exposure

Despite short-term market fluctuations, technology has proven to be a robust and rapidly growing industry. Lack of exposure to tech could pose significant risks in the long run. Therefore, having substantial technology exposure remains crucial for long-term investment strategies.