Market Insights & Analysis from Kramer Capital Research

Volatility Check: Is the Tech Crash Here?

They’re calling this the fastest bear market on record for Apple Inc. (NASDAQ: AAPL) and people who don’t know Wall Street are convinced that the ultimate floor is a long way down from here.

After all, when the S&P 500 swings down 4% on a given day, vast paper wealth can evaporate in a matter of hours. AAPL shareholders alone are now close to $500 billion poorer than they were on Sept. 1.

That’s why they call the CBOE Volatility Index (VIX) the “fear” indicator. Because Wall Street craves certainty, ambient fear spreads fast.

When we see the VIX climb, we get nervous. We decide to reduce our exposure to risk assets, driving the VIX even higher. It’s a vicious, contagious cycle.

And once the bulls blink, all we can do is remain disciplined while the dread circulates. Everyone wants to know how bad it will get before the market recovers its nerve.

That’s when it’s useful to study Wall Street’s statistical record. History won’t tell us how far stocks will drop or how long a decline will last, but we can get a surprisingly good sense of what usually happens.

Is the Tech Crash Here? No Shock, Just an Echo

Never forget that fear is already a factor this year. The pain of the initial pandemic market crash is still fresh for many investors and the mood remains brittle.

Many people are studying every stock shudder to make sure it isn’t signaling a reversion to the days when the New York Stock Exchange circuit breakers got triggered again and again. Nobody wants to live through that again.

But while intraday volatility hit nearly unprecedented levels in March, we’ve been living with elevated VIX readings ever since.

Six months ago, the S&P 500 swung a harrowing 5.5% in the course of an average session, sometimes moving 8% or 9% between the open and close. That’s what extreme volatility really looks like.

Things calmed down a lot over the summer, but even in August, the market as a whole was still moving 0.8% a day, which is on the high end of what I consider “quiet.”

What this means is simple. You’ve been living with volatility for months. You just got used to it.

And now, while September started on a bumpy note, current conditions are only as chaotic as they were in April. You survived April. Odds are good your portfolio will ultimately survive this season as well.

Admittedly, that’s a bittersweet proposition when Big Tech has gotten so far ahead of the rest of the market that we might need to endure these conditions for a few more months.

If AAPL can’t hold $108, it could drop to $83 before finding a firm floor. That’s a gruesome ride for any stock. When your market capitalization is figured in trillions, all of Wall Street feels the chill.

But $83 is only a nightmare scenario if you poured money into AAPL over the summer when the pandemic was in the earliest stages of relaxing its grip on the global economy. That wasn’t the right time to buy this stock.

Likewise, now that Amazon.com Inc. (NASDAQ: AMZN) has broken below $3,200, there isn’t a firm floor in sight until the stock retreats all the way to $2,500. I’d be pleasantly surprised if the bulls rally before we hit that point.

Remember, AMZN had never topped $2,200 before the pandemic changed the world and the Fed flooded the world with easy money. Long-term shareholders still have a reason to feel pretty good at $2,500.

Across the Silicon Valley landscape, stock after stock is in a similarly overextended position where it only takes one more crack in the fragile technical environment to open up another 10-20% abyss.

If you bought over the summer, a move like that will hurt. You’re looking at dead money for months, maybe a year or two years while the fundamentals catch up with the giddy prices you paid.

For the rest of us, it’s just another season on Wall Street. After all, greed and fear are never far apart when the market pendulums are swinging wide.

Through the decades, volatility at this level translates to either big short-term wins or big short-term losses. Average them out, we might see the S&P 500 rebound 5% from here or drop another 5% by the end of September.

That’s far from the end of the world. But that’s why my 2-Day Trader subscribers are making money no matter which way the market moves.

When any particular sector edges up or down, our short-term options strategy multiplies the profit potential that shift would otherwise unlock. Squeeze a little upside out of a few successful trades, and the gains compound nicely.

And in the meantime, life goes on. We’re getting through this. You can hear my latest thoughts on my Millionaire Makers radio show. (Click here for recorded episodes and local stations.)

 

CANNABIS CORNER: Robust Revenue

Looking at the past year in the cannabis market reveals that the industry as a whole remains in good shape.

People are still buying marijuana and its derivatives for medicinal and recreational purposes. The only problem is in the way Wall Street has mapped this particular landscape.

The stocks that investors favored a year ago have cratered, shedding 40-90% of their value. But as new names emerge, the industry as a whole has actually gained ground year to date.

Wealth is being created here. It just isn’t happening for people who own Canopy Growth Corp. (NYSE: CGC), Tilray Corp. (NASDAQ: TLRY) or Aurora Cannabis Inc. (NYSE: ACB).

Instead, the money is going to once-tiny retail distributor Green Thumb Industries Inc. (OTC: GTBIF), which is now on track to rake in more revenue than CGC and TLRY put together.

And while growth has stalled for ACB in particular, GTBIF is still looking at doing 75% more sales a year from now than it can book today. That’s where the excitement in this industry has shifted.

Think twice about buying into the cultivators. The world is swimming in raw plant matter, and since that stuff is really just another agricultural commodity, price pressure on producers will remain severe.

Very few investors pour their money into wheat or corn producers with the same fervor that turned CGC and ACB into multi-billion-dollar companies. Similar logic applies here.

But when you move closer to the retail consumer, companies like GTBIF can grow with the market. As the cannabis map keeps lighting up green, that’s a much better place to be.

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