The market was up broadly today, with the S&P 500 and the Nasdaq Composite both up about 2.5%. It is very likely that we see a short term rally in the indexes here, which could be driven by the most beaten up names. It appears to us that in the short term everyone who wanted to sell – due to either inflation fears or recession fears – has well and truly jumped ship at this stage. The market seems poised to jump on any data on lowering inflation or any data that shows the economy may not be headed into recession. The Invesco QQQ index (most popular Nasdaq ETF) has its highest call option open interest since early 2005, which hints to us that there is still appetite out there from buyers.
We do expect the market to be lower at this stage next year, however we realise that in the stock market nothing falls in a straight line. During 1929, when the Dow fell 89%, there were 10 bear market rallies of 10% or more. Altogether they averaged 22.8% per rally. During 2000, when the Nasdaq fell 78%, there were 16 bear market rallies of 10% or more. Altogether they averaged 22.6% per rally. So far, the Nasdaq has fallen 34%, with just two bear market rallies of 17% and 12% respectively. If our thesis of the market continuing to fall for the rest of the year is correct, probabilities tell us to expect more bear market rallies in the coming months.
Bear market rallies are often characterized by dead cat bounces in the most beaten up stocks. Therefore, we have initiated a small position in Virgin Galactic today. The stock has an almost identical chart to that of Amazon in 2000. We are certainly not predicting that Virgin Galactic will go on a 36,000% run over the next 20 years – we actually think it will go bankrupt eventually – but as far as trading short term bounces, it is a retail trader favorite and has been absolutely pummelled since the top in June 2021. The only difference between the two charts is that Amazon had a lot of head-ripping counter rallies in 2000 – multiple rallies over 50%, and two over 100% – compared to what Virgin Galactic has had so far. This makes sense if you consider how markets have behaved over the past 3 to 4 years. Investors are quick to sell like there’s no tomorrow and then quick to rebuy it all when tomorrow comes. Take a look at the crash in Q4 of 2018 as well as the Covid crash in March 2020.
Again, we are not expecting Virgin Galactic or other highly beaten down names to have a miraculous recovery back to or near to previous highs. We do however believe that there is opportunity for some of these stocks to rally 10-20% within the next few weeks as selling has been exhausted from back to back inflation and FOMC reports.
Cassandra Capital 