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Even Crowdstrike is not safe

June 13, 2022

Crowdstrike is an amazing company, probably one of the last shares anyone is going to sell but if this chart is anything to go by sell they probably will. The company reported its Q1 2023 results on 2 June and , as usual, they were spectacular. This is what CEO, George Kurtz, had to say to the analysts.

“First, fiscal 2023 is off to a fantastic start. We believe our Q1 results exemplify that we have a winning formula that includes scale, growth, profitability, and free cash flow. Second, we saw strength across the platform, including a record quarter for modules deployed in the public cloud, and over 100% year over year ending ARR growth for our emerging product group, which includes our Discover Spotlight, Identity Protection, and Log Management modules. And third, we are seeing more and more customers standardize on the Falcon platform. The number of customers adopting six or more and seven or more modules both grew more than 100% year over year. We believe this underscores our wide competitive moat and our opportunity to drive long-term sustainable growth in both our core and expansion markets.”

Crowdstrike, Q1 2023, 2 June

But this is a market where investors either don’t care about results or they think they have been fully priced in and the shares are too high anyhow. The chart looks extremely threatening. My indicators all turned negative quite a bit higher up and now we have what looks like a massive head and shoulders, which has probably already broken down. If the pattern is right these shares are going to at least halve again from here.

One day the fact that this is such a fabulous business will probably drive a spectacular rally but there is no sign of it yet and even if the next quarterly results are good, as they most probably will be, that may not make any difference either.

When they raid the brothels they take all the girls; that happens in bear markets too. Doesn’t matter how pretty you are your shares still fall.

My strategy of buying QQQ3 into weakness is not looking that great. After two purchases my average price is $95 and the actual price is now below $70. Ouch! It also looks as though it is going to fall further. Do I buy some more at $50 or do the sensible thing and wait for a buy signal. I just have a feeling that if I keep my purchase price tracking down close to the latest price at some point I will do very well.

The moral of the tale seems to be that if you have a set of indicators that work as I believe I do I should follow them and not take emotional decisions like buying into sharp price falls. But I am doing it with very modest amounts of money so if and when there is a 3B buy signal I will think about really piling in and then all will be OK. That’s the plan anyhow.

As Warren Buffett says, when times in the stock market become really dark that is the moment to believe in the energy and ingenuity of your fellow Americans. He has been doing that since the end of the last war and it has worked well for him.

Strategy

I am singling Crowdstrike out to illustrate what happens in bear markets. In the end it is all about indiscriminate selling as people reduce their exposure and are forced to sell. Below is a chart of ARKK, ARK Innovation ETF. The top 10 holdings are listed below and make it very clear to me anyhow why these shares are getting slaughtered. Every share on that list is getting hammered which makes me suspect that the fund’s managers (this is an actively managed ETF) choose shares based on fundamentals and don’t use charts. If they used charts the way I do they would not hold a single one of these shares.

These shares have worked brilliantly using my indicators, both for buying and selling and it will be very interesting when they do give another buy signal but there is no sign of it yet and when shares are falling this fast that creates problems too because many investors can’t believe what is happening and hang on grimly until they are forced to sell.

The other problem for ARKK is that after years of strong inflows they are almost certainly experiencing strong outflows and that makes them forced sellers because they have to keep raising cash. This market is leveraged in so many ways it is no wonder that when shares turned down they fall so far so fast and remain under intense pressure.

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