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Freefall times three

October 13, 2022

Considerable damage can be done to share prices in percentage terms in the latter stages of bear markets so it still makes sense to be cautious. Leveraged ETFs like QQQ3 ( broadly tracks the Nasdaq 100 x three) are in free fall.

Whichever leveraged ETF we look at the message is the same. TECL is all about technology shares. Two things are immediately apparent from the chart. Between 2009 and 2021 technology shares enjoyed a spectacular run. Then comes the hangover and that is happening right now. So far the price is down from $91 to $20 and with no sign of a turning point a drop into single figures is by no means inconceivable.

SOXL is an ETF which is focused on semiconductor shares times three. I have been warning on semiconductor shares for some time with shares like Nvidia, Taiwan Semiconductor Manufacturing and Advanced Micro Devices all having weak charts. Below is a quote from a recent analysis of AMD’s third quarter figures:

According to Gartner, PC shipments dropped a massive 19.5pc in the third-quarter which represented the largest drop since the mid-nineties, indicating that the PC/laptop market is in much worse shape than feared. According to Gartner’s earlier outlook, the company projected a 9.5pc decline in PC shipments in FY 2022 and a 7.6pc drop in total device sales (which includes mobile phones). The latest data from Gartner combined with AMD’s profit warning, however, paints a pretty dark picture of the state of the PC and device markets and things may even get worse for AMD in the short term.

Seeking Alpha 13 October 2022

The big tech mega-cap stocks (Apple, Alphabet, Microsoft, Netflix and Amazon ) are also looking threatened. Threatened is hardly the word for a share price for FNGU (FANG stocks times three) already down from over $50 to under $5. This one is going to be interesting when it finally turns higher. The Coppock indicator is currently minus 144 having been falling since March 2021 and falling steeply since June 2021. The FANG stocks have not been that weak so I am a little baffled as to why this ETF has fallen so far so fast. This is not a stock to buy and hold but potentially a profitable trade on a golden cross by the moving averages. The ETF doesn’t just hold FANG stocks but others with similar characteristics chosen by an index committee. Maybe they have been disastrous performers.

Strategy

I sometimes wonder if these leveraged ETFs will function like the canaries in the mine. When they keel over as they did in late 2021, early 2022 it is time for investors to proceed with extreme care and consider going liquid. When everything turns bullish (moving averages, trend line breaks and Coppock) it is time to become more positive and start investing again. Right now we are in free fall but we will spot the turning point when it comes.

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