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The threat of the mid-term consolidation

October 10, 2022

I am a great admirer of the management team at Polar Capital Technology trust, an actively managed, UK-quoted investment trust which specialises in technology shares. They have done a terrific job and the share price performance speaks for itself. The shares are still massively up on their level in 2009.

However this chart still looks threatening. The shares have tried to rally, the rally has failed and now the price is trying to hold support. My guess is that this will fail, the shares will break down and fall significantly further.

I have been having a look at their take on what is happening in the stock market. Lead manager, Ben Rogoff, is cautious.

Typically, the experience is that when bubbles burst, you don’t get another showing for six and a half, seven years. What you do is hunker down and try to eke out the best performance you can and try to get ready for the next cycle.”

Interview with The Times, 20 August 2022

This ties in with my theory that each bull market is led by new names. Initially when the bear market ends the old names start to recover but generally Netflix, Shopify, Nvidia and others have had their big runs and are unlikely to be the leaders in the new bull cycle. But it takes time for the new leadership to emerge and the technology which excites us will not be e-commerce, the cloud, electric cars and video streaming. They will still be a big part of what is happening but the things that catch investor imagination will be new and, almost by definition, things of which we currently have little or no awareness. That is what makes new bull markets so exciting. Catch these new names early enough and there are huge profits to be made.

Rogoff is still a big believer in the cloud which he says is still only around 20pc penetrated so has a long runway of growth ahead. Around 30pc of the trust’s assets are in three companies, Apple, Alphabet and Microsoft. As subscribers will know on my reading both Alphabet and Microsoft have threatening charts and the Apple chart is finely poised with both moving averages and the Coppock indicator falling.

The latest reported figures from Apple for Q3 2022, ending 30 June and reported in late July were good and ahead of expectations but that is history. The stock market is concerned with what happens next. I was comparing my iPhone 11 with an iPhone 14. The screen is a little bigger but not hugely so. There are some clever features. If you are in a severe crash and unable to call emergency services the phone will do this automatically even if you are outside Wi-Fi coverage by using emergency SOS via satellite. The problem for many of us is that these phones are so clever that we are tempted to stick with the devil we know unless there is a really massive advance. It turns out the crash detection system is so sensitive that it calls emergency services when users are on a roller coaster – better safe than sorry.

Another key investment trust which is focused on technology shares is Allianz Technology Trust. The chart looks similar to that of PCT, with a huge rise followed by a fall and then what could turn out to be a mid-term consolidation. The portfolio is very different to that of PCT. Alphabet and Microsoft are the two largest holdings but with much smaller weightings. The fourth biggest holding is Petrol Brasileiros, the seventh, UnitedHealth Group, the eighth Exxon Mobile and the tenth HDFC Bank so there is much greater diversification but even so the shares are under pressure with the Coppock indicator falling steeply since April 2021 and having just become negative.


My impression is that the stock market is shaping up for another leg down. There are many secondary consolidations and a growing number of fresh breakdowns.The QQQ3 chart for example is hitting new bear market lows and looks poised to move significantly lower.

An obvious problem for shares is the explosive rise in interest rates. Since March 2020 the yield on US 10 year bonds has climbed from 0.332pc to 3.885pc, which is an increase of 11.7 times. If I am right and it is heading for five per cent that would be an increase of 15 times in less than two years which is a tremendous shock for financial markets after years of super-low interest rates. It is hardly surprising that the adjustment is proving painful.

It is also making dollars much more expensive which is not making life easy for US companies. Since June 2021 the US$ has been revalued by 26pc against a basket of currencies. Again this is a huge move in a short time. It is like a massive reset for the whole global economy. Eventually the dust will settle but it would be no surprise if share prices have not yet completed their adjustment to this new world order.

The message for private investors is that cash is king. This not a message that is easily adopted by investment trusts like PCT and ATT which are still almost fully invested and so vulnerable if shares generally do take another leg down led by the technology shares which became so highly valued in the late bull market.

The other message, not yet taken on board by the Russian military, is that the technology revolution continues at an accelerating pace and may be the greatest revolution in human history with who knows what wonders to come.

Poor Truss is like a girl guide thrown into a bear pit. This will either make her or break her but I admire what she is trying to do. Speak to any of the great and good, aka the establishment, and they are horrified and contemptuous but then they always are. They hated Thatcher and speaking personally, I am not crazy about them.

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