Americans are an optimistic bunch. That’s why the meme trade phenomenon may be unique to us — we just don’t want to hear about negativity like a stock market crash. But in my opinion we are headed toward a steep correction. Still, if that turns out to be the case, it could be a once-in-a-lifetime opportunity to pick up growth stocks on the cheap…
Fundamentally, it’s very possible that the suddenly rising bond yields is part of a larger corrective cycle. As you know, last week ended on a downer as investors began rotating out of risk-on names into safer wagers. On paper, the red ink may trigger you to jump in on attractive growth stocks. However, you may want to hold your horses for a bit longer.
I say this because based on technical analysis, the S&P 500 and other major indices are printing what’s known as a broadening wedge formation. According to the excellent work of John J. Murphy, author of the book, “Technical Analysis of the Financial Markets,” a broadening wedge (also known as a megaphone top) represents an out-of-control market. And likely the first to get hit the hardest are non-dividend paying growth stocks.
Some folks will say that technical analysis is nonsense. But here’s the thing. Back in September 2019, strategist Sven Henrich used this very pattern to warn CNBC viewers of an imminent correction. A few months later, the novel coronavirus pandemic devastated the global economy, causing a stock market crash in February and March of last year.
You want more evidence? Go to the Centers for Disease Control and Prevention’s website regarding Covid-19 “Daily and Total Trends.” Take a long look at the seven-day moving average of daily Covid infections: that my friends is a broadening wedge. And it’s the reason why you want to avoid these growth stocks until after they have corrected sharply.
- Tesla (NASDAQ:TSLA)
- Nio (NYSE:NIO)
- PayPal (NASDAQ:PYPL)
- Square (NYSE:SQ)
- Shopify (NYSE:SHOP)
- Airbnb (NASDAQ:ABNB)
- Marathon Patent Group (NASDAQ:MARA)
Before we get into it, let’s be clear once again that this is my opinion. There’s a strong possibility that this article will not age well. However, I’m willing to take that risk. I see too many corroborating data points that make it impossible for me to ignore them. But if you’ve been waiting to buy these growth stocks, you may have a great opportunity to do very cheaply soon.
Growth Stocks to Watch: Tesla (TSLA)
If you’ve been following my work recently, you’ll know that I expressed my concerns with Tesla. So far, I’ve been wrong about my apprehension toward TSLA stock. However, if the warning signals turn out to be accurate, I’d say that Tesla above all other growth stocks is at serious risk for a correction.
First, the valuation for TSLA stock was out of touch with reality before everyone started worrying about rising bond yields. Now, in my cautionary write-up for Tesla, I mentioned that I discussed the narrative with my InvestorPlace colleague Will Ashworth. Among Ashworth’s counterarguments, he stated that Tesla was an aspirational investment and that helps justify the premium.
Ashworth is one of the smartest folks in this business. However, I’m going to disagree with him on this one.
In large part, it’s because of my second point: Tesla has the rich drivers market cornered but this segment will not spark mass adoption of electric vehicles. Further, with competition rising, Tesla won’t have as many opportunities to sell carbon credits, which is a significant reason why it’s showing a profit on its books.
Still, it’s good news if you’ve wanted to buy TSLA, but thought you missed the boat. Shares will likely drop to a realistic valuation.
While Tesla always generates the headlines, Chinese EV manufacturer Nio has been killing it in the markets. Sure, TSLA has put on a whopping performance, moving up nearly 400% over the trailing year. However, NIO stock has redefined what’s possible in highly potent growth stocks, skyrocketing slightly more than 1,000% in the same period.
Of course, this is wildly impressive. However, I think the party is going to end soon. Indeed, there’s evidence to suggest that the music is starting to fade.
Over the trailing month, NIO stock finds itself down about 20%. For many, this is the classic definition of a bear market. Therefore, contrarians are probably tempted to jump into shares. However, if I really wanted to buy NIO, I would wait. Shares will probably unwind much more than this.
Although I find Nio’s efforts to change China’s image as a true automotive contender inspirational in a sense, I don’t trust the company nor the country. That’s because…
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