Opportunities in the Carnage

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The tonal shift from the Fed … the snap-back profit potential in today’s divergence … yes, tech profits can come even when the broad market is down

On Wednesday, we saw an important tonal shift from the Fed.

It was subtle, but it was there. And our hypergrowth specialist Luke Lango believes it marks a critical inflection point.

Despite heavy losses in the market yesterday, which are continuing as I write Friday early afternoon, Luke sees this shift from the Fed as setting the stage for a monster rally in a specific corner of the stock market over the coming 12 months.

To begin explaining, let’s jump to Luke’s issue of Hypergrowth Investing from yesterday:

The story here is pretty simple.The Fed has grown more and more hawkish with every meeting so far in 2022. They grew more hawkish in January 2022 than they were in December 2021, and they grew more hawkish in March than they were in January.

This hawkish evolution has coincided with a rapid rise in macroeconomic headwinds — including the breakout of a war in Europe and the reemergence of Covid-19 lockdowns in China.

Therefore, as the Fed has grown more hawkish, the economy has actually weakened, and the risks of a recession have grown. Of course, as all that has happened, stocks have been crushed.

But, yesterday, that hawkish evolution stopped.

***Luke points out that for the first time here in 2022, the Fed did not sound more hawkish than it did in its previous meeting

If anything, the Fed sounded less hawkish than in March.

Luke notes they didn’t do or say anything unexpected. If anything, the “surprises” leaned more toward the dovish camp.

Here’s what Luke noticed:

  • 50-basis-point hike – expected
  • Commencement of the balance sheet run-off program, maxed at $95 billion run-off per month – expected
  • The potential for another few 50-basis-point hikes at upcoming meetings – expected
  • Acknowledgment that economic activity is edging lower (a more dovish stance than last meeting)
  • Confirmation that a 75-basis-point hike is not being seriously discussed (a more dovish stance than last meeting)

Back to Luke for his takeaway:

All in all, then, everything we heard from the Fed yesterday was either:

  1. Consistent with the same level of hawkishness that was expected.
  2. More dovish than what we heard in the previous meeting.

We did not hear anything that was more hawkish.

We believe this marks a critical inflection point in the trajectory of the Fed’s stance.

The past few months have been characterized by a hawkish evolution of the Fed. We suspect the next few months will be characterized by a dovish evolution of the Fed.

***So, how might this inflection point impact an investor’s approach to the market?

In short, even though it may not feel this way on down days, Luke believes we’re seeing a buying opportunity for the ages.

To be clear, this doesn’t apply to the entire market. Rather, the opportunity is specific to a small group of top-tier technology stocks. It’s something Luke is calling the 1,000% Divergence Window.

In short, the prices of certain, elite technology companies have become wildly decoupled from the intrinsic value of those companies, as measured relative to their revenues/earnings.

It’s rare that this happens. But when it does, it opens up a “divergence window.”

These windows create the opportunity for a huge snap-back, wherein prices race higher toward their equilibrium level relative to revenues and earnings.

Here’s Luke with the scope of the snap-back he’s expecting from today’s divergence:

The greatest stock market phenomenon in the history of capitalism has arrived on Wall Street for the first time in 14 years.

Investors plugged into this phenomenon could make a lot of money over the next 12 months.

Those unaware of it — and those who ignore it — could lose a lot of money over the next 12 months.

The divergences always end with those individual stocks snapping back to their true stock prices, resulting in enormous returns for investors who bought during the divergence window.

We’ve made a lot of interesting discoveries about these divergences.

They usually revolve around growth stocks. They usually last a few months. They usually result in 100%-plus gains in less than 12 months.

***But does such a bullish forecast hold up given current market weakness and big selloffs like yesterday?

That’s the counterintuitive thing – history shows that the beginnings of these divergence snapbacks can happen even while the broader market is still taking heavy losses.

Here’s research on this from Luke:

A few stocks that experienced this divergence phenomenon in 2001 were Amazon (AMZN), F5 Networks (FFIV), and eBay (EBAY).

Look what happened to those stocks throughout 2001 and 2002.

While the broader market kept reeling during that period — the Dow Jones dropped 16%, the S&P 500 dropped 24%, and the Nasdaq collapsed 27% — these divergence stocks soared by an average of more than 90%.

While folks invested in the market lost more than 20% of their wealth, divergence stock investors basically doubled their money!

This wasn’t an isolated event.

The same “elite tech up, broad market down” phenomenon repeated itself in the 2008 divergence.

Back to Luke for those details:

At the time, all stocks were crashing due to fallout from the Great Financial Crisis.

But certain stocks were crashing at the same time their companies were rapidly growing their revenues and earnings. Some examples included Amazon, Netflix (NFLX), and Booking (BKNG).

From November 2008 to March 2009, those divergence stocks soared between 56% and 94%. Over that same stretch, the Dow Jones dropped 11%. Yet again, we see that market investors lost money while divergence stock investors scored huge returns.

This is the power of the divergence. It is such a powerful market phenomenon that is has the ability to send a small group of divergence stocks significantly higher in a short amount of time even if the market crashes.

From an investment perspective, there’s no better value proposition than that.

***Yes, it’s a scary market today, let’s not pretend otherwise

But during times like this, it’s critical to use history as a guide. And history shows that the early stages of divergence windows begin to open even during bearish broad market conditions.

Luke put together a research video on this topic. To watch it for free, click here.

Before we wrap up, I need to underscore a point I made in a prior Digest.

This divergence window isn’t just about returns over the next 12 months. If anything, returns from these next 12 months will be forgettable when compared to longer-term returns.

See for yourself. Here’s Luke with that research:

Based on data from over 20 stocks through three different divergences stretched over 40 years, we’ve found that the average forward 12-month return in these divergence stocks was about 135% across all the examples.

Forward five-year returns were almost 1,000%.

Forward 10-year returns were in excess of 3,000%.

Forward lifetime returns were more than 20,000%!

Despite the sea of red recently, there’s a lot to be excited about.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/05/opportunities-in-the-carnage/.

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