The Bifurcated Market II: Contrasting My View With The Great Puru Saxena

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The market is bifurcated into the mega cap tech stocks that have held up well so far – and thus propped up the indexes – and the smaller but still important stocks that have already suffered brutal bear markets. My premise is that the mega cap tech stocks will roll over into their own bear markets over the course of 2022 while there are opportunities to pick up the leaders of tomorrow in the stocks that have already suffered brutal bear markets – “The Bifurcated Market”, Top Gun Financial, February 16

Are you a bull or a bear? That’s a trick question because the correct answer now is both IMO. What am I talking about?

Since the November top, mega cap tech stocks like Apple (AAPL), Microsoft (MSFT) and Google (GOOG/GOOGL) that led the 2009-2021 bull market have held up relatively well (Facebook (FB) is a notable exception). However, as I have been discussing for many months now, many smaller but important stocks have already suffered brutal bear markets. Therefore, I am bearish on the former – and by implication the market cap weighted indexes – but bullish on the latter and am starting to nibble on what I have termed “the leaders of the future”. This is a unique perspective that I have not seen articulated elsewhere.

One way of making this distinction is by contrasting my view with one of the best investors on FinTwit, Puru Saxena. Puru is one of the few out there who is now recommending starting to buy “the leaders of the future” via dollar cost averaging as you can see in the tweet above. As I have written and Puru has tweeted, many of these stocks are down 50%-80% from their highs. For example, take a look at the charts of Snapchat (SNAP) and Shopify (SHOP) above – two leaders of the future that I have started accumulating positions in. There is now opportunity amidst the carnage.

However, Puru also believes that “the final flush is now underway” and is “on watch for a major low in March 2022”. This is where we disagree. The indexes won’t bottom until the generals like AAPL, MSFT and GOOG/GOOGL have themselves suffered brutal bear markets, dragging the market cap weighted indexes down with them. These stocks are now mature, their growth is slowing and they are overvalued. This process has barely gotten underway as you can see in the charts above. While the “stealth bear market” in important but not leading stocks has been the story for the last few months, I believe the rollover of mega cap tech will be the story for the remainder of 2022.

Further, even once mega cap tech has rolled over and the indexes are near their lows, I don’t expect a V-shaped recovery. That’s because – and again this is a point on which I disagree with Puru – until inflation is under control (and I don’t think that’s going to happen anytime soon), contractionary macro forces will continue to hold back the economy, corporate profits and stock prices. It’s going to be many years before the next bull market begins in earnest.

So am I a bull or a bear? Both. It’s a bifurcated market.

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