Stock Market’s Rise Is Stretched – Reversal Could Hit Apple, NVIDIA And Tesla

August has produced two issues that portend a stock market reversal, particularly for popular favorites like Apple
AAPL
, NVIDIA
NVDA
and Tesla
TSLA
:

• A burst of optimism, especially for fast rising stocks
• Bearish developments in all-time high stocks

Likely, a quick, sharp correction (~10% drop) could temper the optimism. However, the more rapid risers, where optimism is especially high, might be in for a larger fall. Therefore, now looks to be a good time to raise cash for potential opportunities ahead.

Disclosure: Author sold all-time high stock holdings and is holding cash reserves

Here is the explanation behind those two issues:

First, the burst of optimism

Note: Don’t expect this stock market’s rise to continue its unbroken string of up-days, weeks and months. Instead, view the stock market as being in a variable trend pattern, with enthusiastic rises followed by corrections. Such a pattern keeps a bull market in check and healthy.

Therefore, think of this stock market trend as being a multi-act play with two, alternating actors: Pollyanna, who counters every concern with positive assurance, and Chicken Little, who is in a perpetual state of concern, supported by his book, “The Worrywart’s List of What Could Go Wrong.”

Investors too often view the stock market, itself, as the indicator of which message is accurate. Therefore, Pollyanna now commands the stage.

Originally, she was greeted by catcalls, as she tried to push Chicken Little aside. Now, with the market steadily rising, her fan base has grown, and she is cheered daily. Supporting the increased optimism is her message that normality and growth in 2021 will put the coronavirus recession behind us.

Does that mean we are in the clear? No. You can still hear Chicken Little in the wings, along with his loyal followers, chanting, “Watch out!” And, despite his diminished following, his message endures: All the uncertainties, alternate paths and eventual results remain viable. Therefore, don’t accept those assurances of normality and growth returning soon.

For example, from The Wall Street Journal (August 29-30 issue):

Second, the bearish developments among all-time high stocks

Note: Don’t dismiss or make excuses for signs of technical weakness in favored stocks – particularly those that are rising quickly in all-time high territory. Happy times in these stocks, as has been the case this August, can ramp up optimism, enthusiasm and expectations. And that means a reversal – even a “normal” stock market correction – can hit such stocks hard.

Backdrop: Why all-time high stocks are important

Since 1964 I have invested in stocks making new all-time highs whenever I believed the market was in a speculative growth phase – like now. Doing so has provided me with three benefits:

• Early entry into a speculative growth trend and identification of favored stocks
• Potential for reasonably fast gains with limited risk
• Early exit out of speculative growth trend, avoiding favored stock declines

It’s that third item that is the impetus for this article.

On May 26, I bought four all-time high stocks: Bandwidth, Fastly, Five9 and NVIDIA. My goal is a gain of 30% – 40%, and (remarkably) all four fulfilled it: Fastly (45% – sold June 17), Bandwidth (37% – sold July 30), NVIDIA (44% – sold August 21) and Five9 (31% – also sold August 21).

During this period, I found myself thinking about the similarities to the speculative market in 1967. So, I wrote about my thoughts on August 7 in “Mark Cuban And Jim Cramer Cannot Figure Out This Stock Market Because They Weren’t Investing In 1967.” Jim Cramer was the one who surprised me the most. At the time he was fighting against the rising market, saying on August 5, “… I can’t take how stupidly bullish this market can be.”

It’s the NVIDIA sale that tells the story. On that Friday (August 21), I had NVIDIA, Five9 and four other stocks that I had recently purchased. I had expected to hold NVIDIA longer. However, following NVIDIA’s earnings report, Jim Cramer did a classic 180, talking up NVIDIA, along with Apple and Tesla. In other words, he finally ignored Chicken Little’s pessimism and adopted Pollyanna’s optimism – only, he was three months too late. As a result, I felt his conversion was a sign that the market’s rise was overly stretched and so I decided to sell everything.

Then, to confirm my sense of a reversal coming, I spent last week reexamining all 350+ all-time high stocks I had evaluated and not bought over the past three months. What I found was three types of patterns:

• Drifting rises, meaning ETF and index fund investing is at work….