Google Gets Smoked

Google Gets Smoked

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

This week didn’t prove quite as dour as we warned…

On Monday, we looked to the election year seasonality chart of the SPDR S&P 500 ETF (SPY) to give us clues about when to buy for the traditional end-of-year rally.

We concluded you’d want to wait a few days before making your big move.

The data tells the story:

Here we see that yesterday, November 21, was the second-lowest seasonality bottom of the past seven election years – the other being in late October. However, stocks haven’t exactly plunged this week. Despite escalation in the Ukraine-Russian war by bringing U.S. and U.K. missiles into the mix, stocks have spent the week waffling higher. A lot of chop, but ultimately stocks are up about 1%.

What does it tell us when the market defies seasonality? Well, a couple things.

For one, seasonality is all about statistics and probability. It’s not a crystal ball. Instead, it shows us where to look, and when. That’s important to understand.

Looking again at the chart above, we can see that stocks haven’t followed the seasonality chart to a tee this year. There were a few moments where stocks found reasons to sell off right along with the forecast, like in early April, late July, and early September.

But in general, stocks have been strong all year long and at many points defied the seasonal trend.

And that leads to the second point.

This is a white-hot bull market…

And the impetus on investors is to buy, not to hide.

The fact that we’re seeing these deviations against the seasonal trend, mainly to the upside, is its own kind of buy signal. Stocks are performing well during times when they historically cool off. That means when seasonal forces truly kick in from now through year-end, the thrust could easily exceed expectations.

Let’s look at the data again.

Buying this week’s seasonality bottom, measured from November 21, shows strong odds of positive returns through December 31 (almost 86%), with an average return of 3.6%.

A rise of that magnitude would put the S&P 500 firmly back into the 6000 level, even broaching 6120 by the end of 2024.

What’s interesting to me about this is such a rally would put us at the top side of a rising wedge pattern:

If we wind up turning down from the top of this pattern, that would be a sign of further volatility to come. But if we make a clean break above that top rising black line, that resumes the uptrend that began all the way back in November of last year.

This is an important chart to keep an eye on. A bull case can quickly turn to a bear case if this chart breaks below the bottom black line. If that happens, look for support around the 5643 level on the S&P 500.

Google investors just got a rude awakening from the Department of Justice…

On Thursday, the DOJ asked a judge to break up Google (GOOGL), citing a recent court ruling calling Google a monopoly. (Disclosure, I own class A GOOGL shares at time of writing.)

The main goals are to force Google to sell its dominant web browser, Chrome, and to restrict it from prioritizing Google’s search engine on the Android smartphone operating system, which it also owns.

These are harsh penalties that would indeed impact Google’s business operations and revenue. Right now, nearly 57% of Google’s total revenue comes from ads placed on its search results.

Handing over the keys to its Chrome browser could potentially dilute the browser’s optimization toward getting users to search on Google. And de-prioritizing the search engine on Android phones risks its dominant mobile software position as well.

More than 70% of the global smartphone market share is in Android. In the U.S., it’s about an even split between Android and iOS, Apple’s software.

How the DOJ case will all shake out remains to be seen. But we can take a close look at the price action in Google stock, which is remarkable.

At last look, GOOGL had fallen more than 5% from the previous close. A single-day drawdown of 5% or more in GOOGL is relatively rare, happening only 53 times since Google went public in 2004.

I went back through these instances and assumed you bought and held the stock on five different timeframes: one calendar week (or five trading days), one month, two month, three months, six months, and a year. Here are those results:

I went into this study assuming that the longer your held the stock after such a big drawdown, the better you’d do. And that’s exactly what we see here.

If you held GOOGL for a week, a month, or two months, you had coin-flip odds and average returns that were just about flat.

But when you extended it just one more month, your odds of success rose to 77%. A year out, the win rate was 92.3%, and the average return jumped to 31%.

This tells us a couple interesting things. For one, these big down-moves in Google tend to foretell a lot of near-term volatility. So much so, it’s hard to make a short-term call about where the stock will end up.

Google is also one of the biggest tech companies in the world and makes up close to 4% of the S&P 500. While the problems it faces today are clearly isolated, it has a big weight on how the rest of the market moves. And market moves have a big influence on investor behavior.

If you’re looking to buy GOOGL on this dip, just be prepared to hold it for longer than a few months if you want the highest odds of success. And don’t be surprised if this volatility creeps into other areas of the market.

Bitcoin continues to suck the air out of the room…

In retrospect, bitcoin was the easiest trade of 2024. It’s now up 122% year-to-date and, seemingly, cannot be stopped.

We had a good feeling this would happen as early as last October. We knew what happens with bitcoin every few years, even though it seems to always shock the financial world. We knew that the “halving” – when the amount of BTC rewarded to miners is reduced by half –would inevitably cause a stampede. And we knew that the first-ever spot bitcoin ETFs would drive even more capital toward the original cryptocurrency.

I wasn’t quite convinced we would see a six-figure bitcoin so soon, but we’re knocking on the door right now. It’s over $98,000 and climbing.

Even more important than that price chart, though, is the chart of bitcoin’s share of the total cryptocurrency market cap.

Ever so slowly and even stealthily, bitcoin has been sucking up all the investment capital in the crypto market. From a bottom of 40% market share in 2023, it’s since climbed to more than 60%:

The ETFs had a lot to do with this. Spot bitcoin ETFs are, as of now, one of two institutional vehicles for owning crypto – the other being the spot Ethereum ETFs for the No. 2 cryptocurrency.

But as we’ve been preaching here in TradeSmith Daily, stay away from any and all non-bitcoin cryptocurrencies until we see a breakdown of this uptrend. Right now, it represents a focused and singular appetite for the king.

Though, it’s not all sunshine and rainbows. In my purism, back in March I warned against buying MicroStrategy (MSTR). This is a so-called “bitcoin proxy” company whose primary source of value is owning lots and lots of bitcoin on its balance sheet.

As we said then, MSTR is a leveraged bet on bitcoin that, this year, is paying off:

Listening to my advice then clearly meant you missed out on some gains. But here’s why I’m still happy to warn against MSTR.

MicroStrategy issues debt and equity to fund new bitcoin purchases. Doing so has led it to now hold 1% of all bitcoin in existence, with no stated intent to sell.

That leverage cuts really bad on the way down, though. Take a look at what MSTR did compared to bitcoin back in 2021:

That’s what leverage does. It amplifies both gains and losses. Other proxies, like bitcoin miners, look pretty similar.

MSTR is only more leveraged today than it was when we first called it out. Back then, we calculated that MSTR’s equity premium was about 2X – or like buying bitcoin for twice its market price.

The equity premium is even worse today, at about 2.6X. And that’s actually a huge improvement from just a few hours prior to this writing.

MSTR stock is down over 16% as I write off the heels of a major short report out of Heisenberg Research. Bitcoin, meanwhile, is up on the day.

The core asset isn’t vulnerable to leverage, debt, or short report drama like this. That’s why I’m happy to give up some of those gains in exchange for much lower risk.

MSTR might prove to be a great trade as the bitcoin story continues. But as today shows, it’s no good place for buy-and-hold money.

For that stay far away, and stick with spot bitcoin or one of the ETFs.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily

P.S. Be sure to tune in tomorrow for my TradeSmith Daily Interview with options flow master Jonathan Rose.

Lately, Jonathan’s also been diving into the world of short-term options.

These are options set to expire in a matter of days, often even the very same day.

With such a short time to expire, the volatility and profit potential of these plays rise considerably.

But Jonathan’s primary tactic, of following unusual options activity into these trades, remains just as effective. Using these tools, Jonathan has helped his readers close out several trades with gains over 100% – including 245% on Criteo and 177% on Cameco Corp., plus gains as high as 279% on the Invesco QQQ Trust.

Jonathan is putting together a live presentation that will clue you in to the strategies he uses to find these market-beating trades.

Click here to get on the list for that, and tomorrow you’ll start receiving training videos on the strategy, as well as my interview with him for TradeSmith Daily.

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