The Morning Line

It’s All About Buying Those Dips

I’ve written here before about how the broad averages have struggled to go lower during what could turn out to be the initial phase of a bear market. Many traders, particularly greenhorns too young to have never experienced a bear market, appear to be buying each step of the way down. They could do so only if they were confident a rally lies just ahead. You can hardly blame them, since this has been more or less true for the last 16 years. The chart shows February’s selloff in graphic form. Notice the series of elongated bars over the last three weeks. Their steep, smooth fall resembles that of a parachute-drop rather than a crash landing. There is no trace of panic or even urgency in the decline, just hard selling that is being met minute-by-minute with serene buying, most of it occurring in the latter half of the day.

A Doge-y Economy

So far, the S&Ps have fallen 8% from the record highs they achieved near 6200 in December. That’s not even a stiff correction, let alone a bear market. But tariff talk and Doge layoffs have begun to unsettle the markets in ways that make a recession thinkable. A few retail analysts have even conceded there is a “small possibility” of a recession in 2025.  In Wall Street-speak that’s practically a siren alert telling investors to prepare for Armageddon.  But there is barely a hint of a downturn as yet, only two consecutive months of punk consumer spending. It is possible nonetheless to extrapolate a bearish scenario from the chart above. For starters, the S&P 500 will fall to the 5555 target shown. Then, they will rally with sufficient vigor to make tariff worries and the threat of a land war in Europe melt away, at least for a while. (Alternatively, the bounce could come from 5641.50, a proprietary ‘voodoo’ number.)

Although there is no reason to think that a minor mood change will push the broad averages to spectacular new highs, it’s no stretch to imagine the S&P mini-futures poking marginally above December’s record 6178. That would be enough to set the hook, goading bears into a short-covering riot while simultaneously convincing bulls that yet another moon shot is under way. Alternatively, a bear bounce could peter out well shy of the old top.  Either way, we’ll be ready.

A ‘Formula’ for Preparedness

You’ve heard from ‘Formula382’ before. A longtime Rick’ Picks subscriber, he manages wealth in the Ozarks, using puts and calls aggressively, with a dollop of good timing, to keep clients happy. He has also shown uncanny skill at rotating out of sectors just before they peak. In a recent chat room discussion, Formula wondered whether the recent sharp break in the price of Walmart shares might be a harbinger of trouble – and not just minor trouble, either. He is concerned that when the bull market ends, possibly as soon as spring, it will usher in an economic depression worse than the 1930s. I not only share his pessimism, but also believe that a bust of such magnitude is unavoidable. Here’s the discussion thread from the Trading Room, lightly edited:

Formula382: We’ve all been wondering which stock would lead the market higher now that MSFT has fallen out of bed. Is price action in Walmart perhaps the canary in the coal mine? Is the stock not the largest indicator of overall consumer health? WMT’s dive following the recent earnings report was pretty severe — and fascinating. The company’s CFO expects suppliers to “take price” — i.e., suck up costs associated with inflation and/or tariffs. It turns out WMT doesn’t even factor in the effects of potential tariffs on revenue and earnings. Sounds bonkers to me.

The company’s shares have been trading at a 40 multiple, and Costco’s at a nose-bleed 60! These names historically have traded with multiples in and around the mid- to high-teens, much like the S&P. In short, WMT is commanding the multiple of many tech names with just 4-6% same-store sales growth. And not in a hundred Sundays do I believe that the upper crust of the U.S. is now shopping at Walmart. I live in the town they built and can tell you that although we all get our groceries there, I never set foot in a supercenter, not ever!

Cantaloupe Packers

So what’s changed? You can thimble-rig the perceived value of e-commerce by saying that people picking up at curbside is the equivalent of an online purchase; however, it’s merely shifting the work of picking out cantaloupe and cilantro to some high-school kid who does it for you on the company’s dime. Moreover, when customers pre-order, there’s no chance of an impulse purchase of a new salad dressing or hot-sauce.

Crowngas: I think Costco and Amazon are kings, Formula, and I agree with your point about Walmart’s online pickup. I use it religiously (or did when I lived in the states), and I tell my physical-training clients to use it for grocery pickup to avoid going in and buying “unhealthy products.” I am never an impulsive buyer, just the familiar stuff. As far as my stock-picking goes, AI is the future of technology. And one of these days, a small company in the AI business will become a giant like TSLA and Nvidia. A headline writer will ask, “What would $500 invested in this company be worth today?”

‘Too Optimistic’

Formula382: I would love to be that optimistic about anything, Crown, but I’m in the camp that after this market tops, which may be as soon as this spring, we’re headed for a decade-long or longer Greater Depression. Let me outline what I think we’re headed for, and this is also backdated to include a 5th of a 5th of a 5th final completion wave in the S&P and Dow, which is a 5th wave on the shorter term 2020 low until now. A 5th wave from the 2009 low until now and finally, the LONG-term 5th wave completing from the 1932 lows in the Dow. Based on these wave counts that are all converging, the S&P have either topped or will top in the 6250-6500 range. Once a high is established, we should see a drop of 30-40% in the S&P this year, taking them down to 3,500-4,000. We then spend the next couple of years bouncing between the lows and 5000-6000 before the next major move lower, establishing a lower low near 2,700.

Then a lower high again and a lower low once again until we finally find footing between 1,000-1,700 on the S&Ps, which will likely take us until the year 2035-2040 time frame before the ultimate low is struck. Then we can begin the next secular bull that lasts into the 2080 time frame. Might we see the count reset? Sure, anything is possible. But it’s aligning almost too perfectly [to abort]. In 1942, while war was raging, Ralph Nelson Elliott called for the market to go on a 70+ year tear and top sometime after 2012, an amazing call by any measure.

AI Can’t Save Us

My point here is that not even AI can save us from what’s on the horizon. Heck, it might even be a contributor to the deflation that’s likely to set in. Let’s see what happens if/when the SPX carves out a higher high in the aforementioned ranges, and how the market responds. If we visit the 4K level this summer/fall, everyone better start making plans for how they’re going to survive what’s coming.

JoeyJolt: I appreciate these posts, Formula. I’m especially interested in Elliott Wave Theory framing what is likely in the cards for the markets.

Formula 382: Joey, I’ll try to be more ‘vocal’ in here going forward. I think that if we can get the bigger strokes in our favor, with Rick’s precision, it could be a lethal combination. I’m trying to thread a needle with a chainsaw, and I’ve got my own ‘stuff’ to worry about. But I’m equally, if not more, concerned with the $700M+ my clients have entrusted me with.

A ‘Formula’ for Preparedness

Who’s Telling the Truth about DeepSeek?

I’m tracking Nvidia shares closely because they can tell us whether China’s DeepSeek threatens America’s lead in AI development.  The Nasdaq-listed stock got pummeled a month ago when the Chinese revealed they were developing an open-source chatbot that can easily compete on performance and price with the most advanced models offered by OpenAI and other U.S. developers, including Elon Musk. Investors who have bet trillions of dollars on relatively costly solutions were so spooked by the news that they batted NVDA down to $113 not long after it had traded as high as $153.

At the time, I said the stock would be an opportune short sale if it bounced from $113 to $140. It did so last week, hitting a recovery high of $143, but I’m no longer so enthusiastic about betting against the stock. It is the chart that has changed my mind, not the aggressive attack on DeepSeek by investors, analysts, pundits and scientists.    They said China had spent considerably more developing the technology than they were acknowledging and that its smarts were extracted from Nivida chips the Chinese had purchased despite a U.S. embargo prohibiting them from getting their thieving hands on certain high-tech hardware.

Eating America’s Lunch

So, who’s lying? I doubt we’ll get a straight answer from the news media since they are rarely up to the challenge of reporting on developments that seem to upset the status quo. The question remains crucially important nonetheless, since there are literally trillions of dollars of bets and side-bets on the relatively capital-intensive, proprietary approach that American-based companies have taken toward AI development. NVDA’s stock chart is probably as good an answer as we’ll get, since a graph cannot lie. In that regard, a move to new all-time highs above $153 would imply that America’s edge in technology is safe, at least for now, along with the trillions of dollars in investment capital the AI story attracted. If the stock instead falls to my original downside target at $103, that would imply even lower prices are coming, presumably as Chinese developers eat America’s lunch with a cheaper, more powerful AI solution.

Juicing Our Bull Market Bellwether

Get the forecast for Microsoft right and you cannot go far wrong guessing where the stock market is headed next. This has been an article of faith at Rick’s Picks for years, and it has served us well. The chart shows MSFT either moving in lock-step with the Dow Industrials, or sometimes leading the Indoos with pullbacks and upthrusts that were relatively more pronounced and energetic. In July, however, after notching a record high at 468, Microsoft shares began a gentle decline that so far has gone unmatched by the Indoos. The latter corrected moderately for a couple of months, then pushed back up to the highs, where prices have hovered stubbornly since the beginning of the year.

Based on the chart comparison above, I assumed until recently that MSFT was about to lead stocks lower. Now I’m not so sure. Suppose Microsoft shares are simply taking a breather while the broad averages continue higher. This possibility was suggested to me in the Rick’s Picks chat room the other day by a subscriber who goes by the handle Formula432. An Ozarks-based financial advisor who specializes in high-net-worth clients, he manages their portfolios aggressively for yield, often with covered writes that have been astutely timed. “Where should our focus be now?” he asked. “I don’t think MSFT has the relevance it once did. The rotation is real, growth is breaking, and value is going to be in leadership IMO, if only on a relative basis.”

Hemlock Cocktail, Anyone?

I had to agree. Why should the stock market require Microsoft’s leadership if there are other companies with greater growth potential? As long as the software giant can continue to pile up mountainous revenues without spectacular growth, it will remain a safe “hold” for portfolio managers. As much could be said of some other biggies in the heavyweight class known as the Magnificent Seven. GOOG, META, AAPL, NFLX, WMT. TSLA and NVDA. There’s enough growth potential in this list to kick up portfolio performance in boom times, but also, especially in the case of Microsoft, rock-solid revenues to cushion against a downturn.

It is scary to find myself — a glass-is-half-full-of-hemlock permabear — thinking like a Wall Street shill who produces feel-good features for Bloomberg’s business channel. Some might even take this commentary as a contrary sign that stocks are about to crash. I’m down with that possibility as always and will be more guarded than ever against being caught with my pants down if it happens. However, my somewhat adjusted thinking about “rotation” cannot help but leave me more open-minded to the possibility that the Dow will be trading 10,000 points higher in six months.

Don’t worry; I have no intention of casting off the cynical regard for securities markets that informs and colors my writing. Twelve years in the trading pits taught me that capitalism’s symbolic redoubts are just an epic carnival midway, powered by greed, thievery, huckstering and mass psychosis. Thus, the inspiration for my new mantra: Get Bitcoin right, and you cannot go far wrong guessing where the stock market is headed.  Some of you will be pleased to hear that my highest outstanding target for Bitcoin , currently trading for a tad less than $100k, is a salacious $144,586.

Mainstream Media Muffle China’s Breakthrough

Bloggers were revved up when last week began, trumpeting a warning that China’s DeepSeek R1 threatened to crush America’s capital-intensive effort to lead the world in AI development. ZeroHedge was among the first to jump on the story. “The future of humanity is being decided as we speak,” wrote Mark Whitney. “This is a full-blown, scorched-earth free-for-all that has already racked up a number of casualties, though you wouldn’t know it from reading headlines that typically ignore recent ‘cataclysmic’ developments.”

What had the Chinese done to upend the status quo?  Mark Button, a technology expert quoted in the article, describes the situation:  “Imagine we’re back in 2017 and the iPhone X was just released. It was selling for $999 and Apple was crushing sales and building a wide moat around its ecosystem. Now imagine, just days later, another company introduced a phone and platform that was equal in every way, if not better, and the price was just $30. That’s what unfolded in the AI space today. China’s DeepSeek released an open-source model that works on par with OpenAI’s latest models but costs a tiny fraction to operate. Moreover, you can even download it and run it free (or the cost of your electricity) for yourself.”

An Ostentatious Yawn

Predictably, the mainstream media threw everything they had at DeepSeek in the days that followed. The Wall Street Journal led the charge with an ostentatious yawn and a list of bullet points intended to suggest that China’s supposedly killer solution was about as impressive as a set of Lincoln Logs assembled into a working toaster oven. By week’s end, Wired chimed in with a pantywaist report that university researchers had baited DeepSeek with 50 malicious prompts, and that it failed to block even a single one.  If this story had broken a year ago, the old Zuckerberg would have ordered up grief counseling for Facebook’s stasi.

Why did the news media go on the attack? Although we tend to assume they are just shilling for OpenAI, Nvidia and other companies with trillions of dollars sunk into the artificial intelligence story, it is simpler than that. For in fact, journalists are too timid and too lazy to rock the boat with a story that is difficult to nail down.   To be sure, it is not easy to measure DeepSeek’s achievement, whatever its nature against Open AI’s stated goal of “build[ing] computers smart enough and safe enough to end history, thrusting humanity into an era of unimaginable bounty.” Only time will tell whether the Chinese have defeated the pay-to-play model advanced by Nvidia and other big players with an open-source solution that will cost users a relative pittance.

Whatever happens, the news has already deflated stock market valuations, reversing the global “wealth effect” by trillions of dollars. A measurable trillion of the loss will be in Nvidia shares alone. The company was worth about $3 trillion when it peaked in early January at $153, but my technical forecast says NVDA is all but certain to continue falling down to $103 before it finds traction. Although no one knows whether the DeepSeek story will prove to be as earth-shaking as some AI skeptics believe, price action in NVDA cannot but give us a precise answer.  If the stock sinks to $50 after an obligatory, oversold bounce from $103, that would validate the naysayers’ arguments that the AI story was mostly hubris, fated from the start to disappoint.

Nifty Trick Keeps the Bull Alive

I still expect Bitcoin to notch one or two more record highs on the hourly chart, but they will likely be the dying gasp of the bull market that began in 2009. There is reason to doubt that the broad averages will be swept up in this fetid blast of flatulence. That would create a technical divergence of sorts, but we’ll leave it to Microsoft, a peerless market bellwether, to help us gauge its significance. For now, the white-shoed crime syndicate that manipulates the stock for a living is doing its utmost to push MSFT above July’s record 468.35. That’s 5.5% north of Friday’s close, a spread the stock is capable of covering in a mere week. However, it will require a short-covering panic to first punch through the layered peak at 456 that MSFT created in December.

Realize that short covering is the main source of buying power in all bull markets. The cash that portfolio managers throw haphazardly at stocks helps keep them buoyant. However, only bears threatened with potentially ruinous margin calls can muster the kind of urgent buying that is capable of pushing the broad averages past heavy seams of supply. To make this happen, DaBoyz have always employed the same trick: pulling their bids overnight so that a stock falls low enough to exhaust sellers. With no supply weighing on the opening, the Masters of the Universe simply step aside, lending explosive power to even a smattering of buy orders entered just ahead of the bell.

300 Chickens

The result is shown in the chart.  Over the last two weeks, Microsoft has begun the day significantly higher than the previous day’s close mp fewer than three times. Almost no stock changed hands in these gaps, and yet they accounted for $35, or nearly 100%, of the stock’s rise over that period.  This flim-flammery does more than merely keep the bull market alive. It also materializes instantly spendable dollars that count toward the world’s “wealth effect.” Microsoft’s effortless, unearned upsurge added about $277 billion of ‘wealth’ to the macro ledger – enough to actually buy the Brooklyn Bridge and have enough left over to put 300 chickens in every pot.

‘Microsoft Indicator’ Is Fool-Proof

Get Microsoft right, as I continue to remind you, and your forecast for the stock market can’t go far wrong. The tech giant is among the most valuable companies in the world, with extraordinary profit margins tied to an 80% market share in operating systems. The subscription-based revenue model the company has put in place over the last decade is built to withstand a severe economic downturn. And as long as the shares continue to make new highs regularly, it’s safe to assume the stock market will, too.  The trouble is, MSFT hasn’t made a new high in six months, raising the possibility it has entered a bear market. This would have occurred last summer when shares topped at 468 on July 5.  The steep plunge that followed over the next 30 days took the stock down $83, or about 18%. That’s two percentage points shy of a statistical bear market, although investors who have stuck by Microsoft – i.e., every portfolio manager on earth — would find scant consolation in this statistic.

Still, most of them probably have little doubt that new all-time highs await, and they could be right. But a chart stretching back to 2023 suggests persistent distribution, along with ponderous supply that has prevented a run-up to new heights. The chart would take on a rosier look, however, if the stock were to pop just 22 points, or 5%, surpassing an important peak at 455 recorded less than a month ago. MSFT could easily do that in a week, and we should not bet heavily against it.

What About Bitcoin?

A second, nettlesome concern for bears who have already placed their bets is the feisty performance of Bitcoin. Like Microsoft, it appeared to have made a very important top a month ago when it hit a record 108,334. The rally came within 0.1% of a compelling Hidden Pivot target, and that’s why I was willing to lay 3-to-2 odds that the top was in.  However, the merciless short-squeeze that powered Friday’s wilding spree was cause for doubt. Although it topped slightly above a technical resistance that I call a ‘voodoo’ number, Bitcoin would need to start the week with a 3349-point dive to suggest bears are about to get a breather.

But they needn’t throw in the towel if Bitcoin explodes to new record highs in the days ahead, especially if MSFT seems reluctant to join the party. That could be considered a bearish divergence, although not the kind you’re likely to find described in a textbook. There are too many other signs that the broad averages have topped, including breadth numbers that have turned ugly. So be on your guard against Bitcoin going it alone for the bull’s last hurrah. That would keep bulls bullish, at least for a while, setting the hook for a new crop of speculators who have never experienced a bear market, let alone a take-no-prisoners killer like the one that’s coming.