Cocky Bears Outmatched: Tech Triumphs

Investors refuse to sell in May and go away… [Morning Reckoning] May 07, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Cocky Bears Outmatched: Tech Triumphs Baltimore, Maryland May 07, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, A dicey April pullback has given way to a fresh rally as the market’s former momentum leaders gain traction. The bears might have gotten a little too cocky during the April swoon, leaving the door open to an unexpected snapback as investors refuse to sell in May and go away… Facts are facts… and we can’t deny what’s happening in the markets right now. While we were all expecting a bigger correction in April, stocks have reversed higher and have repaired much of the damage. Barring a massive failure here, we should concentrate our efforts on finding quality long setups, rather than pressing any shorts that have taken a hit over the past two weeks. Friday’s not-so-hot jobs number has clearly sparked a glimmer of hope amongst the rate-cut crowd. Stocks are now also aided by the hope that perhaps the economy isn’t as strong as many feared early last week. Yes, I know that sounds a little crazy. But this has been the market’s fixation since the days of the 2022 bear market. And while we don’t know when the bulls will get their precious rate cut, we will have a better idea as to where stocks might be headed in the short term if the averages can continue to bounce after reclaiming key support. Either way, volatility is down and Friday’s rally has helped push the averages back toward the area of the mid-April breakdown. As always, price trumps narrative. If we continue to see stocks build on this move, we need to go with the flow and flip bullish for trading purposes. While some weaker groups have found their footing this month, the resilience of the Q1 tech leaders has been the biggest story… [New Biden Bucks Follow-Up Available Now]( Since posting the original Biden Bucks presentation online, millions of people have viewed it. Snopes and the Associated Press have even attempted to “fact check” and claim some warnings are false: [Click here to learn more]( Point being, the message has raised a storm and caused a lot of controversy. But in the time between the message and now, a lot of new developments have come to light. That’s why an update to the original prediction was just released… one which will likely be even more controversial. [>> Click here now to access the Biden Bucks follow-up](. [LEARN MORE]( AAPL, TSLA Finally Find Buyers The unshakable semiconductors are back on the top of the heap as this sector works on its third straight week of gains coming off the April lows. NVIDIA Corp. (NVDA) is now only a 5% rally away from its all-time highs. This is no small feat considering the stock is coming off a 20%-plus correction following a record-setting Q1 performance. In fact, the Magnificent Seven are (almost) all piecing together significant rallies now that the bulk of quarterly earnings have hit the wire. Two notable laggards – Apple Inc. (AAPL) and Tesla Inc. (TSLA) – finally found traction and pushed higher after failing to participate in the first quarter melt-up rally. Perhaps more importantly, both stocks rallied on “bad” earnings, according to the financial media and Wall Street analysts. Apple beat top and bottom line estimates, yet reported a 10% year-over-year drop in iPhone sales and offered lackluster guidance. Meanwhile, Tesla reported quarterly profits sinking to 3-year lows, and a slew of other concerns we covered in last week’s note. One of our main concerns heading into spring trading was how some mega-caps like AAPL and TSLA were decoupling from the melt-up. But I think it’s time to cross that worry off the list. Unless we see these two names completely fill those earnings gaps and move lower, our bias should remain to the upside. 2 More Earnings Winners Alphabet Inc. (GOOG) is another important earnings winner to watch as the rally continues to unfold. GOOG launched to new highs, jumping almost 10% after reporting an unexpected earnings beat. You might recall that GOOG wasn’t looking too hot back in March as it corrected 15% off its January highs. But a strong snapback and subsequent earnings explosion have vaulted this stock back to top-performer status as it builds on its 20%-plus year-to-date gain. One of the prime drivers of GOOG’s strong earnings reaction was a 20% pop in YouTube ad revenue, demonstrating that the advertising rut from the previous bear market is now firmly in the rearview. “Advertising is so back,” a recent CNBC piece declares. “After a brutal 2022, when brands reeled in spending to cope with inflation, and 2023 defined by layoffs and cost cuts, the top digital advertising companies have started growing again at a healthy clip.” GOOG isn’t hogging all the ad money, either. In fact, we’re seeing signs of a bigger turnaround amongst the social media also-rans. Snap Inc. (SNAP) was the first of these names to come back from the dead after beating earnings estimates in late April. If you have any familiarity at all with this name, you might remember that many analysts were quick to bury it after a miserable earnings report back in early February that sparked an instant 35% selloff. Somehow, SNAP managed to flip the script this go-round, posting its strongest growth in two years. Shares continue to drift higher into May, with the stock now approaching a bigger base breakout. Pinterest Inc. (PINS) was the next social media name to break its losing streak following a stronger-than-expected earnings report. PINS shares kicked off the new trading month with a big earnings beat, launching a 20% rally back toward year-to-date highs. Like SNAP, the stock was caught in a 3-month slump following a previous earnings miss. Now, it’s working on its own breakout as it pushes toward levels we’ve not seen since late 2021. I like SNAP and PINS here as they consolidate near breakout levels. Both stocks remain well off their all-time highs and are on the edge of coming back into favor with investors following some pleasant earnings surprises. If market conditions continue to improve, I suspect we’ll see speculators trickle down the cap scale into names like these that are showing strong upside reversals. By no means are market conditions perfect (they rarely are!). But now is not the time to press your shorts. Instead, I’m looking for unloved trade candidates like SNAP and PINS that are beginning to turn around and change the narrative. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Urgent: Claim Your Copy Of This New Book From America’s #1 Retirement Expert!]( [Click here to learn more]( Forget everything you’ve ever been told about retirement. According to [this new book]( – written by America’s #1 retirement expert – you don’t have to wait until you’re 65+… and you don’t need millions of dollars. [The strategy you’ll find outlined inside this book]( is completely different… All you have to do is tap into the little-known income streams revealed inside this book… And you’ll learn exactly how you can generate almost effortless income every month… instantly, in some cases! [And today, for a limited only, you have the chance to claim a copy of this book for just $1. Click here now to claim your special book offer.]( [LEARN MORE]( In Case You Missed It… The Lunacy of Taxing Unrealized Gains Sean Ring, Editor [Sean Ring] SEAN RING Dear Reader, My goodness, I didn’t think I could hate the present administration more than I already do. It’s a fountain of idiotic ideas, starting with shutting down the Keystone XL pipeline to just sending $61 billion to Ukraine. You may as well just set the money on fire. Everything Boneheaded Biden has done has made things more expensive. And don’t give me, “Well, inflation has come down!” If a product costs $1 in 2021 and then suffers from 10% inflation in 2022 and 5% in 2023, it’ll cost $1.16 right now. So the inflation rate may have come down, but prices sure as hell haven’t. Politicians and WSJ writers still don’t get that. They’re still confused about why The Great Unwashed is so peeved. But if you think practically everything Joke Biden has done so far is counterproductive, wait until you hear this one. The Biden administration wants to apply capital gains tax to unrealized gains. What Are Unrealized Gains? First, let’s define what they want to tax. Let’s say you buy a stock for $10. Over a few months, the stock price grows to $18. You now have an $8 capital gain, but it’s not realized. You haven’t sold the stock yet to realize the gain. Therefore, you have an $8 paper gain, also known as an unrealized or uncrystalized gain. Under the current tax system, you pay no tax on this unrealized $8 gain. Let’s say your stock later rises to $20. You’re thrilled as your stock has doubled. Now, you want to sell at $20. Since you bought the stock at $10 and sold it at $20, you realized a $10 capital gain. The IRS will kindly ask you to pay capital gains tax (CGT) on the $10 gain. If you’ve held the stock for less than a year, it’ll be taxed as ordinary income. If you’ve held the stock for over a year, it’ll be taxed at either 0%, 15%, or 20%. For the sake of this example, let’s say you’re in the upper tax bracket of 20%. That means you’ll pay $2 to the IRS because they said so. I don’t like CGT any more than I like any other taxes. But at least in the current system, you have the cash to pay the tax. What Bumbling Biden and his buffoons want to do is tax you on gains before you’ve sold the shares. It’s asinine. Let me show you. Going back to our example, let’s say on December 31, 2024, the stock price stood at $18 after you had bought it earlier in the year at $10. The IRS would want $1.60 from you (20% of the $8 gain). Since you didn’t sell the shares, I hope you have some spare cash around! Why Would Anyone Even Think It’s a Good Idea? No one does except the idiots in the West Wing. The only reason to consider it a good idea is if you’re a leftist redistributionist. That is, if you’re into confiscation, theft, and thievery. Because that’s all this is. Of course, the leftists in DC will say how taxing unrealized gains is one way of getting money out of the rich’s hands. Stop it. Governments can’t do that because if the people in the government were smart enough to do that, they wouldn’t be working for the government. The Reasons Against It There are some excellent reasons to ensure your congressman never votes in favor of this stupidity. Violation of the Ability-to-Pay Principle: One of the fundamental principles of taxation is the ability-to-pay principle, which states that taxes should be levied according to a taxpayer’s ability to pay. Taxing unrealized gains violates this principle because the gain is not actual income until the asset is sold. And yes, I’d argue it’s not “income” to be taxed anyway. Individuals can have significant unrealized gains but little cash to pay the tax. Let’s go back to our example, except our stock got FDA approval on December 31, 2024, for a new drug treatment they created. The stock went from a paltry $10 to a meaty $160. That’s a $150 unrealized capital gain. Twenty percent of that is $30. What if you don’t have $30 lying around? That’s massive trouble for you. Potential for Double Taxation: Unrealized gains are often subject to double taxation. When the asset is eventually sold, the gain is taxed again as a realized gain. This double taxation is seen as unfair and punitive. Watching the IRS calculate the unrealized and realized capital gains would be a nightmare for anyone trying to be honest and pay their taxes. Disincentive to Invest: Taxing unrealized gains could discourage investment. The prospect of being taxed on profits that have yet to be realized might deter individuals from investing, which could have broader economic growth and development implications. The other problem is the forced selling of stocks from December through April so people can pay their capital gains taxes. Market Volatility: Market volatility can make the value of investments move quickly. An asset might increase in value one year, leading to a tax on the unrealized gain, only to decrease in value the next year. This could result in individuals paying tax on gains that they ultimately do not realize. Let’s go back to our example. On December 31, 2024, our stock just got FDA approval for a new drug treatment they created. The stock had gone from $10 to $160. That $150 difference is an unrealized capital gain. Twenty percent of that is $30. You have the cash and dutifully pay $30, even though you haven’t sold the stock yet. Now, let’s say in 2025, the stock tanks back down to $10. You froze, praying to the market gods that the fall would stop, so you didn’t sell. Do you get the $30 you paid in tax back? How would that work? Wealth vs. Income: There’s a fundamental difference between wealth and income. While income is a flow of money (like wages from a job), wealth is a stock of money (like the value of a house or stocks). Taxing unrealized gains is effectively a controversial and ethically fraught wealth tax. Regular CGT is bad enough. This unrealized version is even worse. Wrap Up You may say this tax is a 25% annual minimum tax on unrealized capital gains for individuals with incomes and assets exceeding $100 million. And that’s great because we should soak the rich… get them to pay their “fair share,” whatever that is. But what if they take their money and run? We need as much capital as we can get. Capital is what separates the developed from the developing. Capital is the lifeblood of advanced civilization. I’m pretty sure this tax will never get past Congress, if only because every rich person owns at least one Congressman. But still, it’s a scary concept that needs to be known… and destroyed. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. 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