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Rally like its 1999

Despite a rocky start to the year, the NASDAQ and other indices are still trading at or near all-time highs.  Recently, GDP and other data suggest the economy is still struggling however, and despite the apparent recovery the Federal Reserve continues to keep interest rates historically low.  The rationale for this extreme measure – now 6 years and running – is often shadowy at best.  Economic data is inconsistent and notoriously unreliable and seems to be contradicting what the wider equity markets are showing.  However, there seems to be a correlation and the Fed’s plan is at least working to prop up the equity markets. But the reality is that cheap money not only leads to higher markets, but subsequently fuels bubbles.

One of the more memorable bubbles is the tech craze that took over the NASDAQ in the late 90s, producing gems like WebVan and even spilling over and enabling corporations like Enron.  Again, we’ve already seen incredible valuations for technology companies that have very little to no assets or physical goods, instead basing their valuation on IP and source code.  There is legitimate value in IP although that IP must drive operating profitability and this has seemingly become irrelevant – again – as companies like Twitter, LinkedIn, and Amazon have PE ratios measured in generations.  But this isn’t something new; we’ve been living in this environment for at least the past five years (if not longer).  Investors seem to be comfortable with the idea of a perpetually unprofitable company, provided their stock continues to rise based on either their potential or talent.  Many IPOs have come and gone since the financial crisis, and generally most have proven to be a success on the surface.  The Valley is still pumping out startups at a steady rate, but at what point will this growth become unsustainable?

One of the more recent startups that stood out from the rest is Magic, a service that at its core enables lazy people with discretionary income to text a service to get theoretically anything they want (sans illegal activity).  Basically, Magic will Google whatever service you’re looking for that is available in your area, mark up that service, and charge you a premium for the trouble.  Say for example you want milk and eggs.  Text Magic and they’ll contact Instacart or a similar service, charge you a premium and have the goods delivered.

We have trained operators standing by 24/7 to answer every one of your requests. Send us a text message, and we’ll get you what you want. We’ll order what you need from the appropriate service (e.g. DoorDash, Instacart, Postmates, etc.), and deal with them so you just automatically get what you want, like magic

This sounds like a good idea until you realize a similar system could easily be set up within a few hours using Twillio, a stock website template, and a few warm bodies to answer text messages.  Nothing (apparently) innovative was developed, no special AI to answer or fulfill requests, not even a dedicated app was developed.  What is more remarkable however is the funding this startup raised.  After completing Y Combinator and posting on hacker news, Magic received $12M in Series A funding from Sequoia Capital.  We’ve gotten to a point where a company with no assets, and now no substantial or novel IP, has closed VC funding measured in the millions.  It’s telling that Sequoia Capital has enough money to justify a $12M investment in a startup of this nature.  Cash has once again become incredibly cheap, and cheap to the point that investments are flowing into tech companies with little prospects for profitability and sustainability.

NASDAQ1

From a technical perspective the NASDAQ is looking prime for a pullback.  Recently both Twitter and Linkedin have posted less-than-stellar earnings, and cracks are beginning to show as the index tries to break through critical resistance.  The NASDAQ is perilously close to the all-time high set back in the 2000 tech boom and is showing signs of struggling to continue the upward trend.  As shown below, there are two critical resistance and support levels now in place, both at just under the 4800 level as well as the 4200 level. This chart also shows the development of Doji, further indicating resistance as the index remains close to the high set in early 2000.

NASDAQ Daily

Furthermore, the chart above shows trend lines converging to form a rising wedge, which broke through on the downside in early March.  The index then confirmed the lower trendline as resistance and then continued to break down further.  This indicates the trend which has developed since late 2014 is now over, and compounded with the additional resistance as the index reaches all time highs suggests the NASDAQ is starting to run out of steam.  But for this to be a confirmed reversal, sufficient selling volume will need to be seen, which so far has not materialized.  Until this is confirmed, the index may continue to test resistance until a breakout occurs in either direction.

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