Macro v Micro; Bitcoin Simmers

It’s an awesome chart for the world’s favourite crypto currency. Talk is that it is all about the imminent approval for Blackrock’s bitcoin ETF, which would be a first for the cryptocurrency and likely bring in a tsunami of retail money into a market famously dominated by the so-called ‘bitcoin whales’.

The chart is long term but looks strong with a powerful golden cross buy signal on the moving averages. Part of the excitement about bitcoin is that historically, when it moves, it really moves. The first bull run on the chart above went from $100 to nearly $20,000; the next buy signal slightly complicated by an intermediate buy signal took the price from $3,000 to nearly $70,000 and now we have another buy signal with a starting point around $15,500.

Bitcoin is the World’s Ultimate Speculation

Don’t ask me where it is going but the tea leaves look favourable and all the things I have cited as making bitcoin the world’s ultimate speculative instrument remain as much in force as ever. The recent bout of inflation and growing unrest in Russia / Ukraine and the Middle East can only reinforce the attractions of bitcoin.

Meanwhile the US stock market remains as hard to read as ever. On the one hand we have a clear rising trend in bond yields, kryptonite for super stocks as noted before. On the other hand exciting developments such as Generative AI are stimulating booming demand for selected technology shares which is bullish at a micro level. There is also a feeling, hard to shake if you live in Kensington, near the heart of London, that we live in a rich world which is growing richer almost regardless of the antics of the politicians and the central bankers.

Cadence Design Software Falls After Great Results

Two of my favourite stocks are Cadence Design Systems and Synopsys. The former reported its Q3, 2023 results on 23 October 2023. The shares were set to open sharply lower after the results which you might imagine must have been disappointing. Not a bit of it.

I’m pleased to report that Cadence delivered strong results for the third quarter of 2023. We exceeded our Q3 guidance on all key metrics and are raising our outlook for 2023.

Notwithstanding the macro uncertainties, design activity remains strong, driven by transformative generational trends such as AI, hyperscale computing, 5G and autonomous driving. Growing hyperconvergence between electrical and mechanical domains, systems and semis, and hardware and software, is driving the need for tightly integrated co-design and analysis solutions. Additionally, trends such as a growing number of 3D-IC and chiplet designs, and system companies building custom silicon, are accelerating.

In this rapidly evolving design landscape, the relevance of AI-driven design automation cannot be overstated, as it’s enabling customers to accelerate their pace of innovation, while enabling them to meet their targets more efficiently.

Over the past few years, we focused initially on incorporating powerful AI algorithms in our core engines, and then built our Generative AI solutions on top of our software platforms. We are seeing growing momentum for our comprehensive JedAI Generative AI platform, with an increasing number of customers adopting these solutions, and achieving exceptional quality of results and productivity gains. While still in the early stages, sales of our GenAI solutions have nearly tripled in the last year.

Anirudh Devgan, CEO, Cadence Design Systems, Q3 2023, 23 October 2023.

This business is clearly hitting the ball out of the park and the chart (not shown) looks as strong as ever. I think both CDNS and SNPS (Synopsis) are excellent choices for Warren Buffett’s 10-year rule. Buy them and hold them for 10 years and you should do very well.

As Devgan says:

We’re well positioned to benefit from the tremendous opportunities ahead, as we help customers design their differentiated products with improved quality of results, productivity and shorter time to market.

Anirudh Devgan, CEO, Cadence Design Systems, Q3 2023, 23 October 2023.

Cadence’s business is booming.

But design activity is very strong. And especially, I would say, in two verticals for the future activity, is strong in data centre and AI, and then automotive, given the electrification and the massive transformation that’s happening.

So, if you look at the next three, four years, these two segments will grow significantly, the whole AI-driven data centres and automotive. And because they are growing so fast — first of all, the cadence of those end customer products is increasing and also, they need to be more and more efficient given that design activity and complexity is going up.

So, there is more design activity and also use of AI to accelerate and be more productive. And even we are using AI internally to be more productive ourselves. So, definitely for these two big, big verticals, and this is a multi-year trend. This is not a — and you mentioned some of our large customers, we are very fortunate to work with. We always say we want to win with the winners, and we always focus on the leading companies in the data centre and AI space and also now in the automotive space. So that activity is strong, and I expect that to continue.

Anirudh Devgan, CEO, Cadence Design Systems, Q3 2023, 23 October 2023.

So when looking at this stock, and I think the same goes for Synapsys, whatever the macroeconomic factors are doing, short of a meteor hitting the planet, you should just buy them.

Monthly Moving Averages Don’t Look Good

I have again updated my table of benchmark stocks, ETFs, indices and crypto currencies. The picture did not look great the last time I did this and it looks worse now with bitcoin a notable exception. There is something to be said for not having any exposure to the stock market at the moment. Probably 90pc of the indicators and stocks I watch have given sell signals and most of the remaining 10pc are rolling over.

For once there are good returns to be gained from holding cash on deposit.

The stock market is behaving in a way that suggests there is bad news ahead. Rising interest costs put pressure on businesses that expose weaknesses. As Warren Buffett put it so pithily – ‘when the tide goes out you find out who has been swimming naked’.

Cash can be a spectacular asset when share prices are in free fall. It may not happen but the charts are making me feel cautious. In another stock market aphorism they say – ‘when the police raid the whorehouses they take all the girls’. It is amazing how far shares in even the best performing businesses can fall when a bear phase takes hold.

We had a long bull market. We had a spectacular sell-off in 2022. We have had a strong but narrowly focussed rally in 2023. Now that seems to be losing steam. One chart tells the story of what is happening.

These monthly moving averages sell signals can often be significant and this one is clear. We have a dead cross on the moving averages. The last such signal came in January 2022 and we know what happened then. It is always anyone’s guess how far shares will fall when we get these signals but given what is happening almost across the board with my benchmarks I feel nervous. We could be heading into a ‘Cash is King’ period.

When Cash is King

My best guess is that the next set of results from Nvidia for Q3 2023, due on 21 November are going to be fantastic but even that may not be enough to save the shares or prevent further near term turbulence in Nvidia shares. The monthly chart looks decidedly wobbly.

Strategy – Time for Caution

My charts are painting a negative picture. For someone like me who operates with maximum leverage this is a treacherous stock market where it is easy to lose money fast and thus one best avoided unless you can take a long term view based on long-term charts and outstanding fundamentals.

Share Recommendations

Bitcoin. Buy @ $34,344

Cadence Design Software CDNS. Buy @ $236

Synapsys. SNPS. Buy @ $467