A Wild Ride

February 28, 2021

Weekly Market Outlook

By Keith Schneider

You may have noticed in our recent weekly Market Outlooks, and Mish’s Daily Updates that we continue to expect enhanced volatility.  Why?   The market has been on a straight upward trajectory since March of last year and some valuations have been getting a bit stretched.

Also, we have an administrative sea change, the economy is starting to open back up and there will be much debate about which parts of the economy need stimulating, creating uncertainty and volatility.

Add to this our view that value stocks are waging a comeback which mean certain market sectors, such as Consumer Staples, Energy and Financials may be the stronger areas of the market.  This really showed up last week.

Two factors for that are essentially inherent, rising interest rates and the price of crude oil jumping.  Yes, oil’s price took a big jump with the recent deep freeze in Texas, but energy prices had already started a rally (many of you know that we took a position in Oil in Complete ETF which is up significantly already).

Perhaps the biggest surprise in 2021 is the fast rise in interest rates.  The 10-year Treasury yield is up 60-80% thus far this year from historically low rates during 2020 in the height of the COVID lockdowns of 0.67% to now nesting at 1.4% (Many of you are aware of how profitable our trade in TLT was last year when we left stocks and moved into bonds).

This recent rise in interest rates is reflective of the economy gaining traction and a more normalized yield curve.  While positive, lower interest rates fueled a refinance and housing boom, kept business borrowing low and helped the economy stay in business during the virus malaise. Rates are still low, but their rapid rise is having a detrimental effect on high growth momentum stocks whose multiples were analyzed in a zero-interest rate environment by savvy young Wall Street analysts.  The market is beginning to adjust to a higher cost of borrowing.

We are still positive on the markets longer term, for the reasons cited above.  Add to this, substantial stimulus /helicopter money is about to be dropped into a more positive buoyant business environment as we enter “herd” immunity this Spring. Consumer confidence, reported this weekend, inched up and shows that the consumer is feeling more bullish on the economy.  Vaccines and COVID-19 remedies should add to this scenario.

We have long discussed in all our communications to you, that our investment process factors in volatility in a meaningful way.  Moreover, the past few weeks we have shared with you the changing landscape, our negativity on bonds (we recently took an inverse bond trade in our Complete ETF), and the technical indicators signaling rising risk and volatility.  This should and could continue.

The Market Gauge investment platform is a tightly disciplined and systematic process with the best algorithms in the business. Some of these moves more quickly than others but they are all reactive and designed to capture the edges necessary to generate profits but more importantly, keep our investors out of trouble.  This is why several of our investment strategies recently were under-invested, some sitting completely in cash and/or getting out of the markets at the beginning of last week.  Most of our investment strategies are positive for the year and well ahead of their respective benchmarks.

We cannot nor will not prognosticate on what the markets will do next.  We do not buy into projections or look into the proverbial crystal ball to give you a “call” on where the markets are headed.  We have way TOO much confidence in our investment process.  But with all the market variables and inputs changing rapidly (see the Big View bullets that follow) we do know this---volatility has risen, the landscape is ever changing on we all need to be prepared for A WILD RIDE. We highly recommend you use several of our complimentary strategies because they work so well together and help mitigate risk while diversifying your portfolio.

Here are this week’s latest highlights:

• Risk Gauges are still in bullish mode despite the weakness in equities this week although they are closer to reversing as US bonds gained verses both stock and junk debt
• All key US equity benchmarks closed down for the week, led by big tech (FANG and QQQ) which was down over -5%,
• The QQQ’s, the SPY and the DIA are about to have confirmed phases changes under their respective 50 DMA’s
• Latin America (ILF) and Emerging Markets also gave up ground after running rich with some mean reversion kicking in
• Long Bonds (TLT) reversed its recent 3-month tumble had a key reversal pattern on Friday
• The Modern family held up well with only Biotech (IBB) breaking down under it 50 DMA, while the five other members held their ground
• Market Internals / McClellan Oscillator and Volume patterns remain very weak (the Dow Industrials the exception regarding volume) with tech heavy NASDQ under strong selling pressure
• Growth stocks (VUG)continued its underperformance verses Value (VTV) and closed under its 50 DMA, confirming a phase to warning
• Gold (GLD and GDX)) and Gold miners once again got hit hard (looks a bit overdone now) with precious metals being questioned as safe haven with the emergence of Bitcoin and Cryptos in general
• Emerging Markets (EEM), backed off its recent leadership but still holding longer term outperformance which should provide a good entry point
• Soft commodities (DBA) closed positive on the week bucking the selloff in most asset classes although currently running rich and subject to some mean reversion
• Energy prices also bucked the selloff but hit a wall on Friday running a bit rich and could be ready for some additional downside pressure once the energy crises in Texas gets under control

Have a great weekend and best wishes for your trading.

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