Bubble Trouble for Next 10 Years?

November 22, 2020

Weekly Market Outlook

By Keith Schneider

As the outcome of the presidential election is still being contested and the virus spreading to its highest levels since the initial outbreak, US equity markets mostly shrugged off this uncertainty with small caps gaining nicely on the week. This was partly spurred on by positive news regarding vaccines.

Looking deeper under the hood, sector rotation out of utilities and consumer staples into retail and energy (each rallied over 5% for the week) was clearly a positive, confirming recent price action.

However, longer term valuations of US equities verse the US GDP are at historic levels much like 1928, 1999, and 2007, suggesting a bubble. This bubble according to John Hussmann is indicating horrible returns for stocks (worst ever) over the next decade.

Of course, bubbles can last a lot longer and run much deeper than anyone anticipates and hence our focus on risk control to both leverage the upside while reducing drawdowns.

The highlights of this week’s market action are the following:

• Risk gauges remained green across the board, but underneath the hood there was some signs of weakness
• Small Caps (IWM or Grandpa Russell) improved its TSI (TREND STRENGTH INDICATOR) leadership over the other US equity benchmarks, up over +2% for the week
• Volume patterns show a neutral reading and digestion of the recent rally
• Value stocks are holding their recent breakout verses the S&P 500
• US long bonds rallied, leaving high yield corporates in the dust (a negative for US equities)
• Gold needs to hold recent lows as well as current levels relative to the SPY to stay in a positive mode
• Commodity sensitive Emerging Markets led by Latin America continues to perform well and looks ready for more

Check out this week’s video as we cover an interesting trading pattern which should give us a good heads up for determining the next short-term direction of the markets.

Best Wishes for your trading.