Euphoria or Thrill

October 24, 2021

Weekly Market Outlook

By Keith Schneider

blankMarkets continue to behave as they have during other market cycles.

Two key equity benchmarks (SPY and DIA) made all-time highs.

The important question to answer is, what stage are we in… is it euphoric?


Classic market valuation metrics (Buffet style metrics) have been frothy for some time if you look at PE ratios, margin debt, and/or national debt versus GDP.

Liquidity is excessive (negative interest rates after accounting for inflation) is a major contributor to this speculative insanity.

Even more remarkable is the valuation of some new asset classes such as cryptocurrencies, art tokens, and even blank art canvases, which are selling for the price of a luxury car.

The overnight value of Trump's new SPAC shot up to almost 7 billion before closing at a mere 3.4-billion-dollar valuation after just 2 days of trading. This is based on a planned media company that currently has no product or even a mobile app.

Now on the flip side, and despite Trump's recent failures at several other media ventures, it is possible that the huge capital inflows, if appropriately used, could fund and turn the enterprise into a money-making venture.

If one looks at other meme stocks such as AMC and GME, huge capital inflows have allowed these companies to change their business models and potentially make some money in the future. Hence prices are still in bubbling mode.

So regardless of your political beliefs, this environment mandates one to adapt to rapidly shifting conditions.

Our belief is to always follow the technicals first because, by the time you figure out the logic, it is often too late.

Additionally, we advocate the use of risk controls so you can take advantage of what the markets offer while keeping your eye on the big picture.

Remember, Amazon, one of the great companies to arise from the internet bubble in the 90's suffered more than a 90% decline (drawdown) when the bubble broke in 2000, and it took a decade to regain those highs.

NFLX suffered an 86% decline before its rise to success.

FB, AAPL, GOOGL, and many other great companies have success stories of recovering from big drawdowns, but their success is an exception, not the rule.

It's critical to avoid such drawdowns without missing out on the success of great companies or markets.

We demonstrated how you can do this with mechanical trading models like our Nasdaq 100 All-Stars last week. You can see the replay of that demonstration here.

As always, this week's Market Outlook video is intended to help you become a better discretionary trader who can minimize drawdowns and take advantage of the market's opportunities.


This Week's Market Highlights

  • Risk Gauges have backed off despite new all-time highs in the S&P 500, and they are currently neutral as the yield curve continues to flatten
  • Two signals related to interest rates went to Risk-Off: High Yield Debt (HYG) versus US Treasuries (TLT) and Utilities (XLU) versus the S&P 500 (SPY)
  • Major indices were all up over +1% on the week despite the neutral volume
  • McClellan Oscillator for SPY shows market internals starting to run a bit rich, and looks to be mean reverting to the downside
  • The Up-Down volume ratio for SPY confirms the overbought reading from the McClellan Oscillator
  • Sentiment readings also confirm an overbought scenario in SPY, with short-term vs. long-term (VIX vs. VXV) volatility showing extreme frothiness
  • The number of stocks within the SPY above the 10-day moving average (DMA) is also running rich
  • Consumer Discretionary spending (XLY) vs. Consumer Staples (XLP) shows a Risk-On scenario, with XLY +2% and XLP +0.7% on the week
  • Regional Banks (KRE) were strong on the week and hit a new all-time high weekly close, indicating pressure on rates
  • The yield curve continues to flatten in anticipation of rate increases and further tapering
  • The best performer on the week was Silver (SLV) +4.45%, an inflationary indication
  • Contrary to the inflationary narrative, the Soft Commodities ETF (DBA) failed to clear its highs and closed the week in a warning phase
  • Copper (CPER) was overbought on both price and momentum according to Real Motion, and is in the process of mean-reverting with a Friday performance of -1%
  • On Friday, Gold (GLD) saw its 50-DMA cross above the 200-DMA on Real Motion, ahead of the price which failed the 200-DMA but found support at the 50-DMA
  • Oil (USO) continues to compress at extremely elevated levels, looking poised for more upside


This Week’s Crytpo Market Highlights

  • Bitcoin (BTC) hit a new all-time high of $67,000 upon the approval of the ProShares Bitcoin Futures ETF. However, BTC saw a drawdown back to $61,000 support on Friday
  • Ethereum (ETH) failed to make new all-time highs, selling off right as the coin hit resistance at the $4,400 high from May of this year
  • Decentralized Finance projects outperformed the rest of the market over the past 7 days, including Solana (SOL) +25.7%, Avalanche (AVAX) +14.3%, and Polkadot (DOT) +5.6%
  • ProShares BTC Futures ETF became the fastest ever ETF to naturally achieve $1 billion in assets in only its first two trading days, beating Gold's (GLD) 18 year record

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