March Madness (and why it matters to you)

March 22, 2021

Weekly Market Outlook

By Keith Schneider

blankAfter a two-year, COVID-19 induced hiatus…

This week I was reminded of the excitement of the return this weekend of March Madness (NCAA men’s basketball tournament).

My colleague’s description of the March Madness betting expectations sounded like the same stories I hear about the market’s upside projections, like Tesla’s continuous volatile climb this past year or the re-opening of society.

I shouldn’t have been surprised.

This is MARCH MADNESS, and this weekend, 64 college men’s basketball teams will get the opportunity and privilege to compete to be called the best in all the land. I’m told there are a lot of “new teams” that have not competed in the NCAA basketball tournament in many years, if not decades.

These new teams are like a small cap stock that has exploded in price and now rests in the NASDAQ 100 (QQQ).

These new teams are from schools as small as 4,000 students that have been pining to make the playoffs for many decades.

They haven’t won a single game in the tournament for some 50 odd years.

I mention the tournament because, like the markets hitting new highs, the appetite for college sports reminds me of the ongoing excitement and enthusiasm surrounding the new IPOs, SPACS, and obscure technology companies which are all generating fresh interest daily.

Making this year’s March Madness even more maddening is the fact that on Friday there were 6 major upsets! Then on Saturday night, there were another two making it a total of 8 huge upsets.

One example, the #15 seeded, 4,000-student Oral Roberts, defeated the 60,000-student, #2 Big Ten Ohio State.

March Madness upsets like these demonstrate the power of the right team, in the right place, at the right time.

March Madness upsets are like the potential of small cap stocks.

Imagine if you had the right technology stocks last year, like Zoom (ZM) and Moderna (MRNA), in your “bracket” or portfolio last year as they rocketed from obscurity to leaders within their categories.

Fortunately, stocks are not as difficult to get right as college basketball teams.

Here are some crazy statistics surrounding March Madness…

Submitting your college team picks in a “bracket” has become a national pastime.

ESPN offers $1,000,000 to the winner with the perfect “bracket.”

Some 48 million brackets had been submitted to become this year’s perfect submission.

ANY and ALL winners walk away with a cool $mil!

Unfortunately, it’s not that easy.

Of the 48 million “brackets” as of Friday night, there were supposedly only 160 perfect brackets remaining at midnight Friday.

As of Saturday afternoon, it was down to 8.

And by Saturday night, NONE.

WOW. This has never happened in round 1. What are the odds of that happening?I want to point out that the March Madness tournament has that name because unforeseen victories happen that are least expected. This is like a stock that gets downgraded and sees a sharp 10% correction overnight.

It also reminds me of the current euphoria that is pervasive by traders and investors alike and the vast sums of money the market is attracting.

Over the past few months, we’ve highlighted in this weekly Market Outlook…
…the current economic backdrop of loose money,
…accommodative Fed Policy, and
…ongoing stimulus or “helicopter” money being dropped from the sky.

This has tricked the economy in both positive and negative ways.

Food prices, gasoline, real estate, and the cost of eating out have all gone up and that may eventually have a negative effect on inflation.

The positives, of course, are that if you are selling real estate, putting money in the market, or have any kind of collectibles (artwork, jewelry, old cars) this environment benefits the collectors, holders, and certainly the sellers.

This “loose” money is also finding its way into the markets.

We have seen many new highs in the Dow, S&P 500, Russell 2000, and continued high sentiment readings on many stocks, and…

Many of the biggest gainers have been the previously beaten down “value” stocks.

However euphoric the markets appear to be and…
However fast the money is being made by speculators in Bitcoin, small-cap stocks, SPACs, retailers, and semiconductor stocks…

I am here to remind you things can get ugly really fast.

Recently, we have been redundant in our warnings on encouraging you to use strict discipline and an investment process that manages RISK as its priority.

Many of you have inquired about a few of our investment strategies that are currently mostly invested in cash.

For example, our NASDAQ and Small Cap All-Stars have high cash positions.

A big up day in the market brings questions from subscribers about when we might get back in?

The next day, when the market is down sharply, I hear from others that say, “boy am I happy to be sitting in cash.”

As floor traders on the exchanges, we learned long ago that it is more important to keep your profits, protect your principal, and sit the dance out when things become uncertain, go sideways, and get volatile.

That time is now. It is particularly important to invest in more than one strategy and exploit more than one “edge.”

We encourage you to incorporate several of the MarketGauge strategies/models in your overall game plan.

Additionally, we will continue to provide additional methodologies and strategies to help you further diversify and exploit more than one “edge.”

March Madness is all fun and games if you’re playing your brackets, but we suggest you don’t take the same approach with your trading, and…

You can be a big WINNER in our rendition of March Madness for trading and investing.

Here are this week’s latest highlights:

  • Risk Gauges backed off to a neutral reading, an important shift to keep in your focus
  • Value (VTV) plays continue to outperform growth since early November 2020
  • US equity benchmarks stalled, led by Grandpa Russell (IWM) – 2.82% for the week, which is running rich but up over 15% YTD
  • Three of the four US equity benchmarks closed under their 10 DMA’s while the QQQ’s remained under 50 DMA and in a caution phase
  • Volume patterns across all four US equity benchmarks improved to neutral
  • Long Bonds (TLT) made new 52-week lows with quickly rising interest rates overhanging the markets, although a bit of mean reversion (a rally) is in the ether
  • The Modern Family continues its leadership rotation to the Financial Sector (KRE} while Semi’s (SMH) and Biotech (IBB) stayed weak
  • Big Cap Value (the DIA) continues to outpace its piers
  • Market Internals / McClellan Oscillator patterns reversed yet again and back into a defensive posture
  • Energy (USO) reversed its massive move to the upside as the vaccine rollout in Europe stalled, hurting prospects for a quick recovery
  • Sentiment held steady with the cash index staying above 20, or cautious levels
  • Gold (GLD) and Gold miners (GDX) firmed versus the S&P 500, while Oil dropped as these two commodities continue to run divergent from each other. This is quite a shift from the 1970’s where petrol dollars found their way into the yellow relic, driving gold to $850 per ounce. It peaked by January of 1980, over 25X from its lows early in 1971 ($35 per ounce)
  • Soft Commodities (DBA) need to hold current levels on weekly charts to keep a bullish posture

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