Something Stinks

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Written by Keith Schneider and Donn Goodman

As we come upon the Thanksgiving holiday, there is much to be thankful for, especially being able to get together with friends and family in the post Covid isolation era. I believe that there will be more people traveling by cars, planes, and rail than ever before.

The food will be delicious and we will all share our thanks for many things, including being alive, being together, the great (and expensive) food and the fantastic stock market returns of the past two years since January 2020. Actually, since 12-31-2019 to last Friday the S&P 500 is up a whopping 45.7% with a roller coaster downward ride of over 35% during that time. If you had used Alpha Rotation, your drawdown would have been minimal, and our Conservative Alpha S&P 500 has been up 40.6%, while our Moderate Alpha Rotation S&P 500 would be up 119% and again you would have experienced a run up (Long Bonds/TLT) during the March 2020 sell off.

So, What Smells?

While we sit here today enjoying the second most S&P 500 number of new ATH high days since 1995, we also are experiencing enhanced market uncertainty. Most noteworthy is that both market internals and market sentiment eroded despite two US equity benchmarks hitting new ATH’s this week. Furthermore, Grandpa Russell (IWM)was down almost -3% for the week while the NASDQ 100 was up over 2%, a very mixed message. The big question is whether or not IWM can hold at its 6-month calendar range high which is currently at $232.

Mish nailed yet another inconsistency in her commentary this Friday: “This past week the market found both love and irreconcilable differences. The love came from the big cap tech stocks. Nvidia, Apple, Google, Microsoft all gave investors hearts and flowers. On the flip side, small caps, energy, industrial metals, and transportation stocks gave investors indigestion, inconveniently ahead of Thanksgiving”

With inflation rising at an accelerated rate and disruptions in the supply chain creating shortages and enhanced demand, everything including milk, cars, food products, paint, lumber, gasoline and especially Turkey are rising at double digit rates, which will eventually wreak havoc in our society. These rising costs are going to (if not already) impose a substantial tax on every American just through their everyday purchases.

 

Risk On/Bullish

• Discretionary Spending (XLY) and Semiconductors (SMH) were each up 3.7% on the week, 2 very speculative sectors
• Growth stocks (VUG) driven by a few FANG mega stocks were up on the week, while Value (VTV) took a tumble
• The US Dollar (UUP) was up 1% on the week, putting pressure on precious metals

 

Risk Off/Bearish

• Market Internals fell apart this week, especially the McClellan Oscillator for both the SPY and the NASDQ composite.
• 9 out of the 14 sectors/Industry groups that we track ended down on the week, despite the S&P 500 and the NASDQ 100 hitting new all-time highs
• Hindenburg indicator is showing 14 ominous omens, a flashing red light for the S&P500 (SPY)
• New Highs vs. New Lows looking bad for SPY
• Volume analysis showed distribution, especially in IWM with only 1 accumulation day over the past 2 weeks despite its recent run to new all-time highs
• Sentiment measured by VIX.X looks to be on the verge of an important breakout, with the 50-day Moving Average (DMA) looking ready to take out the 200-dma for the first time since August 2020

 

Neutral

• Major divergences in the price action among the 4 key indices, with QQQ making new highs up +2.3%, while IWM has dropped -2.83% on the week is at best neutral for US Equities
• Risk Gauges stayed in the neutral zone for the SPY
• Energy (XLE) and Oil Services (OIH) were both down drastically on the week as US gas prices continue to rise
• Across the board foreign equities lost ground vs. the US markets, not surprising considering Covid-19 lockdowns throughout Europe
• Precious Metals mean-reverted from being overbought, will likely consolidate, setting up for next move higher
• Inflation ramping up with Soft Commodities (DBA) flying this week potentially positive short term but longer term bearish for equities

 

Crypto Highlights

• Bitcoin (BTC) tumbled nearly 15% to begin the week, but now looks to be making a push to regain support above the 50-day Moving Average
• Ethereum (ETH) also suffered to begin the week as the coin’s price fell below $4,000 for the first time since October
• The biggest catalyst of this week’s crypto market drawdown was an options expiry on Friday, which saw BTC temporarily losing the $60,000 level and ETH losing $4,000. As of Saturday night the market already looks to be rebounding quickly
• Avalanche (AVAX) was the best performing large cap coin this week, up +35% while the remainder of the market floundered… a bullish sign for the decentralized finance space