The Market’s Urgent "co·nun·drum"

November 7, 2021

Weekly Market Outlook

By Keith Schneider


blank/kəˈnəndrəm/
noun

  1. a confusing and difficult problem or question:"one of the most difficult conundrums for the experts"

 

Last week we saw a small, but a much needed, significant degree of bipartisan action!

Even with a few Democrats, and most Republicans voting against it, the $1.2 TRILLION Infrastructure Bill, passed.

For most people, I believe, this type of bill was long overdue.

Our decaying roads, bridges, and airports are in desperate need of a major overhaul, and this bill may be just what the US needs.

However, the criticisms from the dissenters are either that it did not go far enough (more $ is needed), or that it will further stimulate an already inflationary economic situation and inflation will become very problematic.

This inflation vs. fiscal stimulus conundrum is a “confusing and difficult question” that the market has not had to grapple with for decades.

Rather than try to figure out the expected deleterious effects a crumbling national infrastructure, expanding national debt or inflation, we’ll watch the markets’ price action and our several mechanical trading models for guidance on where they will head next.


The Week in Review

Earnings reports poured in with over 80% of the companies reporting beating their earnings expectations.

Earnings are up on average 30% from the September low a year ago.

Revenue beats have also poured in as net profits continue to soar, propelling the markets higher.

One interesting point is that when a company misses (Peloton, Amazon & Moderna) to name just a few, the market has taken swift action to adjust their pricing.

This is just a preview of what may occur in the future as more companies miss elevated and euphoric earnings estimates. This is another Conundrum the stock markets will likely face soon.

Additionally, let's not forget that elevated valuation metrics are close to historical highs which is not exactly a positive for buy and holders.

On Wednesday, the Federal Reserve announced they would begin tapering their bond purchases by $15 billion a month. This announcement was not accompanied by any projection that they may soon raise interest rates, something many economists had expected.

In our view, this dovish action was yet another Conundrum of the Fed taking little to no action and not willing or yet able to nip the high (and growing) inflation in the bud.

Is this the Start of Something Big?

According to the Hirsch and Mistal's 2021 Stock Trader's Almanac, November marks the beginning of the best performing six-month period for stocks.

In our view, the market is running rich right now (see positives and negatives in our Weekly Highlights below) and could be due for a correction at any time.

One extreme example of "running rich" is illustrated by the chart below.

Earnings yields adjusted for inflation is a closely watched indicator by money managers and pension funds, and this metric is at all-time lows and coincide with healthy corrections to bring them back into adjustment.

blank

Add to this, high yield corporate debt not acting well, and this week both risk-on (stocks) and risk-off (bonds) both rallied giving mixed signals.

Earnings are good, interest rates remain low, and we are in a positive investment period despite sky high valuations.

The Conundrums continue.

 

This Week's Market Highlights

Risk On

  • IWM and QQQ led this week, up 6% and 3.2% respectively, with all key indexes hitting all-time highs
  • There still appears to be plenty of room for further upside in the indices with Real Motion indicating momentum has not become overbought on daily charts (except for IWM)
  • Small Caps (IWM) have broken out relative to large caps for the first time since early May
  • Market Internals show that SPY has achieved three hundred new 52-week highs, the highest number since early May
  • Volume analysis shows significant improvement, with more accumulation days than distribution days across the board
  • Volatility (VXX) popped a bit on Friday, but still closed lower on the week, a Risk-on confirmation
  • The number of stocks within SPY that are above key moving averages are increasing at a healthy pace and not showing extreme froth, a big positive for the index
  • Semiconductors (SMH), Technology (XLK), Consumer Discretionary (XLY), and Retail (XRT) were the top performing sectors this week, once again confirming a Risk-on scenario
  • On the long end of the yield curve, interest rates eased, helping to fuel the fire in equities
  • Growth stocks (VUG) continue their upward trend vs. Value stocks (VTV)


Risk Off

  • Risk Gauges remain neutral despite the major indices making new all-time highs across the board this week
  • China (FXI) had additional stress in their real estate sector, putting pressure on Chinese equity markets
  • Weekly charts are running rich, with QQQ and SPY showing overbought on both price and Real Motion
  • Both Emerging Markets (EEM) and Established Markets (EFA) continued to lag, with US equities dominating on the global stage


Neutral Metrics or Just Noteworthy Developments

  • Agriculture (DBA) attempted to breakout but failed
  • Gold (GLD) cleared its 200-day Moving Average with a strong finish to the week
  • Biotech (IBB) broke down and moved into a distribution phase, indicating that the COVID-19 virus may be under control sooner than expected


CryptoPulse

Don't Dig for Gold… Sell Shovels

The hot commodity around the world right now is cryptocurrencies, and it just so happens that they aren't all too different from classic commodities.

Bitcoin is often compared to gold because of its use as a store-of-value and the currency's deflationary nature.

Another big similarity between Bitcoin and Gold is that they both get more difficult to mine the longer time goes on, as there is not an infinite supply of either resource.

As modern technologies developed and humans became more efficient at mining gold, we realized the reality of scarcity very quickly.

Nobody could get their hands on enough gold, no matter how much they had to risk to get it.

The 1850's saw people from all over the settled United States dropping everything and packing up to move to a foreign place all for the hopes of making unimaginable riches during the California Gold Rush.

Ironically, more money would be made by those that developed the gold mining industry than those that were mining the gold themselves. The best investment wasn't in the scarce commodity, but in the technology and industry that supported it.

A similar phenomenon took place in the late 1990's during the dot.com boom.

With the benefit of hindsight, we can safely say that the technology companies that worked to create a global technological infrastructure would have been a significantly better bet than trying to pick a winner out of hundreds of companies' that had the sole aim of existing as an internet company.

An example here would be investing in Apple, IBM, or Microsoft rather than Napster, AOL or Pets.com.

Now, how does this same phenomena apply to cryptocurrencies?

Well, these days the news and social media are filled with stories of amateur traders making 10x or even 100x profits on cryptocurrencies and cryptocurrency companies that you've never even heard of!

It can be shocking to see 18 year old traders on Robinhood getting better annual returns than their parents' money managers, but it's happening, and it’s an indication of a financial paradigm shift.

Old money is now trying to figure out how to play a young money game.

So how can you get in on monumental profits without having to overexpose yourself? Play the long game!

Instead of throwing your nest egg at a random cryptocurrency that sounds like it has potential, maybe you invest in Nvidia. Instead of buying an NFT, you can invest in a metaverse company like Facebook.

This isn't to say that you shouldn't take risks and trade speculative opportunities in this rapidly evolving space, you just need to know about all the different types of opportunities that there are!

Personal discipline, risk management and a bit of skepticism appear to be the formula for developing a strong trading strategy in the cryptocurrency space.

Instead of digging for gold, consider history’s valuable lesson of investing in the guy that's selling the shovels.

If you’re interested in trading either the inflating prices of crypto coins and/or profiting from a more conservative strategy of trading the stocks of companies benefiting from the rise of this new asset class, don’t miss the reveal of our NEW crypto trading services!


One Comment

  1. blank

    Thomas Leong

    Happy Birthday Keith, Hope they let you out to a restaurant or something that 's open so you and Mish can celebrate.

    - Reply

Leave a Comment or Reply

Your email address will not be published. Required fields are marked *