These Warning Signs Point to More Weakness Ahead in The Stock Market

After the Black Friday selloff, there was increasing of supply last week to push the 4 US indices down. As shown in the daily chart below, S&P 500 E-mini Futures (ES), E-mini Russell 2000 (RTY) and E-mini Dow Jones Futures (YM) broke the support levels (as annotated in the orange line) on 26 Nov (highlighted in blue) while the outperforming index, Nasdaq 100 E-mini Futures (NQ) also broke the support on 1 Dec followed by a test and continuation to the downside in the next 2 days.

S&P 500 Price Action and Volume

It is crucial to analyze the price action and the volume in order to find out the dominating force (either supply or demand) in the market in order to anticipate the market direction.

As shown in the screenshot from my private Telegram Group for Mastering Price Action Trading above, there was presence of demand on 30 Nov 2021 when compared to 26 Nov’s, yet the results for the next day was bearish with big price spread, suggested that the demand was overwhelmed by the supply, which pointed to more weakness ahead.

As S&P 500 tested the first support area near 4500, it rallied up after an oversold condition as it hit the oversold line of the down channel as shown above. There was a shortening of the thrust to the downside with increasing efforts suggested presence of demand at the support area. Once again, the bull could have a chance to rally up after reaching the oversold condition. Pay close attention to how S&P 500 will interact at the axis line (where the support-turned-resistance) near 4625 if it happens.

Given the significant increase of the supply together with the strong bearish momentum as shown in the price spread and velocity since 22 Nov, we could expect a lower low test to around 4450.

Intermarket Relationship: US Dollar Index (DXY) vs S&P 500

Next, let’s take a look at the intermarket relationship between the US Dollar Index (DXY) and S&P 500 below:

As shown in the weekly chart comparing the US Dollar Index (DXY) and the S&P 500, DXY formed a downtrend since 2017 while S&P 500 was in a nice up trend. In 2018, DXY started a rally and flattened in 2019 while S&P 500 formed a correction and consolidate in a trading range from 2018-2019. In 2020 during the COVID -19 selloff, DXY spiked up while S&P500 had a deep correction. Since the COVID-19 low, DXY was in a downtrend and formed a base in the first half of 2021 while S&P 500 in a strong up trend.

In Sep 2021, DXY broke out from the base and is currently in an uptrend heading towards the previous high at 100 while a correction is still unfolding in S&P 500.

Based on the inverse proportion relationship between the US Dollar Index and the S&P 500 since 2017, this could point to more weakness ahead in S&P 500 given the current strength in the US Dollar Index.

Above are only two of the many key factors I analyze daily to anticipate the market direction. If you would like to stay on top of the market, click here to join my live session every week to discover more market insights and stock trading opportunities.

Is It Too Late to Buy Microsoft?

Dow component Microsoft Corp. (MSFT) has outperformed its mega-cap rivals so far in 2021, posting a phenomenal 53% return. It hasn’t touched the 200-day moving average in 20 months or carved a single 20% pullback since March 2020.  In addition, the stock has gone straight up since the start of October, adding nearly 25% into Monday’s mid-session peak. Of course, this lopsided performance won’t last forever because mean reversion practically guarantees a fall from grace, sooner or later.

Well-Positioned for 2022

Mr. Softee must continue to fire on all cylinders to attract new investors but has the tools in place to outperform the competition well into 2022. Internet-as-a-Service (IaaS), cybersecurity, and productivity segments continue to post excellent year-over-year growth, relieving pressure from an operating system that’s grown resistant to profitable upgrades. And let’s not forget margins, which have expanded from 30% to 42% in just five years.

Despite the torrid advance, Wells Fargo analyst Michael Turrin just reaffirmed his belief that Microsoft shares will continue to rise, noting “we acknowledge shares are trading at historical highs, but think this is justified given: (1) market positioning is the best it’s ever been, (2) core businesses have evolved favorably over the past decade, including numerous strategic additions (i.e. LinkedIn, GitHub, etc.), and (3) strong incumbent position in a tight market, which we view as especially favorable in the current environment”.

Wall Street and Technical Outlook

Wall Street consensus this year couldn’t be more bullish, with a ‘Buy’ rating based upon 31 ‘Buy’, 3 ‘Overweight’, and 4 ‘Hold’ recommendations. More importantly, no analysts are recommending that shareholders close positions. Price targets range from a low of $294 to a Street-high $410 while the stock is set to open Tuesday’s session about $26 below the median $364 target. This modest placement should support additional upside, albeit at a slower pace than the last 10 months.

Microsoft has posted steady upside since breaking out above the 1999 bubble peak near 60 in 2016. It pulled back to a 3-month low during 2020’s pandemic decline and turned higher, breaking out to new highs in June. The stock has posted three intermediate breakouts since that time, including a high volume gap above resistance near 300 after a strong Q3 2021 earnings report.  Weekly relative strength is overbought and slowly rolling over, suggesting the stock is about to enter yet another intermediate pullback.

For a look at today’s economic events, check out our earnings calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Target Selling Off Despite Strong Quarter

Retail superstar Target Corp. (TGT) is trading lower by more than 3% in Wednesday’s pre-market despite beating Q3 2021 top and bottom line estimates. The company posted a profit of $3.03 per-share, $0.22 better than expectations, while revenue rose a healthy 13.2% year-over-year to $25.29 billion, more than $500 million higher than consensus. Store comparative sales increased 9.7%, adding to 9.9% growth in the same quarter last year.

Firing on All Cylinders

Digital comparative sales jumped 29%, marking a major deacceleration compared to the astounding 155% growth posted in Q3 2020. Target now expects to book “high-single digit to low-double digit” comparative sales growth in the fourth quarter, raising guidance from previous expectations for high-single digit growth. The full-year operating income margin rate is expected to be 8% or higher, reflecting strong management of skyrocketing wages and supply chain disruptions.

Target CEO Brian Cornell commented on the quarterly results, admitting he expects supply chain challenges to continue well into 2022 but believes the company is well-positioned for a strong holiday season. He notes that employee retention has improved as Americans slowly settle into the best job market in decades. And, although he insists there is a commitment to “provide great value during inflation”, he failed to make specific predictions on profit margins going forward.

Wall Street and Technical Outlook

Wall Street consensus stood at an ‘Overweight’ rating ahead of the report, based upon 20 ‘Buy’, 3 ‘Overweight’, 7 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $235 to a Street-high $337 while the stock is set to open Wednesday’s session about $24 below the median $285 target. The sell-the-news reaction after a solid quarter and healthy guidance suggests those results were already baked into the stock price.

Target broke out above 4-year resistance in the 80s in July 2019 and entered a powerful uptrend that accelerated after a deep dip in March 2020. The stock nearly tripled in price into the July 2021 high at 267.06, yielding a 40-point pullback into October, followed by a recovery wave that exceeded the prior high by less than two points this week. The post-news reaction matches a bearish volume divergence, with many shareholders using the latest uptick to dump positions. The 50-day moving average near 250 marks the first downside target in this selling wave.

For a look at today’s economic events, check out our earnings calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

A Post-Covid Hangover – Should You Worry About Your Portfolio?

Amazon executives noted shifting consumer habits as the pandemic eases and people become more mobile. Amazon forecasted the next quarter’s sales at between $106 billion and $112 billion, compared to Wall Street expectations for right around $119 billion.

Amazon’s projections would still represent growth of +10% to +16%. Keep in mind, bears are also pointing to ongoing fears of supply chain hiccups, higher-trending inflation, and new coronavirus outbreaks. Earnings come at a busy pace again today with results from Caterpillar, Cerner, Chevron, CNH Industrial, Colgate Palmolive, Enbridge, Exxon Mobil, Johnson Control, and Procter & Gamble.

The worry on Wall Street is that this new normal rate of growth will be slower than many analysts and trading firms are forecasting coupled with higher inflation and or supply chain dislocations corporate profits could fall under some pressure or in this case be less than Wall Street is forecasting for the next few quarters. Bulls expect more consumer spending will shift from goods and pandemic-related services (delivery, video games, cloud/collaboration software) but are still betting on pent-up demand for things people missed out on during lockdowns, as well as goods and services that are currently in short supply.

Data to watch

Updated inflation data is also on tap with the ISM Manufacturing Index on Monday and the Services Index on Wednesday.

There will be plenty more earnings next week too, including Simon Properties and Zoom on Monday; Activision Blizzard, Alibaba, Amgen, Clorox, ConocoPhillips, Eli Lilly, Fidelity, Match Group, Monster Beverage, Occidental Petroleum, and Phillips 66 on Tuesday; Allstate, CVS, Etsy, General Motors, Kraft Heinz, Marathon Petroleum, MetLife, MGM Resorts, Rocket Companies, Roku, Trane, and Uber on Wednesday; Adidas, AMC, Carvana, Cigna, Cloudflare, Corteva, Duke Energy, Kellogg, Moderna, Nintendo, Novo Nordisk, Siemens, Square, Wayfair, Zillow, and Zoetis on Thursday; and Dish Network, Dominion Energy, and DraftKings on Friday.

Insider Accumulation

ES ##-## (Daily) 2021_08_01 (19_25_02)

I have mixed feelings about SP500. There are a few signs of weakness. However, it might be the result of low summer activity. Advance-Decline Line is clearly bearish. Insider Accumulation is also not that strong. Moreover, the Volatility Index is very low and potentially it could bring a pullback. In any case, SP500 futures failed to close the week above Gann resistance. And that is also a negative sign.

The Federal Reserve policy is still supportive. But keep in mind, that SP500 has rallied around 100% since the pandemic bottom without any pullback. And the retest of key support zones near 4200 and 4000 is realistic.

On the other hand, the continuation of the rally is also possible but only if price sustains above 4400. If that happens, bulls will target 4500 and 4600 in extension.

Today’s Market Wrap Up and a Glimpse Into Friday

Stocks finished the day in the green after investors were able to brush off signs that the economic recovery may have hit a snag. The Dow Jones Industrial Average tacked on more than 150 points, while the S&P 500 and tech-heavy Nasdaq also inched higher. The market indices showed resilience even as the delta variant threatens to throw a wrench into economic expansion for the rest of the year.

Second-quarter GDP expanded at an annual rate of 6.5%, which catapults the economy beyond pre-COVID levels but falls short of estimates. Meanwhile, the forecast for the rest of the year could be threatened by the uncertainty from the delta variant. Companies have responded by delaying the return to the office or in some cases reinstating mask policies for consumers. It’s déjà vu all over again.

Investors were able to focus on the glass half full. For example, consumer spending and corporate earnings have been bright spots of late. Meanwhile, supply chain issues seem to be a stumbling block.

Stocks to Watch

Amazon reported its Q2 results, and the stock sank 5% in after-hours trading. While the e-commerce giant reported revenue of slightly more than USD 113 billion, Wall Street analysts were looking for USD 115 billion. Amazon’s revenue outlook for Q3 also falls below consensus estimates, and the stock is being punished. The latest quarterly performance unfolded just before Jeff Bezos was replaced as CEO by Andy Jassy earlier this month.

Pinterest is also under pressure in extended-hours trading, falling 14%. The company fell short on its number of monthly active users, which came in at 454 million compared to estimates of 482 million. This indicator could also come back to bite Pinterest in Q3, for which management failed to provide any forecast and blamed the pandemic.

Robinhood’s IPO was a flop after the stock fell more than 8% on its first day of trading on the Nasdaq. The trading app’s shares opened at USD 38 and finished the day at just under USD 35. Robinhood sought to appeal to retail investors but was in for a rude awakening. The broker finished the day with a market cap of USD 29 billion.

Look Ahead

On the economic front, Personal Income & Spending for the month of June comes out on Friday. Wells Fargo economists predict that income fell 0.2% while spending increased 2% vs. May levels. The weaning away of the stimulus is pressuring incomes.

Today’s Market Wrap Up and a Glimpse Into Friday

Stocks rallied yet again, sending the S&P 500 to its sixth consecutive all-time high. Investors celebrated jobless claims showing that the economy is back on track. Weekly jobless claims came in at their lowest level since the pandemic reared its head.

The Nasdaq also finished higher while the Dow Jones Industrial Average added more than 100 points amid a strengthening economy and a second-quarter earnings parade that is just getting underway.

Energy stocks were a bright spot in the session after WTI crude oil surpassed USD 75 per barrel. Dow member Chevron benefited from the bullish sentiment and tacked on about 1.5%

New in the Hood

The market was abuzz about Robinhood’s IPO filing. The commission-free trading app has been generating revenue hand-over-fist as the retail-investor-fueled meme stock craze has taken shape. Now Robinhood seeks to capitalize on that demand and list on the Nasdaq under a sign-of-the-times trading symbol, HOOD. To demonstrate how popular the app has become, Robinhood generated USD 522 million in Q1 2021 revenue vs. USD 127.6 million in the corresponding year-ago period.

Stocks to Watch

Nike gained 2% on the day after touching on a new all-time high. The sports apparel company turned in impressive sales results and investors expect the momentum to continue.

Walgreens did not receive the same reception on Wall Street even though it also produced a solid quarter. The stock was down 7% in the session despite having lifted its outlook for the year. Investors are still ahead as the stock is up more than 20% year-to-date.

Meme stock AMC Entertainment shed 4% in the session. The stock’s market cap is currently just over USD 27 billion but the company has billions of dollars of debt on its balance sheet. Investors might be starting to think twice about the sustainability of the valuation.

Look Ahead

Investors should keep an eye on Virgin Galactic on Friday.  Billionaire Richard Branson will reportedly head into space on July 11, nine days before rival Jeff Bezos’ space flight. The stock is up more than 4% in extended-hours trading.

On Friday, the much-anticipated Employment Report for June will be released at 8:30 a.m. ET. Wells Fargo predicts that hiring accelerated in June vs. May and that the economy added 750K non-farm payrolls.

Today’s Market Wrap Up and a Glimpse Into Thursday

Another day, another new all-time high for the S&P 500. The broader market index just set its fifth-straight record after finishing the day fractionally higher to just under 4,300. The Nasdaq failed to keep up and ended the day slightly lower, while the Dow Jones Industrial Average tacked on 210 points, with Boeing, Goldman Sachs and Walmart leading the gains.

Now that the month of June is in the rear-view mirror, it’s clear investors have managed to push stocks to impressive gains despite signs of inflation and lofty valuations. The S&P 500 and Dow are up roughly 14% and close to 13%, respectively, year-to-date.

The economy is humming along, with consumers exhibiting signs of resilience. For the back half of the year, however, investors will be weighing whether the economy can stand on its own two feet without the help of a dovish Fed. This will begin with Friday’s all-important employment report.

Stocks on the Move

When you hear that an electric vehicle stock is rallying, you would not be alone to guess Tesla. Today, however, that title went to NIO, a Shanghai-based EV maker. The stock gained nearly 6% on the day amid optimistic investors ahead of the company’s Q2 results coupled with China’s recovering economy. Wall Street analysts are also reportedly turning more bullish on the stock.

Sticking with the auto stock theme, shares of Ford fell 1% today. The company revealed it would suspend operations at some of its North American facilities due to a shortage of chips. The shutdown will cost the automaker upwards of USD 2 billion and slash its production significantly in the interim.

China’s ride-share company Didi made its debut on the U.S. stock market today. The ADR shares came out of the gate strong, rallying by a double-digit percentage, but the enthusiasm didn’t last. Didi finished the day with a gain of 1%.

Look Ahead

The ISM Manufacturing index for June comes out after surpassing estimates and climbing to 61.2 in May. Wells Fargo predicts the reading will stay “elevated” for June amid a strong orders pipeline.

On the earnings front, retailer Walgreens and spice maker McCormick are on deck. McCormick has benefited from rising demand as consumers spent more time cooking during the shift to staying at home during the health crisis.

US Stock Futures Retreat after Monday’s Tech Stock Rally Sends S&P and NASDAQ to Record Highs

U.S. stock index futures are edging lower early Tuesday after the benchmark S&P 500 Index and tech-heavy NASDAQ Composite finished at record highs the previous session.

Shares of Morgan Stanley advanced 3% during extended trading after the company said it will double its quarterly dividend. The bank also announced a $12 billion stock buy back program. The announcement follows last week’s stress tests by the Federal Reserve, which all 23 banks tested passed. Bank of America, Goldman Sachs and JPMorgan also announced dividend increases, CNBC reported.

At 04:32 GMT, September E-mini S&P 500 Index futures are trading 4274.00, down 6.50 or -0.15%. September E-mini Dow Jones Industrial Average futures are at 34139, down 25 or -0.07% and September E-mini NASDAQ-100 Index futures are trading 14484, down 27.75 or -0.19%.

With two days left in June and the second quarter, the S&P 500 Index is on track to register its fifth straight month of gains. The NASDAQ Composite is on pace for its seventh positive month in the last eight. The Dow, however, is in the red for the month, and on track to snap a four-month winning streak.

Monday’s Recap

The NASDAQ and S&P 500 hit all-time highs on Monday, fueled by tech stocks as investors expect a robust earnings season while interest rates remain low. In contrast, cyclical sectors dropped sharply amid fears over a spike in COVID-19 cases across Asia. Financial and energy posted the biggest sectoral loss on S&P 500, down by 0.81% and 3.33%, respectively.

Both the S&P 500 and the NASDAQ hit a series of record highs last week, the tech-heavy NASDAQ’s 5% gain in June is outpacing its peers as investors pile back in to tech-oriented growth stocks on diminishing worries about runaway inflation.

Stocks on the Move

Big tech companies including Facebook Inc, Netflix Inc, Twitter Inc and Nvidia Corp were among the biggest boosts to the S&P 500 and the NASDAQ.

Facebook jumped over 4% as a U.S. judge granted the company’s motion to dismiss a Federal Trade Commission lawsuit. The social media giant finished Monday with over $1 trillion in market capitalization.

On the NASDAQ-100, the largest gainer was Nvidia Corp, which rose 5.0% after major chip makers Broadcom Inc, Marvell and Taiwan-based MediaTek endorsed its $40 billion deal to buy UK chip designer Arm.

Traders Bracing for Slew of Economic Data, Quarterly Results

On the economic front, investor attention will be focused on consumer confidence data, a private jobs report and a crucial monthly employment report due later this week. Quarterly results from Micron Technology Inc and Walgreens Boots Alliance are also slated for this week.

For a look at all of today’s economic events, check out our economic calendar.

Gold Finds Footing; FedSpeak Stewing

260621_gold_scoreboard

…when (cue FedSpeak) up popped St. Louis FedPrez James “Bullish” Bullard stating inflation is more than they’d just expected, such that a rate hike may come next year. Then chiming in with same came Atlanta FedPrez Raphael “Ready to Raise” Bostic. At the same time, Minneapolis FedPrez Neel “Keep Cash a-Comin'” Kashkari says they can slide without a rate rise beyond 2023. (Is that deflationary-depression-speak?) Too, New York FedPrez John “It’s All Good” Williams still leans to keeping the spigots open. Stewing away are the FedPrez!

Still, diplomatically maintaining equilibrium is Federal Reserve Chairman Jerome “Please ‘Em All” Powell pointing out to Congress that whilst the economy has shown “sustained improvement”, it nonetheless has “a long way to go”. (See further down our Econ Baro).

‘Course going down Mexico-way, they’re not waiting another day, Banxico boosting their lending rate by 0.25% (to 4.25%), their first increase in two years.

But the week’s real kicker was TreaSec Janet “Old Yeller” Yellen stating with hat-in-hand to Congress that the USA defaulting on its DEBT would be “unthinkable”; (that really would wreck stock markets right ’round the world). Nothing like issuing DEBT in perpetuity, eh? “Got Bonds?” We hope not. “Got Gold?” We hope so.

And indeed with all the FedSpeak and weaker economic data throughout the week, Gold — the recent decline for which was well overdone — finally found some footing, albeit narrowly so. Gold’s “expected weekly trading range” for that just past was 57 points: but only a range of 32 points actually was traded, second narrowest year-to-date. Moreover as we go to Gold’s weekly bars from a year ago-to-date, the present parabolic Long trend is still barely in place, price needing to stay above 1764 in the new week to avoid such trend flipping to Short. But the broad trend as measured by the diagonal dashed line has rotated a tad more negatively:

260621_gold_weekly

And comparatively across the five primary BEGOS Markets (Bond / Euro / Gold / Oil / S&P) from one month ago-to-date, Gold (-6.5%) is the weakest of the bunch, whereas Oil (+10.4%) is firmest:

260621_begos_tracks

As a further reminder, Gold would like to see the Fed get on with raising its Funds rate, for as history shows, the yellow metal can do very well when Fed Funds rise from nothing as again we reprise this chart from the three-year 2004-2006 stint:

260621_gold_fedfunds

So with the Fed now stewing in a bit of a pie-fight as to when to raise rates and engage in paper taper, let alone agree on the state of the Stateside economy, we understand it quite clearly via the Economic Barometer, which looks to be commencing a fresh decline:

260621_econbaro

Indeed from this past week’s rash of incoming metrics, only May’s Durable Orders showed any improvement, and just mildly at that. Otherwise, the month’s Home Sales (both Existing and New) missed their April levels, Personal Income remained negative with Spending flat, and the Fed’s favoured gauge of inflation growth — the Core Personal Consumption Expenditures Index — came in slower than April and milder than anticipated. Again as we’ve said: the expected economic boom “has already happened.” Let’s see what next week’s 13 data items do to the Baro.

As for the S&P 500 — which no longer goes down — the 4300 level is within Monday’s “expected daily trading range”. And perhaps 5000 before year-end? Why not. Our “live” price/earnings ratio is a mere 56.6x. Do you pay $56 for something that earns $1? Of course you do: all day long! Making money has never been easier. (One wonders if those airhead FinMediaTV networks could be litigated for “financial libel”). Again: “Got Gold?”

We do here on the left in the following two-panel graphic of the precious metals’ daily pricing from three months ago-to-date, Gold’s “Baby Blues” of linear regression trend consistency careening down to their -80% axis. But upon them curling up from that level, ’twill be an early indication of the trend turning positive. For Silver on the right the assessment is the same:

260621_gold_silver_dots

Now for their respective 10-day Market Profiles, you can readily see the “footing” to which we allude in this week’s title. For Gold (below left) the key hold area is right here in the current 1783-1778 zone, whilst for Sister Silver (below right) ’tis between 26.25 and 26.00:

260621_gold_silver_profiles

To wrap, in that we can’t get through an edition of The Gold Update without bemoaning the S&P’s horrendous overvaluation which we above cited, here’s a plus (ha!) and a minus toward it all ultimately unraveling.

The Plus: According to Fed stress tests, shareholders can jump for joy as the banks in which they invest can tolerate some $500bn of loan losses. So bring on the share buybacks! “We don’t need no margin for error!”

The Minus: The in-thing to do these days if you’re a publicly-traded company with no earnings, lots of debt and no competitive edge is to sell more stock. ‘Tis basically accepted now that folks will blindly buy your shares. “We’re stuck on stooopid and don’t even know it!”

‘Course, you shan’t ever be stuck — royal right or otherwise — given you’ve got Gold!

Cheers!

www.deMeadville.com
www.TheGoldUpdate.com

Best ETFs For July 2021

That’s why I spend my time crafting portfolios chock full of outlier stocks. If you choose right, you’ll have enormous gains on your hands in the years to come.

Now, I pick my ETFs perhaps a bit differently than other people. I can find outlier ETFs by tracking the Big Money. But that alone isn’t enough: when I catalog the components and find outlier stocks underneath… that’s the winning recipe.

That’s how I found the best big-money ETFs for July.

First, I looked at all ETFs making Big Money signals by going to MAPsignals.com and scanning the Big Money ETF Buys and Sells chart. I looked for recent days with heavy buying (the bright blue spikes):

Chart, histogram Description automatically generated

Once I knew which ETFs Big Money was buying, then I wanted the best opportunities. Remember: ETFs are just baskets of stocks. MAPsignals specializes in scoring more than 6,000 stocks daily. Therefore, if I know which stocks make up the ETFs, I can apply the stock scores to the ETFs. Then I can rank them all strongest to weakest.

Once the ETFs were sorted, I noticed Real Estate funds at the top. That’s why this month the top ETF is IYR.

#1 IYR – iShares U.S. Real Estate ETF

As we can see- there was a lot of Big Money buying plowing into this ETF over the last year. It accelerated noticeably since February:

Graphical user interface Description automatically generated

IYR holds some great stocks. One fine example is PLD (Prologis, Inc.). Below are Big Money signals for PLD:

Chart, line chart Description automatically generated

#2 BOTZ – Global X Robotics & Artificial Intelligence ETF

A.I. and Robotics are undoubtedly a huge part of our future. Big Money thinks so too. Look at the buying of BOTZ over the last year below.

Diagram Description automatically generated

One great example stock that BOTZ holds is Intuitive Surgical. They make the surgical robot called DaVinci. It allows remote surgery- a phenomenal technology.

Chart, line chart Description automatically generated

#3 VDE – Vanguard Energy Sector ETF

Energy was an unloved sector last year. But it’s having a sudden resurgence. Big Money has been buying VDE:

Chart, histogram Description automatically generated

VDE holds a bunch of great energy stocks. One such stock that has been a Big Money darling in the past is FANG which is seeing a rebirth:

Chart Description automatically generated

#4 LIT – Global X Lithium ETF

Like it or not, lithium is the power of the foreseeable future for EVs. Look at all that green last year:

Chart, histogram Description automatically generated

And LIT holds some great stocks. One of them is the best-known EV manufacturer which is very reliant on lithium: Tesla Inc.

Chart, line chart Description automatically generated

#5 ARKQ – ARK Industrial Innovation ETF

The media has recently heaped scorn upon Cathie Wood, CEO of ARK Invest after she was Wall Street’s darling last year. The proof is ultimately not in the headlines, but in the Big Money buying. Here we can see clearly that Big Money loved ARKQ last year. The question is: when we see selling (red) should we worry?

Diagram Description automatically generated

The answer lies in which stocks the ETF holds. And ARKQ holds some great ones. One such outlier is Teradyne:

Chart, line chart Description automatically generated

Let’s summarize here: the top 3 ETFs (IYR, BOTZ, and VDE) for July score well in terms of MAPsignals’ scores. That means Big Money has been pouring into them:

Graphical user interface, text, application Description automatically generated

LIT and ARKQ however, rank lower on our list of ETFs. This is because of weak technicals. These weaker ETFs represent great potential bargains.

So, there we have the 5 best ETFs for July.

The Bottom Line

IYR, BOTZ, VDE, LIT, & ARKQ represent top ETFs for July 2021. Real Estate, Energy, and Robotics stocks have performed well lately, which should continue. Lithium has an interesting story too. Paying attention to the fundamental quality of ETF constituents is paramount.

To learn more about MAPsignals’ Big Money process please visit: www.mapsignals.com

Disclosure: the author holds long positions in TER in managed accounts, but no positions in IYR, BOTZ, VDE, LIT, ARKQ, PLD, ISRG, FANG, or TSLA at the time of publication.

Charts Source: www.mapsignals.com, FactSet, End of day data sourced from Tiingo.com

Investment Research Disclaimer

Gold Price Forecast: Gold Must Hold $1750 or Risk a Larger Breakdown

Our Gold Cycle Indicator finished at eight (8). If it sinks below zero, I will put the available funds to work in the Premium Metals Portfolio.

Graphical user interface

Description automatically generated

GOLD DAILY

Gold formed a bullish engulfing candle on Monday. Prices need a strong close above $1800 to support a possible bottom. A continued breakdown below $1750 would promote a retest of the March lows and potentially lower.

Chart

Description automatically generated

SILVER DAILY

Silver prices are constructing a multi-month ascending triangle. Prices need to hold support near $25.00 to maintain the structure. The pattern continues to favor an upside breakout above $30.00. On the bearish side, prices would have to break below $22.00 to recommend a more profound correction back towards support surrounding $19.00.

Chart

Description automatically generated

PLATINUM

Platinum formed a swing low after testing support surrounding $1040. I’d like to see progressive closes back above $1100 to recommend a bottom. Otherwise, a continued breakdown below $1000 would support a drop back towards $800.

Chart

Description automatically generated

GDX

Gold miners are trying to hold support surrounding $34.00. It would take a daily close above $35.10 to form a swing low. However, to recommend a bottom, I would need to see a decisive close above $37.00.

A picture containing chart

Description automatically generated

SPY

Stocks reversed once again near the 50-day EMA and are rapidly approaching fresh highs. The trend looks exhausted, and we are overdue for a multi-week correction. At this point, it is more of a question of when and not if, in my opinion.

Chart

Description automatically generated

BITCOIN DAILY CHART

Bitcoin dipped briefly below $30,000 to test critical support surrounding $28,000. This area must hold to maintain the potential for an advance to fresh highs (above $65,000) by year-end. A continued breakdown below $28,000 would confirm a new bear market in Bitcoin and subsequent crypto-winter.

A picture containing text, electronics, computer, display

Description automatically generated

My Bitcoin analysis still supports one final rally towards $90,000 by year-end, but the crackdown in China and brewing regulatory pressures in the U.S. may prove overwhelming. Prices must hold $28,000.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For regular updates, please visit here.

Volumes Spike As Technology Stocks Lead

And now we’re approaching the summer months, which happen to be rather volatile as volumes shrink, pushing stocks around. Investors got a taste of summer volatility on Friday, June 18th as a swath of selling hit stocks.

In fact, it was the largest single-day of selling since the pandemic, second only to 10/28/20. Below is a chart from my research firm MAPsignals, which measures big buying and selling in stocks. The red bars are the daily total of sells.

Look how Friday was the largest sell day in 2021:

TextDescription automatically generated
Source: FactSet

Here’s a zoom in:

Chart, histogram

Description automatically generated

Big selling in stocks makes people uncomfortable. But, I’m not too worried. After looking into the data a bit further, the selloff is normal. Let me explain.

Last Friday was Quadruple witching. That’s the 3rd Friday of March, June, September, and December. They call it Quad witching because 4 expirations happen: options futures, stock options, market index futures, and stock futures. Basically, 4 times a year there’s huge volumes in stocks.

And when volumes are high, you can expect stocks to whip around. So, this raises a question: Do stocks tend to pull back on quad witching days? To find out, I looked at prior returns for the S&P 500 (SPY ETF) on the last 6 Quad witching Fridays.

Notice anything?

Text, table

Description automatically generated

That’s right, recently it’s a red day for the S&P 500. So, Friday’s action was ordinary…at least to me. But, let’s keep going. How has the SPY ETF performed on these days going back to 2015?

You tell me:

Text

Description automatically generated

Only 3 out of 26 periods had a positive daily performance. So, nearly 90% of the Quad Witching days going back to 2015 were red for stocks. So, Friday’s selloff doesn’t worry me.

Rather than worry about single selloff days, my data points to a strong undercurrent for stocks. The Big Money Index (BMI) has been trending higher lately.

If you’re new to the BMI, it tracks Big Money buying and selling stocks on a 25-day moving average. If the index (blue line) is gaining, the market usually follows higher. If it falls, it usually precedes a pullback in stocks.

Right now, it’s at a 6-week high:

Chart, histogramDescription automatically generated
Source: MAPsignals.com

And this leads me to the main message of today: Technology stocks are getting bought as reopening and value stocks are getting sold. For growth investors, this is a good thing!

Under the surface of the Big Money Index are daily buys and sells. It’s important to pay attention to where the money’s flowing. Looking at last week, we can see that buyers were seen in Technology and Energy stocks.

A picture containing graphical user interfaceDescription automatically generated
Source: MAPsignals.com

Off to the right you can see yellow areas. Those tell us that 25% or more of a sector saw outsized buying and selling. Notice how there was chunky selling in popular value/reopen groups: Financials, Industrials, Materials, Discretionary, Staples, & Utilities.

So, let’s tie this all up. Quad Witching Fridays tend to be red for stocks. It’s normal. And looking under the surface, the bigger picture points to a rotation out of value and into Technology/Growth and Energy.

Sometimes pullbacks happen. Doing a little dive into history helps calm nerves and put everything into perspective.

Disclosure: the author holds no position in SPY or the S&P 500 at the time of publication.

Learn more about the MAPsignals process here: www.mapsignals.com

Disclaimer

https://mapsignals.com/contact/

Post-Fed Markets. What To Expect Next?

Fundamental analysis

At the same time, the central bank lifted its growth expectations for 2021 to +7%, an outlook far above the anemic GDP growth rates experienced pre-pandemic. Bulls largely want to stay focused on the economic “boom” ahead, believing it will more than offset any near-term inflation headwinds that companies may face in the second half of the year. And there is evidence money may be shifting back into some of the mega-cap growth stocks.

I just worry that the move might be temporary in nature or perhaps just a knee-jerk and a place to park some money until they figure out their next move. The Fed’s more hawkish shift also seems to be providing a further boost to the U.S. dollar, which shot up nearly a full percentage point against a basket of six other major currencies in the ICE U.S. Dollar Index.

Keep in mind, many big-money players have been forecasting a somewhat softer dollar based on the Fed’s extended supports. Obviously, a stronger dollar is a headwind for commodities and that was on display last week with a sea of red across everything from grains to metals and oil.

Oil markets are also feeling some additional downward pressure from the coronavirus surge happening in the UK, which some worry could ripple across the EU and further delay other re-openings.

Data to watch

Housing is in the spotlight in the first half of the week with Existing Home Sales Tuesday and New Home Sales on Wednesday. The housing market has been sending some mixed signals lately as home prices continue to soar, inventories remain at historic lows, and builders struggle with skyrocketing input prices and labor shortages.

Other data includes Durable Goods Orders and the final estimate of third-quarter GDP on Thursday; and Personal Income & Outlays, and Consumer Sentiment on Friday.

SP500 technical analysis

sp500 analysis fed 20 june 2021

While last week SP500 posted a fresh record top at 4258.5 (4267.5 on Jun), bears have returned to the market, aggressively selling futures on Friday and for sentiment to end a sequence of higher weekly lows with losses of 118 Pts from the top. This is negative and with cycles pointing lower, we can see further decline. 4179.0 is an important level to watch if tested and rejected. The supports 4100.5, the May 20th open, 4046.0, the 5-week base, and 4020.0, May’s low trade.

Keep in mind that this could be just a jerk-reaction after the Fed. Also, cycles forecast a potential rally in 2 weeks.

Why The Dollar Matters (A Lot!)

With the recent rally this past week in the dollar, it is important for investors to understand why such a move matters. For those who love charts, this article is for you.

The most obvious and well-known correlation between the dollar and equities is the association of a weak dollar with the outperformance of most commodities and real assets. It is no coincidence the significant gains in commodities over the past 12 months have come during a period of a declining dollar. We can clearly see this inverse relationship in play by comparing the performance of copper and oil against the dollar.

Dollar & copper
Dollar & copper

Dollar & oil

Dollar & oilAn extension of this relationship is how periods of dollar weakness coincide with the relative outperformance of equity markets sectors reliant on economic growth. As we have witnessed over the past year, the falling dollar has resulted in the outperformance of consumer cyclical versus consumer defensive stocks, as well as materials, industrials, small caps and energy stocks outperformance relative to the broad market. Likewise, this period of dollar weakness has seen the underperformance of defensive sectors such as utilities and bonds.

Consumer cyclicals vs defensive
Consumer cyclicals vs defensive

Basic materials vs S&P 500

Basic materials vs S&P 500Industrials vs S&P 500

Industrials vs S&P 500Utilities vs S&P500

Utilities vs S&P500Small Caps vs Large Caps

Small Caps vs Large CapsDollar & bonds

Dollar & bondsFrom a fundamental perspective, these relationships make sense. A stronger dollar is generally a function of a contractionary or disinflationary outlook. During deflationary shocks à la March 2020, dollars are in high demand and act as a safe haven or risk-off asset. Conversely, a weaker dollar is generally a function of economic growth and rising inflation expectations.

What this means is the dollar tends to appreciate when bond yields fall. This comes about due to the safe have characteristics of the dollar. If the economic outlook looks sluggish and appears to be slowing down, we tend to see money flow into dollars, and by extension, we see money flow out of the growth and inflationary dependent sectors and asset classes of commodities, small caps, cyclicals, industrials and materials and into those of a defensive nature.

Perhaps the most well-known implication of dollar strength or weakness is the performance of foreign and emerging markets relative to the US. Emerging markets in particular are inherently cyclical and dependent on the dollar. This is particularly the case for those countries with high levels of US dollar denominated debt or the commodity producing countries.

Emerging markets vs S&P 500
Emerging markets vs S&P 500

I detailed the dollar and emerging markets dynamic in depth in my article arguing the bull case for emerging markets, most of which is detailed as follows:

A rising US dollar causes the domestic currency of emerging economies to fall and inflation to rise amid weaker economic growth. Contrary to a developed economy whose economic growth is generally associated with inflation, being beholden to foreign-denominated debt reverses this dynamic. Higher inflation results in the central bank needing to raise interest rates and sell their foreign exchange reserves to defend their currency from hyperinflating, which acts as a further headwind to economic growth and exacerbates this dynamic in a self-reflexive manner.

These countries are unable to simply print money to monetize the debt, as is commonplace in developed countries whose debt is denominated in their own currency. The governments will then look to use fiscal policy as a means to stimulate, resulting in increasing budget deficits at the same time foreign and domestic capital flees the country for a safer alternative to preserve wealth, resulting in a negative current account balance along with a budget deficit.

Of course, these dynamics work in reverse too when the dollar is falling and create an economic tailwind that results in strong economic growth and asset price appreciation generally superior to developed markets. As the domestic currency strengthens, inflationary pressures fall, allowing the central banks to lower interest rates whilst the economy is booming, spurring lending and reinforcing growth.

At the same time, the governments are not required to run budget deficits, nor are the central banks required sacrifice their foreign currency reserves and run current account deficits to defend their currencies. You could almost think of a rising dollar as a form of quantitative tightening for most emerging markets, whilst a falling dollar could be considered a form of quantitative easing.

Therefore, for one to be willing to bet on the outperformance of EM relative to US equities, one must have a bearish outlook for the dollar.

Is this dollar rally sustainable?

In my view, the dollar has appeared to be in need of a rebound for a few months now. To be clear, we are far from seeing the start of a new trend higher in the dollar, but, as the consensus towards the dollar has been and remains almost exclusively bearish, it is not often we see price action conform to consensus.

Speculators are still betting heavily against a rally in the dollar.

Conversely, speculators are betting heavily on the relative outperformance of the euro. Meanwhile, commercial hedgers (i.e. the smart money) remain long dollars and short euros.

Technically, the coming weeks will be telling for both the dollar and the euro. With a potential head and shoulders bottom forming on the dollar index, and conversely a head and shoulders top for the euro, should these patterns follow through and the dollar move further to the upside, many of the “consensus” inflationary and growth orientated trades in which investors are all in on, may experience a period of underperformance.

A continued rally in the dollar over the coming months may well be a signal the inflation trade has gotten too ahead of itself. I have written previously how this may be the case. What’s more, the bond market also appears to be signaling a pause in this narrative for the time being, as I too mused upon recently. If the dollar does move higher, expect to see reflation trades dip and thus the outperformance of defensives, utilities, bonds and tech.

Regardless of whether we do see a meaningful move higher over the coming months, it is important for investors to understand the implications of such a move, as is the purpose of this article. Whilst a move higher would not bode well for risk assets, it would likely be unsustainable and thus brief.

With US debt to GDP at an all-time high of 130%, US net international investment position (NIIP) of -65% of GDP, lack of foreign investment in treasuries and an economy heavily reliant on the appreciation of equity prices, for mine, policy makers will understand the damage a dollar rally could cause. In the long-term, I do remain in the dollar bear camp. However, we need to see a rally and wash-out of the negative sentiment before the downtrend is able to continue.

Finally, I will leave you with this excellent chart by Julien Bittel, summarizing the relative return of the major equity sectors and asset classes to moves in the dollar.

Source: Julien Bittel, CFA
Source: Julien Bittel, CFA

Gold Drops Exceedingly; Fed Ducks Reality

190621_gold_scoreboard

Gold

Having settled the week exceedingly down 6.2% at 1764, Gold is now priced by the market at but 46% of its currency debasement value (as measured by the StateSide “M2” money supply) of 3870, even as adjusted for the increase in the supply of Gold (which today is 201,480 tonnes). Neither is Gold a discarded relic, nor shall it ever be supplanted by cryptocrap. Gold remains humankind’s sole de facto true currency as so shall it be even after we’re not around anymore.

Dollar

Its Index (by descending weight = the €uro, ¥en, Sterling, CanDollar, SweKrona and SwissFranc) gained 2.0% for the week, which of the 1,068 weeks millennium-to-date ranks 44th best (in the 96th percentile). Contextually, ’twas the Dollar’s firmest up stint since a series of weeks during the March 2020 depths of COVID, prior to which was the +2.3% week ending 14 November 2016. But as a valued member of our Investors Roundtable would say: “For the moment, the Dollar is leading the Ugly Dog Contest.” Shan’t last; it never does.

Gold and Dollar

Long-time readers of The Gold Update know that Gold provenly plays no currency favourites. As herein referred to a week ago, in 2014 on 04 September, Gold year-to-date was +4.7% and the Dollar +4.4% … “How can that be?” … Just because Gold tends to be priced in Dollars doesn’t mean squat as to how the Doggie Dollar itself is priced. Cue Fleetwood Mac from back in ’77: “You can go your own way…”And clearly for Gold, ’tis a long way up to go, the Dollar be damned.

The S&P

The mighty S&P 500 just lost 2.1% of its value in four days. Millennium-to-date that at best ranks as “noise”; ’tis not even in the bottom 10th percentile of four-day price changes. The “live” price/earnings ratio is at this writing an outrageously ghastly 53.5x, the yield a puny 1.359%, and the risk of ownership 100%. As we penned to our Investors Roundtable on Thursday: “My stock market fear has morphed into sheer terror. I used to take The Rud’s “50% correction” with a grain of salt. That now actually may be modest. ‘Tis merely about “The When”.” The stock market remains a losing game, (which is why most people on Wall $treet never make any real money).

The Fed

Here’s a simple equation: Late Fed + Dopey Media = Comprehensive Misconception. A time-honoured truth specific to the Federal Reverse is that ’tis “always behind the curve”. However, we wonder if this time the Fed in negotiating the curve has instead gone beyond the edge of adhesion and off the cliff. This past Wednesday, the Federal Open Market Committee unanimously voted to neither taper asset purchases, let alone raise its Bank’s rate, toward maintaining the ongoing 0.00%-0.25% FedFunds target range.

But more incredulously (this from the “Defying Common Sense Dept.”) the FOMC “penciled in” to raise interest rates by late 2023, (ahead of that initially considered). Accordingly, the fawning FinMedia — specifically the FinTimes — printed: “The Fed nailed it.” Nailed what? That they see two FedFunds rate increases the by end of 2023? How about by the end of this year? The Fed hasn’t nailed anything: rather, in ducking reality, ’tis The Fed that stands to get nailed. Are their two portended rate increases going to thus be 10% apiece? Just to catch up to inflation (er, uh, stagflation), you understand; (see 1976-1980). Honest to Pete and back again: if one still is in stocks and not in Gold, there’s not much more we can do. Facts indeed.

As for you valued readers who understand and take the Gold Story seriously, the following view of the weekly bars from a year ago-to-date at present doesn’t look that great. Or does it actually a buying opportunity make? Recall the late great Richard Russell: “There’s never a bad time to buy Gold”:

190621_gold_weekly

That noted, the parabolic Long trend certainly appears poised to flip Short in the ensuing week, price having completely hoovered our 1846-1808 structural support zone. And yes, our forecast high for this year of 2401 may be in jeopardy. Or (the French word for Gold): may the forecast in hindsight by year-end appear to have been modest? Recall 1977, 1978, 1979, 1980, 1982, 1983, 2006 and 2008. On verra, mes amis…

As for the near-term, Gold today at 1764 is within a structural support area of 1799-1755; should that bust, the next such area (with some wee overlap) is 1760-1677 (let’s not even go there…)

Rather, let’s go have a look at the Economic Barometer. It does have the beginning of that good-for-Gold “Game Over” look:

190621_econbaro

We read this past week that non-financial aggregate StateSide debt is now nearly one-half the size of the U.S. economy. (Again, let’s not even go there…) And as to our ongoing notion that the post-COVID economic boom “has already happened” as folks abandon COVID-time activities and replace them with those more apropos of “normal” times, spending data now indicates that large item purchases are “out” … and that eating out is now “in”.

To be sure, whilst May’s Housing Starts, Industrial Production and Capital Utilization all improved, Building Permits slowed as did Retail Sales. And for June, the New York Empire State Index, Philly Fed Index, and National Association of Homebuilders Index all fell short of their May readings. Up with inflation, down with the Economic Barometer/S&P 500, and hello stagflation. (“Tick…tick…tick…”)

Meanwhile, on this side of the pond, ’tis said so much COVID-debt was taken on by companies, that “life-support lending” is in vogue toward combating insolvencies. This has of course (and notably post-Fed) knocked the €uro from the podium in the ongoing Ugly Dog Contest, the Zone’s currency taking its biggest three-week tumble since COVID really kicked in during April a year ago. (And for those of you scoring at home with that European vacation in mind, the €uro’s present 1.189 level looks to erode by our purview to 1.173, even to 1.161). “C’mon Mabel, we’re goin’ to Rome!”

Now two weeks back when we could “see” some Gold setback — even just seasonally let alone technically — we perhaps ought have entitled that piece (instead of “Gold’s June Swoon”) rather as “Gold’s June Doom”. Indeed since Gold’s recent 1913 high on 26 May, price today is -7.8%, about its net change year-to-date (-7.2%). And per the following graphic on the left, upon Gold’s “Baby Blues” cracking the +80% ice back on 07 June, ’twas surely the real commencement of this swoon.

Note that on the right in Gold’s Profile for the last fortnight there’s been scant trading volume through much of the mid-to-lower 1800s, which for the “All gaps get filled” fans is encouraging for Gold to rebound, (and which common sense of course says ’twill):

190621_gold_profile_dots

Silver’s like +80% ice broke even sooner, back on 25 May as we seen below left. Should she not hold price here, her next structural support area is a full Dollar’s range from 25.68 down to 24.68. Sister Silver’s Profile below right matches sufficiently well with that for Gold, the Gold/Silver ratio now 68.2x running just a tad above the millennium-to-date average of 66.3x:

190621_silver_profile_dots

Whew! After a week like that (our outlook/review thereto), we can only finish up with something even more cuckoo. In her testimony this past week before the Senate Finance Committee, former Fed Chair Janet “Old Yeller” Yellen in sellin’ the Biden Administration’s $6 trillion budget presented it as a step to resolving “climate change” and “inequality”. We can’t wait: all of us equally poor under clear skies. “Got Gold???”

Cheers!

www.deMeadville.com

Today’s Market Wrap Up and Look Ahead to Tomorrow

The S&P 500 remains so close yet so far away from another record high as stocks fail to find enough momentum to push the index over the top. The index hovers at 4,219 compared to an all-time high of 4,232. All three major indices — the Dow Jones Industrial Average, S&P 500 and Nasdaq — finished the day fractionally in the red.

Declines in names like General Electric, Bank of America and Target offset any gains in the likes of Johnson & Johnson and Apple. Investors have been treading lightly ahead of tomorrow’s CPI data so they can get a read on inflation in the economy.

Wall Street firm Deutsche Bank is predicting that there is danger ahead on the inflationary front due to the massive economic stimulus that has made its way to the economy. The firm doesn’t expect inflation to rear its head until 2023, however.

Meme Stocks Most Active

Not surprisingly, meme stocks topped the list of the most actively traded names. Companies like Clover Health, AMC Entertainment and BlackBerry rounded out the five most actively traded stocks during the regular session. It wasn’t until after the markets closed, however, that things got really interesting.

GameStop reported its much-anticipated fiscal Q1 earnings and the stock tanked 9% in after-hours trading. Sales were up 25% thanks to the company’s shift in strategy toward e-commerce. They are going for it and have named Amazon alum Matt Furlong as the new chief executive. Investors didn’t like the fact that GameStop failed to give an outlook. The company is also looking to sell up to 5 million shares of its common stock.

On the regulatory front, the U.S. Securities and Exchange Commission is looking into changing the rules in the market. Chairman Gary Gensler said he doesn’t want to see orders directed to high-frequency traders, suggesting that retail investors would get a better shot at the best price if there was more efficiency in the stock market.

Look Ahead

For tomorrow, all eyes will be on the U.S. Bureau of Labor Statistics’ CPI report. Estimates are for the index to come in at a whopping 0.5% for May, nudging the 12-month rate for prices to just below that level. If the forecasts are right, the cost of living is likely to exceed any pay raises that the workforce will see.

On the earnings front, the calendar is light with Azure Power, Roots Corp and Chewy all on deck.

 

Berkshire, Metals, Financials, and Gold.

  • Berkshire has not been acting as in the past during the last several years.
  • Its performance depends on its portfolio.
  • The business cycle helps to understand the change.
Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows the price of Berkshire in the upper panel. The lower panel shows the business cycle indicator as updated in real time in each issue of The Peter Dag Portfolio Strategy and Management.

The business cycle indicator reflects the decision of business managers to replenish depleted inventories. A rising business cycle indicator measures the strength of the activities needed to replenish inventories – the purchase of raw materials, hiring of new workers, and the increase of borrowing to finance new capacity and ongoing operations.

During such times commodities, wages, interest rates, and overall inflation rise. The equity markets respond by favoring industrial, material, financial, and energy stocks. Defensive sectors such as utilities, staples, health care, and bonds underperform the market during this period.

The business cycle peaks because rising interest rates, energy prices, and overall inflation reduce consumers’ purchasing power. The outcome is slower growth in demand. Business does not recognize what is happening and lets inventories build up.

Eventually, rising inventories have a negative impact on profitability. Business is forced to cut production to reduce inventories. It decreases purchases of raw materials, cuts the labor force. It also borrows less to reduce interest costs. The outcome is lower commodity prices, lower wages, and lower interest rates. The result is steadily declining inflation.

During such times sectors such as staples, healthcare, utilities, and bonds outperform the markets. Cyclicals, industrial, metals and mining, and financials underperform the markets.

Despite its phenomenal performance, Berkshire stock responds to the trend of the business cycle. A decline in the business cycle indicator, indicating slower economic growth, is reflected by a slowdown in the price appreciation of Berkshire (see above chart). The sharpest gains in its stock price take place when the business cycle rises and the economy strengthens.

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows the business cycle indicator in the lower panel. The upper panel shows the performance of Berkshire compared to metal and mining stocks (ETF: XME). The graph is obtained by dividing the price of Berkshire by the price of XME.

The graphs show XME outperforms Berkshire (the ratio decline) when the business cycle rises due to a strengthening economy. When the economy weakens and the business cycle declines, Berkshire outperforms XME.

The above chart is similar to the relationship between XME and gold discussed in detail here.

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows the business cycle indicator in the lower panel. The relative performance of BRK/B and gold is shown in the upper panel. BRK/B outperforms gold when the business cycle rises, and the economy strengthens. On the other hand, BRK/B underperforms gold when the economy is weakening, and the business cycle declines.

I discussed here the cyclical pattern of bank stocks and how they relate to interest rates (not that obvious). One of the points of the article was bank stocks have a pronounced cyclical behavior. They outperform the market (SPY) when the business cycle rises. They underperform the market when the business cycle declines. These tendencies are similar to those of BRK/b (see first chart).

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows in the upper panel the performance of Berkshire compared to SPY (the graph shows the ratio of the price of Berkshire divided by SPY). The chart shows Berkshire outperforms SPY when the business cycle strengthens. It underperforms SPY when the business cycle declines. In other words, Berkshire performs like a bank stock during the business cycle.

Key takeaways

  1. Berkshire outperforms the market when the business cycle rises. It underperforms the market when the business cycle declines.
  2. Berkshire responds like a bank stock to the trend of the business cycle.
  3. Berkshires outperforms gold when the business cycle rises and underperforms gold when the business cycle declines.
  4. XME outperforms Berkshire and gold when the business cycle rises.
  5. XME underperforms Berkshire and gold when the business cycle declines.

Stocks are Getting Bought Again

Fact

We can’t see most of the light spectrum.

Quote

Be sure to take the lens cap off before photographing. – Elliot Erwitt

Let’s start with an overall view of the market. We can easily see the trend of the S&P 500 for 18 months:

Chart, histogram

Description automatically generated

It went up, down, then up with some bumps along the way. We all know experiencing it was not that simple. But, let’s look at the internals.

Here, we’ll plot the MAPsignals version: the Big Money Index. It tracks all unusual Big Money buying and selling on a 25-day moving average. Notice how the picture changes. Have a look:

Chart, histogram

Description automatically generated

As we can see in this small sample (only 18 months out of 31.5 years of data) when markets get overbought (above the red line), it can lead to a fall. And when markets get oversold (below the green line), it can precede a monster rally. Oversold is rare. Only 1% of the last 10 years it triggered. Recently the BMI has been range bound, frustrating market timers.

Like most things market-related, the BMI is a great tool when it’s trending. When it’s not, it can cause traders to get anxious. So how do we get a better sense of when the Big Money Index will start ramping again?

To answer that question, look at the SPY (S&P 500 ETF) chart with a study I did. I calculated a 20-day moving average of daily buy signals. Then, to separate higher than average periods of buying, I made a simple formula: if that day’s buying was bigger that the 20-day average give it a “1.” If it was less, give it a “0.” So below in green reveals days when buying was more than the 20-day moving average:

Source: MAPsignals, End of day data sourced from Tiingo.com

The picture of the market is coming into focus. Unsurprisingly, when buy signals were larger than average, markets usually rallied.

Now let’s keep going. Let’s do the same type of study for selling. When one day’s selling was higher than the 20-day average, it got a “1.” Otherwise, it got a “0.” Check it out:

Chart, histogramDescription automatically generated
Source: MAPsignals, End of day data sourced from Tiingo.com

When selling picks up, markets tend to fall.

So where are we now and where are we going? Let’s zoom in. What we notice is that buying and selling happened in May. That makes sense with the big rotation out of Technology stocks and into real-economy sectors.

But the storm suddenly passed. And recently things have been calm (no big buying or selling). That is until Thursday May 27th. The buyers showed up:

Chart, histogramDescription automatically generated
Source: MAPsignals

Real Estate, Communications, and Discretionary stocks saw the love. Utilities were largely for sale. Let’s breakdown the buying by sector:

TableDescription automatically generated with low confidence
Source: MAPsignals

Finally, look at the quality of those buy signals. Discretionary stocks had a 3-year earnings growth average of just +1.3%. And 3-year sales growth rate of -347%. Contrast that with Technology stocks seeing an average 3-year earnings growth rate of +44% and 3-year sales growth rate of +22% (source FactSet).

What’s my take on all of this? Quality growth stocks are starting to get bought after a long quiet period. Stocks hurt by COVID-19 are the new growth areas.

It’s simple. Earnings, surging profits, and a reopened economy is very bullish for stocks.

We could be setting up for the next leg higher.

Here’s the bottom line: The data is turning bullish for stocks. Buyers are showing up and based on history, markets could be ready to blast off.

Disclosure: the author holds no position in SPY or the S&P 500 at the time of publication.

Learn more about the MAPsignals process here: www.mapsignals.com

Disclaimer

Early or Late Cycle? Fast-running Bull Market Unnerves Investors

By Thyagaraju Adinarayan and Sujata Rao

It’s been just over a year since a new business cycle kicked off, yet the speed at which it’s progressing is unnerving some investors who fear the swift-running bull market is headed for an abrupt end over the coming year.

Some, pointing to higher-than-usual equity returns and valuations for this stage of the cycle, are even asking whether this could just be the same, decade-old bull market which survived last year’s COVID-19 blow.

Either scenario isn’t great for markets. The accepted wisdom is that bull markets don’t die of old age. They meet their end at the hands of central banks, typically when valuations and leverage get too exuberant.

So if COVID-19 didn’t kill the bull, the Federal Reserve’s upcoming stimulus unwind may do it. Such fears have already slowed equity gains in recent weeks, accelerated flows to safe-haven cash and defensive assets.

Grace Peters, investment strategist at J.P. Morgan Private Bank, noted that less than 18 months in, markets were displaying “mid-cycle” characteristics that had appeared only around the five-year mark last time.

The S&P 500 index is 24% above the prior bull market peak hit in Feb 2020. After 2008, stocks took roughly five years to achieve that milestone.

Peters noted, too, that equity returns are running already in the “mid-teens”, faster than the mid-to-high single digits which is typical of the mid-cycle phase.

“I’m surprised by the speed of travel compared to the 2008 crisis… we’ve been growing cautious about a short-term pullback.”

The 2009-2020 bull market was the longest ever, racking up global equity gains of 237%. The pandemic then brought on the fastest bear market ever — classed as a 20% top-to-bottom drop.

That bear was quickly chased away by central banks which slashed interest rates and turned on the money-printing presses. Since then global stocks have risen 73% – $42 trillion in value.

Those moves indicate a new cycle, technically at least. But the shallow bear market and the much faster and stronger bounceback are causing some to have doubts.

“We never had an extended down cycle,” said Eaton Vance’s chief equity investment officer Edward Perkin said. “This equity market is either mid- to late-cycle or it is in the second act of the previous cycle that never ended.”

The cycle would likely be ended by monetary policy moves, possibly if Fed tightening sends the economy back into recession, Perkin said, though he saw it as an issue for 2022.

EARLY ECONOMY, LATE MARKETS

Valuations are, arguably, another danger signal. The cycle restarted with higher valuations and the S&P 500 trades already at an exuberant 21 times forward earnings.

Research by Kleinwort Hambros on market cycles going back to 1870 shows that cyclically adjusted price/earnings — the CAPE ratio — are 11.5 times on average when a bull market starts and around 20 times when it ends.

But the cycle that kicked off last March started with a 24.8 CAPE ratio which is now at 37, the study shows.

Valuations are of course inflated by stimulus — $30 trillion since last March by some estimates, much higher than the preceding decade. Interest rates far lower than during past cycles make share prices look less outrageous.

Fahad Kamal, chief investment officer at Kleinwort Hambros noted that as markets have galloped on, a disconnect has arisen with the economy which still displays early-cycle features such as high joblessness.

That unusual situation makes his positioning more cautious than it would normally be this stage of the cycle, he said.

The question is how quickly economies will catch up.

“Fed tapering is a risk but if it’s replaced by genuinely stronger macro activity then you don’t need that much liquidity. In a perfect world, stronger fundamentals will offset the taper,” Kamal said.

If not, markets will look to central banks again. Norman Villamin, chief investment officer of Swiss asset manager UBP said the post-2008 years show policymakers will act against any slowdowns, effectively creating mini-cycles.

“I think we’re reasonably early in the cycle,” he said, but “it is important to distinguish between the bigger picture trends and these mini-cycles.”

(Reporting by Thyagaraju Adinarayan and Sujata Rao; additional reporting by Ritvik Carvalho; Editing by Toby Chopra)

Stocks Continue To Chop Around Just Below All-time Highs

Big money players still seem a bit uncertain in regard to betting more money on the reopening and stronger demand or taking some bets off the table fearing higher inflation, companies struggling to find good help, and supply chain shortages that could make meeting stronger demand next to impossible.

Fundamental analysis

Earnings season is nearly wrapped up with over 95% of S&P 500 companies having reported. Key releases today include American Eagle, Dick’s Sporting Goods, Nvidia, Snowflake, and Williams Sonoma. Average S&P 500 earnings growth for Q1 is now over +51%. Average earnings growth estimates for Q2 are around +50%. This means there’s not much room for error at current valuations.

As I mentioned above, some believe those lofty expectations could face headwinds from labor shortages, higher inflation, supply chain dislocations and/or reduced support from the Fed.

Federal Reserve Vice Chair Richard Clarida was among several other Fed officials yesterday that pushed back against worries of runaway inflation. Clarida did admit that the latest CPI read was “a very unpleasant surprise” but he mostly echoed the Fed’s official stance that current inflationary trends will be “transitory.” He also acknowledges the “risk case” that inflationary pressures could end up being more persistent than expected but said the Fed has the tools necessary to “offset” that if necessary.

Most Fed officials have publicly echoed similar sentiments, although Philadelphia Fed President Patrick Harker and Dallas Fed President Robert Kaplan have both indicated they think it is appropriate to begin talking about “scaling back” the Fed’s asset purchases. With so much uncertainty surrounding the central bank’s next move, bulls may be unwilling to add more risk ahead of the Fed’s upcoming meeting on June 15-16. In the meantime, investors will continue mining Fed comments and economic data for clues.

There was quite a bit of data to unpack yesterday but the overall theme was “higher prices” with housing data dominating. Home prices continued to accelerate in April with the median price for a new home sold climbing more than +11% to $372,400, while the average sale price hit a new record high of $435,400, up +8.7% from March.

At the same time, New Home Sales fell nearly -6% in April with the familiar culprits being blamed – surging material costs and low inventories. Builders unfortunately are struggling to increase new home supplies because of the exact same reasons, with shortages and higher costs extending to everything from lumber to new appliances.

It’s also worth noting that Consumer Confidence pulled back a bit in May, the first decline in six months with worries growing around inflation and future job prospects.

There is no significant economic data today but investors will hear from Federal Reserve Vice Chair of Supervision Randal Quarles. During a Senate Banking Committee hearing yesterday, Quarles said the Fed along with the FDIC is in “a sprint” to research and develop a regulatory framework for cryptocurrencies and digital assets pertaining to banks, noting they are still in the early stages.

Technical analysis

ES 26 may 2021 forecast

In the absence of a swing signal in SP500 futures, it makes sense to stick to day trading. Advanced Decline Line is bullish, while Insider accumulation is weak. At the same time, the Interest rate Forecast and Fed Funds Forecast are neutral. In other words, SP500 is a mixed bag in terms of swing trading.

For today, the neutral zone is 4155.75 – 4220.50. Middle-strength level within this range – 4188; weak levels – 4172 and 4204.25. If the price holds above 4220.50, look for 4236.75 (weak level) and 4253 in extension (middle-strength level). If 4155.75 breaks, the magnets are 4139.75 and 4124 accordingly. Note, mentioned levels should turn into support/resistance before taking a trade.