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RoboStreet – May 6, 2021
Market Landscape Taking Notably More Defensive Tone
This week has seen an accelerated rotation out of high P/E growth stocks and growth stocks in general after Treasury Secretary Janet Yellen noted in a seminar speech the interest rates may need to rise to keep the economy from overheating. After the Nasdaq fell 375 points in knee-jerk sell-off, she tried to walk back her comments, but the damage to stock prices and investor sentiment had taken its toll.
The fierce rotation out of growth and into energy, industrials, transportations, materials, and financials is dominating the daily price action. Prices of essential commodities continue to rise, feeding the appetite for upping portfolio weightings to reflect some exposure to these under-owned stocks while reducing exposure to the crowded mega-tech and growth stocks.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
Professional money has been fading the tech sector into what has been nothing short of ballistic first-quarter results. It’s clear the market doesn’t believe the Fed’s narrative about leaving rates alone for the next couple of years. But at the same time, the yield on the 10-year T-Note is holding steady at 1.56% – probably out of fear of a market correction looming after earnings season comes to a close in the next week or two.
The technical picture is also not so clear. The $SPY continues to trade in the range between $410 and $420. The $DXY is reaching oversold levels and started the bottoming process. The $TLT is trading in the uptrend. A short-term key support level is at $410.
I would consider raising cash at this point as the best part of the recent rally is behind us. Based on our models, the $SPY can pull back 10-15% in the next 2-6 weeks. Based on our models, the market (SPY) will trade in the range between $415 and $418 for the next 6 weeks.
The problem this massive sector rotation is that big cap tech represents 49% of the Nasdaq and 27% of the S&P. The market cannot meaningfully advance without the participation of mega tech, and it’s a problem for the bulls as until the selling pressure in the tech sector is exhausted. And that may not occur until we get closer to the second-quarter earnings season that unfolds in mid-July.
In the meantime, there are some underlying issues that portend a bumpier ride ahead for the market. When investors are feeling confident, they sell dollars and buy risk-on assets, which has been the case for several weeks heading into May. There is noticeable weakness in the euro, European markets, and emerging markets. Some of this is due to the rolling pandemic, some can be attributed to supply chain disruptions as well as higher input prices for manufactured goods that are squeezing profit margins.
The chart of the Emerging Markets iShares ETF (EEM) is the barometer for how this key sector of the global markets trade. The 50-day moving average (orange) is poised to trade down through the 20-day moving average (blue), which opens the way lower for further deterioration.
When taking the dollar into account, it historically rallies when the euro and emerging markets start to fade lower, and this time around is no different. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is flashing three buy signals in our proprietary AI-driven Seasonal Chart. This is an excellent indicator to position portfolios off of, as it raises a caution flag about the market’s near-term direction.
This would be especially true if the Fed starts to send a tacit message to the market that it may have to consider tapering sooner than its current monetary policy dictates. Any whiff of such a change in stance would light a fire under the dollar because the money would be coming out of the system and the supply of dollars would start to shrink. It would also likely trigger some broad market selling pressure as the risk of the punch bowl of Fed stimulus being removed takes on a tone of reality.
The market is trying to sniff out what to expect with the huge Biden spending plans, tax proposals, and tapering by the Fed. As such, volatility will be on the rise for the balance of May with my forecast of a pullback growing more likely with each day.
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And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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