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RoboStreet – May 13, 2021
Market In Correction For The Near Term
Stocks experienced a trap door selloff that was already in the making with several key growth stocks breaking down leading up to Wednesday’s steep slide. Key inflation data in the form of consumer prices soared levels not seen since the Reagan era, and it triggered a “sell first, ask questions later” response.
Thursday’s Producer Price Index also came in at twice the rate of what consensus expected, but the reaction was muted in that the bond market had priced in what it believed to be a two-day set of negative headlines in one trading session. The 10-yr Treasury yield popped to 1.7% and retreated slightly to trade around 1.67% as of Thursday, as traders are now expecting the Fed to be forced to address inflation and how forward Fed policy might be modified.
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.
To their credit, many commodity prices topped out this week, most notably copper and lumber in what has been a torrid rally in all categories of soft and hard commodities for the past several months. With the understanding that an overbought correction was due from the recent melt up, there remains a strong bias that the bullish trends in commodities will resume as U.S. and global economies are rebounding at an accelerating pace.
From a purely technical standpoint, the $SPY broke the key support level at $410 and VIX spiked to the $28 level. The reflationary stocks and the rest of the market sold off and there was no place to hide. The QQQ trading below the 50-day moving average and the $SPY approaching 50-day moving average held, at least for now.
The Small Cap Stocks, The Biotech and the Semiconductor stocks broke through main support levels and trading below their 50-day moving averages. The $DXY is reaching oversold levels and rebounded in a flight to safety. The $TLT sold off today and is retesting recent lows. Short-term the $SPY key support level is at $377-403.
I would consider rebalancing portfolio at this point to be more market neutral. I expect the first wave of the sell-off to reach the end either this week or next. The VIX approaching the $30 level and the Biotech and high Beta stocks did not make new lows today (ARKK, XBI).
The second wave of the sell off will start after sharp rebound (the $SPY reaching $412-$418) and I would use any market strength to raise cash.
Based on our models, the $SPY can pull back 10-15% from the all-time highs in the next 2-6 weeks. Based on our models, the market (SPY) will trade in the range between $388 and $425 for the next 2 weeks.
When we get into markets like the present, conventional thinking tells investors to be greedy when others are fearful. This is true, but the timing of which has to be executed properly, and from work, this correction isn’t over. The rotation out of growth and into reflation stocks will endure during this pullback, but the index weightings of big-cap tech and consumer discretionary stocks far outweigh the influence of all the value and cyclical stocks combined.
To this end, the mean reversion trade for growth stocks has to run its course, commodities-based stocks need to consolidate and reflation stocks will likely hold up best during this corrective phase as they have gained huge popularity of late. As the market bounces off Wednesday’s extreme sell-off, investors and buy some portfolio insurance in the event of a full 15% correction for the SPY.
The CBOE Volatility Index (VIX) gapped from 16 to 30 this week and has dipped back to 24 per Thursday’s market bounce. Another leg down for stocks could see the VIX trade up to $35. If so, buying shares of the iPath S&P 500 Short-Term Futures ETN (VXX) as a liquid instrument to offset what I believe will be a second wave lower.
Our proprietary AI models that support every trade we recommend within our RoboInvestor advisory service, are confirming our near-term downside bias. In fact, we don’t put into action recommendations unless they are vetted by our AI platform. In the case of VXX, our Seasonal Chart is flashing a “Higher” probability reading for the next 20 trading days, which suggests the market will be at risk of trading at lower levels for the next three weeks.
I noted that the dollar index (DXY) is also pushing higher, as is typically the case during times of market volatility. DXY held key support at 90.0 and are bouncing off that level, where a revisit back up to 92.0 wouldn’t be out of the question if the market takes out Wednesday’s lows.
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Make RoboInvestor your next best trade, and do it today as we are entering a period of rising uncertainty. AI helps greatly to remove many of the “unknowns” in the market that can adversely impact portfolios. The overall investing environment is shifting and there is not better time than the present to take me up on my offer to join the RoboInvestor community and put our AI platform to work in your portfolio right away.
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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