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A Look Ahead at 2021

The challenge of predicting the future is you have to wait to find out if you’re right.

As much as folks may want to claim they can predict the future – especially around the stock markets – the reality is, you can’t; because investors are fickle, and supply and demand are funny things.

Underneath all the layers of sophistication – the models – the math – the rationalization – are humans and machines. These market participants are crunching all this data, trying to get to one basic decision: should I own this investment or not? Buy, hold, or sell?

It’s a simple explanation for how markets can get irrational – because people can get irrational.

So looking into the future, after 2020 gave us so many new variables to consider — so many things that can shift both the supply and demand side of the equation — is really more of a glorified guess than much else.

Yet here we are, doing our glorified guessing.

So, what concerns are on the table?

Biggies: a mess of a political climate; monetary policy and the repercussions of creating new dollars; fiscal policy and the creation of new taxes or legislation; foreign policy and geopolitical risk; environmental policy and its impact on regulation; the list goes on.

So how do we make sense of it all?

Here’s an old adage that’s appeared on this blog: keep doing what you’re doing until the markets tell you to change. It’s a rather simple way of saying ‘don’t fight the trend.’

So, until the trend shows evidence of changing, what then?

Short-term (as in, for the next week or two… or maybe longer), the markets are declining in volatility and moving higher. Largely this appears to be in anticipation of additional government stimulus. The PPP program has a second wave, and it appears likely there will be more direct stimulus (essentially beta testing universal basic income – a subject for another day).

The push higher, in the short-term, has followed a trend line the past several weeks evident in the graph below. If trend continues, expect the SPX to finish the week somewhere between 3827 and 3851.


Looking a little deeper under the hood, the chart below shows the S&P 500 as over-bought. As discussed in the past, this is a condition, but not necessarily a short-term indicator of a pull-back in prices.

The temptation is to assume markets want to pull back, or revert to the mean. Longer-term, this may be the case. But often times markets will find a sort of short-term consensus that leads to a push higher for prices. When this happens, you can see markets in over-bought conditions for a while. In fact, sometimes markets even break-out higher. So don’t read too much into this. It just means the up-trend is currently in place. Once it breaks, we likely see a spike in volatility and downward moves in prices. Until then, we look for confirming indicators and other signals to help validate where the herd is headed.

Finally, looking ahead to the rest of 2021…

This is a very challenging year to project. Based on the current Price-to-Earnings multiple and projected earnings, the S&P 500 projects out to 5200. That’s a gain of about 40 percent.

Frankly, this seems extraordinarily unlikely given the overall economic uncertainty of the day.

Taking a more subdued view of the future, we have a year-end target for the S&P 500 between 4260 and 4350.

There is some math behind these numbers, and a lot of trend analysis. If you’d like a deeper dive into this, watch last week’s forum call under the technical section at about 35 or 40 minutes into the call.

The summary is this: if you sort of normalize data and take some of the Covid extremes out of the mix, the trend was still pretty strong. That trend should continue in the near-term because of additional stimulus. But, with the political regime change and the blue wave in Washington, it’s more likely we see a return of Obama-era policy and additional regulations. This should create some growth headwinds for earnings, which in turn will slow down the rate of growth.

If these projections are correct, the first quarter of 2021 should be relatively strong, but it’s likely the markets will have to digest some policy change – and possible inflation – that will likely derail the current up-trend. Hence the low probability of a 5200 finish for the SPX.

Another trend to watch for 2021 is asset rotation. Large tech has been a huge beneficiary of the Covid trend. This sector of the market has driven a large part of the major index returns.

If money begins to shift from less large-tech over-weight into other sectors of the markets, the major indexes could experience some headwinds. However, other areas of the market – such as small and mid-caps, value players, and international holdings — may benefit from asset rotation.

So these are major themes we’re watching this year:

Will the Fed begin to increase rates in the latter half of the year in response to rising inflation? Will a big-tech asset rotation create opportunities in other areas of the market? Will emerging markets benefit from a weakening dollar as rates rise? Will commercial real estate recover after covid, or has the workplace permanently changed to a more work-at-home model?

Oh, and don’t worry. There will be more questions. We’re only a week into 2021 and look what we’ve already dealt with. And you thought 2020 was an adventure…

If you’re interested in learning more about this or other BigFoot Investments resources or would like to join us on a complimentary webinar, please contact us at
customerservice@bigfootinvestments.com

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

To Re-Open or Not

Here’s something I don’t get to write very often: even though the markets look over-bought here, they looked poised to take out their all-time-highs this week.

Sure enough, major indexes are over-bought – statistically, I mean. But statistics schmatistics. This is 2020, where anything goes.

A quick look at the chart below will show that prices are way at the top of the ‘cloud’ (a technical measure of the last 21 trading days and the standard deviation of the period’s trading range). In typical circumstances this would suggest prices are temporarily too high and due for a pull-back. But did we mention 2020?

At times a shift in news or sentiment will create a shift in the market. It is a dislocation, but it also marks a potential trend-shift in market prices. When this occurs, it’s not uncommon to see ‘typical’ market measurements temporarily thrown out the window. And that’s what appears to be the set-up.

Last week’s announcement of a Covid vaccine was greeted by a lot of optimism in the markets. Meanwhile, on the other hand, the number of reported Covid cases is at an all-time high. The beauty of the markets is, it’s willing to strip away much of the politics from the data. And the rise in cases doesn’t seem to matter that much to the success of the economy (as long as cases don’t outstrip hospital capacity).

What does seem to matter is whether or not economies are allowed to remain open. If Covid cases lead to enough hospitalizations, new lock-downs could occur (such as the new lockdowns announced in Oregon beginning Wednesday, shutting down dine-in restaurants and restricting stores to partial capacity).

New shutdowns would likely be greeted by market pull-backs. But so far, the shutdowns appear to be mainly a West Coast deep-blue phenomenon. We shall see if the concept gains traction or not. The announcement of yet another vaccine today (this time from Moderna) shows promise and suggests a silver lining may yet be found for this pandemic.

For the week, look for the markets to open higher on Monday and likely set all-time highs for both the S&P 500 and the DJIA. The SPX is now ‘hunting’ for the 3800 level, perhaps before year’s end. For this week, the target appears to be 3675. It will take a drop below last week’s low of 3511 to break this trend.

A couple of other details worth noting:

The SPX, being more tech-heavy these days, may underperform the DJIA for the remainder of the year. Likewise, the NASDAQ may underperform the other indexes over the same time period. There has been significant price improvement in the Russell 2000 indicating money is beginning to shift in the economy. The ‘stay at home’ trade has been a very powerful trend for 2020. However, Big Tech in many respects is over-bought. It would not at all be surprising to see money begin to shift out of big tech toward other areas of the economy if vaccines shift the trade from stay-at-home to back to the ‘old normal.’ If this shift happens, it would create a headwind for both the S&P 500 and the NASDAQ given their overweighting to tech.

As always, do your own homework. This is just a blog, not a recommendation. But if you’ve been reading this for a while, you know how that works.

Now please forward to a friend or share this somewhere. Apparently it helps search engines find us. So we’d sure appreciate if you could help us spread the word. Cheers!

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Reading Between the Lines

Reading the headlines you’d assume the markets were gearing for a collapse. After all, just about ever superstitious thing you can think of is lining up. It’s a month before elections, there are protests (and riots) all over the place, hurricanes – POTUS even got Covid.

A look under the hood at the BigFoot Database is similarly concerning. The total percent long for the database is now under 42%. That’s slightly more than a 50% reduction off peak numbers that crested 84% long.

The NASDAQ and the S&P 500 both have sell signals. The DJIA just tripped a wait signals.

All three major indexes dipped into correction territory in September.

And, of course, there are all the structural problems in education and the economic supply chain resulting from Covid shut-downs.

So things have gotta be bad, right?

Well, yeah… but that doesn’t mean the stock market has to go down.

This week there is a key technical area for the S&P 500 to watch: 3427. .. or if you want to split hairs, 3426.96. This was the closing price for the index on September 4th, just two days after the markets had set new all-time highs then aggressively sold off.

If the SPX manages to close above this key level any time this week, it would likely signal a re-test of the all-time highs for the index.

It may seem counter-intuitive, but keep in mind the stock market is a forward looking mechanism that is trying to handicap the future. In that respect, it is already looking as far ahead as it can – including past the election. So what we’re really looking for is a signal that expectations are going to change.

The technical data, so far, does not indicate those changes. In fact, the price movement seems to be consolidating around the current levels. Futures have indicated a positive open for Monday, and it appears the momentum is shifting back toward the up-side.

Even the BigFoot Database, while negative, is in a fairly extreme condition. Remember, part of what triggers a sell signal in the system is a negative volatility spike. If volatility drops, those signals will stabilize and potentially flip back to the buy side.

So keep an eye on 3427 on the S&P 500. That is the critical resistance area for the week. Support should show up at 3323. And, if trends hold, volatility could actually decline (again, counter-intuitive in this media cycle, but a possibility nonetheless).

In the FWIW, the President having Covid is probably less of an event than the media has let on too. We will discuss more about this in our upcoming forum call this Thursday. Catch you there… (and if you’re not on the list and would like to join the call, ping us at customerservice@bigfootinvestments.com and we’ll get you a link).

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Quick Update

I’m on vacation so I’ll keep this quick. And because I’m lazy today, I’m writing in the first person. Oh well, I guess it’s a bit editorialized… like everything else in the news these days, right?

So the markets are in an interesting spot. The S&P 500 looks like it’s close to an intermediate resistance level at 3275. If this is the case, we could see the markets move a bit above this but a pull-back toward the 3150 level may be in the cards.

Several of the signals in this market are indicating slightly over-bought conditions. We’ve also seen a lot more activity in the small and mid-cap spaces in the last few weeks. We’ve also seen big tech get knocked around some.

All of this gives the ‘feel’ that values are getting lofty again as money starts shifting around.

The Covid stuff, of course, continues to be meaningful due to the major policy decisions that are still hanging in the wind. Will we see an extension of unemployment benefits? More stimulus? If so, markets can go higher. If not, then it’s time to take a more serious look at the structural changes to our economy… because we’ve hidden those with a few trillion in spending. But they’re not gone…

So here’s the quick summary:

SPX has resistance at 3275… we’ll probably blow past this on Monday (based on futures), but that doesn’t mean we won’t re-trace later this week.

SPX support is at the 50-day moving average, just above 3140. It’s about 4% lower than Friday’s close.

Also, the market seems biased to the ‘close down’ stocks again. The cynic in me is not surprised for many reasons. I’ll spare you my political theories and keep to the numbers. Just look at big tech vs airlines if you want to get a sense of which way the wind is blowing… for now.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

13 Weeks

This week may very well set the tone for the next 13 weeks in the stock market. It marks one of the largest reporting weeks, with hundreds of S&P members reporting over the next five days. The results of this week – the guidance (or lack thereof) – will be the last report until about a week before the election.

The technical set-up for the markets shows one of rotation. The value portion of the market has under-performed its growth counterpart for months. Large caps have been the haven asset. But there may be some rotation on the horizon as market participants reach into the value and smaller-cap areas of the market for bargains.

As optimism grows over a Covid vaccine – and as yet another round of stimulus looms – it appears the irony trade is on the rise. Irony because so many assumed a mess would happen leading up to the election. So far, the markets seem to be indicating the opposite.

While it’s still possible the markets could pull back from here, the pattern has been one of consolidation with volatility on the decline. With money finally spreading to other areas of the markets – and large tech finally pulling back a bit – many of the signs are healthy.

There is another interesting element at play here. The US dollar is weakening. And with all the stimulus money, there may even be signs of inflation beginning to materialize. Low interest rates have continued to fuel the housing markets. The weaker dollar is fueling commodities. And, silently in the background, a bid is materializing under emerging markets.

All of these are signs the markets believe a path forward is possible (if not probable).

A look under the hood of the BigFoot Database reveals over 86% of symbols tracked have long signals. This is close to an all-time high. The three major stock indexes all have buy signals. And the credit and market macro’s are positive.

The economic macro is the only weird spot. While showing positive, the marcro remains “broken” at this time due to the extraordinary unemployment figures we still have. The data is simply so far out-of-whack the neural network doesn’t work yet. Fortunately (or unfortunately, depending on your belief system) stimulus money has kept enough money in the pockets of the unemployed it hasn’t shown up in the system as a catastrophe yet.

So earnings and guidance matter. And this week may determine, to a great extent, the direction of the markets for the next 13 weeks. If companies report either up-side surprises or guide positive, it could mean more up-side for the markets.

As of now, futures were positive overnight, and the major indexes appear to be biased to the positive. The S&P is likely to test the 3276 level, with a possible push towards 3000. Support is currently at 3157. Should the underlying trends of the market continue, look for large cap tech to flatten out or pull-back slightly as small and mid-cap value sees some asset rotation.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Flirting with W’s

Last week volatility returned as markets took a turn south.

It’s difficult to discern just what caused the move. From a purely standard deviation basis the markets looked over-bought. But this is rarely a reason in and of itself to get markets to pull back.

Civil unrest? Maybe. Spike in Covid-19 cases raising concerns of shutdown 2.0? Maybe. Jerome Powell’s talk on future Fed policy? Maybe. Permanent job losses and higher long-term unemploymenet? Maybe. Over-ambitious estimates of 2021 economic growth? Maybe.

Pick what you’d like, whatever it was, the markets peaked Monday then went on an aggressive 4-day slide ending the 3-week positive streak.

The spike in volatility may bring technical analysis back into vogue temporarily as markets seek to find support.

Based on the last several weeks, support looks to be showing up in a few key areas: 2944.99 / 2903.24 / 2860.95

The 100 dma is at 2944.99, the 50 dma is at 2903.24, and the slightly more controversial low in the 4-week pattern for the 21-malg is at 2860.95. The malg (moving average linear regression) actually printed back in April. So we’re talking about a pretty aggressive slide to give up all of May and June’s gains to roll back that far.

Resistance isn’t really worth discussing right now. The discussion is about whether or not the markets will find a footing. And there are a lot of variables the markets are trying to price in right now. Pricing in structural changes to the economy can be tricky.

Last week definitely put a damper on momentum too. The BigFoot database seems to have stabilized as the trend of weekly additional buy signals flattened last week, showing no significant change from the prior week. This is an indication that momentum has flattened or turned negative.

The other macro economic indicators in the BigFoot system remain unchanged at this time.

For the week, look for volatility to remain high with pressure to the downside. This may be part of the “w” that many have called for during this recovery. Pricing has arguably been pretty high based on valuations and future earnings projections for a lot of large-cap stocks. A pull-back from these would not be out of character. The larger question is how long does the pull-back last, and how deep does it go? If this trend plays out anything like it has for the past few months, it could be a fairly quick and violent move with a similarly paced resolution.

If futures are any indications, we will see a quick drop at the open on Monday. How the rest of the week follows through will the interesting. Technical indications suggest we’ll see downward pressure most of the week, or until the SPX hits at least 2950 or so.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Still Rallying… for Now

In spite of the various structural elements still unresolved in the economy this market continues to climb.

At this point, even the BigFoot Market Macro would flip positive if June ended today.

Both the S&P 500 and the NASDAQ have algo buy signals. The BigFoot database is 70% long right now. Only the DJIA is yet to flip to a buy signals… and momentum is close to triggering that positive as well.

In short, despite the job figures and supply chain stresses of the past several months, the stock markets are caught in a wave of momentum.

Call if FOMO. Call it TINA. Call it irrational. But it is what it is. The trade has been risk on. Money has been moving into beat up names like the airlines (wow) and beat us sectors like consumer discretionaries and risk-on factors like small-caps.

Whether or not it makes economic sense is not the question. This is what momentum and sentiment can do.

Will it last forever? Probably not.

Will it collapse at some point soon? Maybe.

But for now, here’s what is technically unfolding:

The SPX is set to challenge the 3275.87 this week. This was the ‘crest’ of the 50-day moving average in this pattern — the high-water mark of that indicator before the markets collapsed in March.

If we breach that, it’s highly likely we’ll re-test the all-time highs for the SPX.

There is very little down-side momentum right now. Futures are indicating another positive open for the markets. This should set the tone for this week. If there is a pull back (unlikely until later in the week) look for the first level of support around 3130.

The Fed appears to have purchased this market… or at least rented it for a bit. And you know what they say: don’t fight the Fed.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

I Don’t Get It, But That Doesn’t Matter

I’ll admit it: this market baffles me sometimes. Here we in the midst of an economic shut-down — unemployment has exploded; bankruptcies are popping up all over the place; profits are in the tank — yet this market charges higher.

Even the BigFoot Database has shown improvement as the number of total long positions has climbed over 33%. That’s up 50% from a week ago. So clearly there’s some momentum under this thing.

The question is, is the action healthy? Not if we look at earnings, which, according to JP Morgan are down over 47% on average for companies reporting.

It’s fine… markets are forward looking… the economy is about to turn back on and thing will go back to normal.

Yeah, right…

The economy might turn back on, but social distancing policies have become a real thing. And large parts of the economy will not be the same… especially restaurants and entertainment.

Also, markets failed to render a new intra-day high last week. Could be nothing — just trader activity — Or… could mean we’re running out of buyers and this is the price level for a while.

As discussed in prior blogs, we’re at a resistance point technically. Markets have drifted sideways for the last few weeks as the 2950-ish range but are yet to close above or ‘beak out’ from this level.

If this market were to follow a more typical pattern from here, we’d expect a pull back to at least 2800 or so (and more likely 2650ish). I use these vague levels because… frankly… this market is making up new rules as we go, fueled by mind-boggling Federal Reserve intervention and Government stimulus.

That rocket fuel has done a solid job stabilizing the bond markets and keeping hope in the economy. But… it’s been a while. And rocket fuel burns off. The Fed can keep buying bonds, but what happens next? How long can we pay people not to work?

Of course, these are rhetorical questions. But they do have a bearing on the stock market. For a season now, these markets have moved based on how the fight against Covid-19 has been going. That’s shifting though… reality is going to have to creep into this thing. And the big unknown is whether or not all this new debt of Uncle Sam’s will have any unintended consequences.

Meanwhile, we will deal with our moment-to-moment day-by-day analysis. And futures say the market should head lower… of course, it looked like they said this last week as well. What we ended up with is more of a sideways pattern.

The 200-day moving average has declined to close to 3000. If this market manages to close above this area by month end we could actually see a macro re-purchase signal. But this is a long ways off, and 3000 is currently much more of a resistance level than a support level.

Pricing patterns suggest a sideways-to-negative bias this week, with 2950 continuing as resistance, and 2873 as support. But like I said earlier, I don’t get it… this market has done with it sometimes does: prove the greatest possible number of people wrong at any given time.

My take – I still think this thing is over-baked and we’re trading on hope. And I think we can (and probably will) move lower in this trend. What I hear from a lot of folks is desperation – as if they missed the bottom and somehow missed their chance on this thing.

Maybe… But typically, right about the time you throw in the towel is when the market knows. At some point, data will matter again… then again, I don’t get this market (but that doesn’t matter)…

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

SPX braces for a gap down

Is Coronavirus a Black Swan?

If there is such a thing as a self-fulfilling prophecy, the Coronavirus may be on its way to becoming the next ‘black swan’ of this market.

We’ve been asking ourselves the question for some time: what is going to bring this bull market down? After all, since last October, valuations just kept climbing.

Initially the markets shrugged off the idea that Coronavirus was that big of a deal… then some companies started specifically crediting the outbreak with an impact on financial numbers.

No big deal, the impact is baked into the price already.

But perhaps expectations of this outbreak missed the mark. Perhaps this as a lot more serious. A Biblical pandemic even?

Before borrowing a bunch of trouble, let’s look at things in context. The coronavirus is awful… but so is influenza. This is not ebola. While it is potentially lethal, the majority of those infected still survive the illness. This is not to trivialize coronavirus but to give us some perspective.

Currently, coronavirus is part of an active news cycle. It’s unknown, it’s scary, and it’s the perfect train wreck to get folks staring at their screen. In short, it’s an advertiser’s dream.

Since the stock markets have largely dismissed the circus that is Washington DC lately (thought if Bernie Sanders continues to gain momentum this could change) , the coronavirus news cycle keeps viewers glued to the screen. And the unknown factors that seep into the stock market are drawing this out more than the typical 1-week narrative.

So what are we to make of this?

First, a quick breakdown:

Fundamental data, as measured by BigFoot’s economic and credit macros, remains solid. Technical data, as measured by BigFoot’s market macro, is always solidly above any sell threshold.

All three major indexes (DJIA, SPX, NASDAQ) have ‘wait’ indicators… this is neither a sell nor a buy. It is simply an acknowledgment that downside volatility has increased (so buy at your own risk).

When looking at the technical price movement of the SPX, this week is setting up for a big gap down at the open. Futures are indicating somewhere close to 90 points of downside. That’s over 2.5%.

This is definitely a knock on the market’s momentum. But the truth is, the SPX upward pricing channel will not be broken unless the index closes below 2514 this week.

A close below this support level potentially throws everything out of whack. It would mean a close both below the 50-day moving average, and the prior support/capitulation point where buyers showed up to support the markets.

It also means there is very little pricing support all the way down to 3036 or so… so basically a drop back to the 3000 level for the SPX.

For the non-math-whiz reading this, that’s a full-blown correction.

But keep in mind, this market is gapping lower after a big up-trend. And it’s doing so on speculation and fear.

Perhaps the markets are getting it right. Maybe this is a pandemic-level event and global economies are going to completely grind to a halt. Or perhaps this is a classic over-reaction to fear.

The reality is, this market has been moving higher and higher with virtually no resistance since last October. It has spend most of its time at the top of its pricing range. This projected drop simply flips from the top of the 1-month trading range (1.5 standard deviations above the 1-month pricing average) to the bottom of the range (1.5 SD the below).

The jarring and scary nature of a pull-back like this can be enough to shake anyone’s confidence in this market. But keep in mind a handful of other odd details:

Oil is dropping but gold is climbing in price.

The US dollar is climbing, treasury prices have been dropping… and gold is climbing.

The gold thing is likely fear, where the rest of the data says this underpinnings of this market are fundamentally unchanged.

If anything, the spread of Coronavirus may further strengthen the US dollar, as other global economies are weaker that the US already. This could lead to further weakness, exacerbating the dollar’s strength… not great for trade, but great for keeping treasury yields low.

Bottom line: one day does not a trend make.

Monday is likely to be painful. The real interesting thing will be not how we open but how we close. If markets manage to open to big losses but pair more than 50% of those losses by close, that’s probably a pretty good sign that equities are still an attractive asset.

Don’t let the man behind the curtain (the media) fool you. Stick to the data and a process. This bull will eventually die. But let’s let the numbers do the killing rather than the rumors.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Hard to Fight a Trend

This market has a lot of momentum.

Yes, it’s an underwhelming statement; but it’s nonetheless true. The stock market has the wind at its back these days. Even in the face of scary headlines about Coronavirus epidemics.

The reality is that Coronavirus is having an effect on systemic profitability. It has altered behaviors and shuttered factories for many multinational players. The result is, not surprisingly, profit headwinds.

And yet this market goes higher.

Did we mention this market has a lot of momentum?

This is becoming a more concerning sign as retail investors shrug off concerns, rally behind the cry of a ‘good economy,’ and continue to push stocks to new all-time highs.

Currently, it’s tough to peg just how high this market can go. But the down-side has given us a few technical hints.

The January pull-back for the SPX set up a consolidation wave with support around 3285. This is a little less than three percent below current market levels – not exactly a massive pull-back if those numbers get tested – but enough to give traders a new entry point. And frankly, that seems to be the pattern of this market: buy the dips.

We’ve seen this before, and markets went significantly higher during 2019 when this happened. Will history repeat itself? Who knows? But did we mention this market has a lot of momentum?

Until evidence suggests otherwise, it may be wise not to fight the tape too much on this one. This bull will end, but the eminent demise is not evident at this time.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.