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Stimulus is Here. Now What?

So the markets got what they thought they wanted: more stimulus. Now what?

From a technical perspective, it’s unclear. While the S&P 500 set an all-time intra-day high last Thursday, the pricing pattern does not yet appear to be a significant break-out. In fact, when the bill crossed Biden’s desk on Friday, markets barely managed a higher close from the prior day.

So what is going on?

For one, the near-universal conversation is about inflation. Not if – but when – does inflation take hold?

The Federal Reserve seems to think it’s a ways off. And while the 10-year treasury has moved considerably on a percentage basis, on an absolute basis it’s still near historic lows.

So what are we to believe? Is there inflation, or is it contained?

The strange answer is, both and neither.

Take a look around. There is inflation. Already, fuel, energy, food, and real estate have moved significantly higher. Most commodities (excluding precious metals) and crypto currencies have also moved higher.

The question is, is it contained? And, regardless of the real answer, policymakers believe it is. At least, until it isn’t…

Intuitively, it stands to reason that printing tons and tons of money in the form of a massive stimulus program would lead to massive inflation, a devaluing of the dollar, and a host of other economic dislocations.

That seems to make sense.

What’s lost in the equation is the massive demand destruction that has been caused by covid.

Large portions of the economy are still being significantly impacted by covid. This economic anchor has weighed down certain segments of the economy (literally killing some parts of it). This is the demand destruction that gets glossed over in the conversation. It’s as if folks have accepted things after a year. Those that didn’t make it are gone. The survivors move on.

Here’s the thing though, it has to get factored into the equation… demand destruction during the shut-down. But more importantly, demand creation after the re-open.

As long as parts of the economy are still encumbered, inflation will likely remain partially contained. It’s a mechanical result. The supply/demand curve is affected by the fact that either a) the widget can’t be made, or b) the unemployed have fewer resources.

Stimulus sort of plugs a gap for resources (although not without longer-term consequences). That, in effect, props things up. But what does it do to repair the supply side of the chart? Answer: little to nothing.

Now, as the economy re-opens, the supply side of the curve improves. And, in theory, folks go back to work. So the demand side of things should balance. Then all you have to do is… oh yeah… repay the debts… with more taxes… which reduces the money supply…

And that’s really the underlying issue: money supply. Who has access to the money to spend? For real estate, you can borrow. And for the stock market, in the form of margin, you can borrow. But for food, utilities, rent? Not so much.

So there’s some can kicking going on here. And the though, certainly, is that it’s easier to deal with repercussions during times of strength, so let’s worry about it later.

The problem is, later has never arrived. In periods of economic strength, there has been no savings. In periods of economic weakness, there’s been more borrowing. The equation never gets balanced.

Well, eventually, markets will balance the equation. You can’t manipulate and manage things forever… or at least it’s never been successfully applied in history to this point. But that doesn’t seem to stop some from believing it’s worth another shot. (But I digress.)

Where does that leave the markets today?

Short answer: the probably go higher from here.

What????

Yes, you read that correctly. The probably go higher from here.

Why???

Because there is nowhere else for money to go, and it’s still cheap to borrow. There is access to capital and leverage in the markets. There’s optimism the economy will reopen. And, perhaps most important of all, it fulfills the unwritten law of market irony. Things often behave different than expected for longer than folks think.

The larger technical picture at play suggests the SPX is still headed towards the 4200 level. Once that area is achieved, it’s probable there will be a bit of a trader’s pull-back as markets reset, rates move higher, and multiples begin to come in. Projections show this beginning to show up in late April.

If that holds true, there’s 2-to-6 more weeks of upward movement before this market gets so far over its skis it trips itself.

Here’s a look at the 2021 projection for reference:

S&P 500 Projection for 2021 (projected on Jan 7, 2021)

For this week, look for a positive bias. Technical trends suggest a virtually flat week ahead. However, if markets gain some traction, the SPX could test as high as 4021. Downside support is at 3858.

Part of why this week may be relatively sideways is because the FOMC is meeting. Any change in guidance on Wednesday (quite unlikely) could impact things. Look for some version of guidance suggesting further accommodation (code for cheap money). As long as the general trend of rates remains low, multiples can stay higher. If a move does occur, it’s likely to be on Tuesday (movers in advance of the meeting) and Thursday for those repositioning after the meeting (this, by the way, is just an educated guess – that’s often how it goes – but hey, no guarantees).

Assuming rates remain unchanged, the current trend higher should continue. Even a hint at a rate change will mean it’s time to talk about the next phase of this market (and multiple contraction).

Note, the projections above for the year suggest a decline in multiples in late April. This also happens to align with the next FOMC meeting on April 27-28. Stay tuned.

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.

A Trend May Be in Danger

Don’t look now but the trend that was established back when the first vaccine was announced seems to be in jeopardy.

The S&P 500 has been marching its way toward 4000 for weeks now. Of course, this is nothing terribly remarkable in and of itself. Given enough time, the probability of the S&P 500 reaching (and surpassing) 4000 is extremely high. The question is less “if” than “when”.

The original trend was climbing on a pace of approximately a 31 PE for the index. This is a historically high multiple that has been rationalized primarily by historically low interest rates. (Because that risk-free rate of return is so low it throws off other math.)

Looking at last week, the SPX posted its all-time high on Monday then faded sideways over the rest of the week. (Not all the major indexes failed, which is part of why the trend is not ‘dead’ per se, just in danger.)

Looking at the futures for Monday, looks poised to open lower.

The question is, will there be traction? Do markets find buyers here and move higher, or will behavior change?

While the government tracking methods insist inflation is a ways off, more anecdotal measures (like the cost of gas at the pump or groceries in the store) tell a different story. Interrupted supply chains, political red tape, and yes – Covid restrictions – continue to play a significant role in this saga.

A look at the financial sector implies that rates may be rising soon.

If all of this is true, interest rates would risk, multiples would decline, and indexes would likely decline in response.

The wild card is stimulus. It’s really an inflationary tool. The issue is, in the short-term, it changes buying behavior by stimulating the demand side of the curve first. People can literally buy more stuff, so they can drive prices (and profits) higher in the short-term. But longer-term, it changes the supply of money in circulation, reducing its purchasing power. The creates all kinds of knock-on effects in valuation formulas (especially in lending).

The market seems to be digesting all of this now. It would not be surprising if the PE ratio of the S&P 500 began to decline toward more historic norms. Likely it will still remain higher than long-term averages, just not as high as it’s been.

Does this imply a major correction in the markets?

Not necessarily.

If corporate earnings continue to climb – which they very well may, given the probability of stimulus driving demand – earnings could climb while PE ratios decline. In affect, we could see a sort of sideways market where both variables more or less cancel each other out.

If this is the case, the 4000 level could become a bit of a plateau for a while as the index oscillates around it for an earnings season or two while markets figure out where things are going.

Think it sounds crazy? Go look at some of the major real estate markets around the country. Pricing in many areas is at a point where cap ratings are nearing parity with treasuries. It’s almost as if risk-free rate of return is no longer part of the equation.

History, of course, teaches us that markets can remain irrational for longer than expected (and certainly longer than you can remain solvent). So it’s not to suggest prices can’t go higher. It’s to suggest prices are very expensive in certain areas of the market if we see interest rates rise.

And that’s really the key: this market is now built on low interest rates. Any change to this would create systemic shockwaves.

The Fed has more or less opened its playbook up and is telling everyone the calls before they make them. “Rates will stay low” is basically the message. But if for any reason this story changes, things could get interesting quickly.

For this week, the question is whether or not the market resumes the 30-ish PE climb, or if there is more shake-down to come after last week’s sideway move.

The technical patterns have largely been organized and moving higher. However, the next big fat round number (4000) is about here, and that typically means there’s some oscillation as markets evaluate bigger picture metrics.

Also, we’re in the middle of earnings season right now. That will quickly taper off and we’ll begin to look toward Q2 for the next trend confirmation.

On the upside, resistance is likely at the 4000 level, with some intermediate resistance at 3975/3986.

On the downside, support is likely around 3872. If that fails, look for 3858, and an extreme downside of 3812.

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.

Blip?

Markets have been on a wild ride for the past two weeks. The S&P 500 fell from its all-time highs down to its 50-day moving average, only to rally back to all-time highs again to close out last week.

At this point, the momentum is still intact. So the trend continues: higher.

As with all things in the market, every up-trend ends in a downturn (duh). The question is when?

The longer-term idea that price multiples are unsustainable at these levels still seems to make sense. Recall the 2021 projections called for markets to go higher – for the SPX to rally towards the 4000 level – then for a potentially more significant pull-back from these levels.

Judging from the way markets have been moving, this may be a less organized trend that would make the pull-back harder to spot. If stocks do not uniformly correct across the board, it may not even be recognizable.

Instead, what we could see is a type of sector rotation where money moves out of some stocks, prices correct, and then begin to recover – all on a stock-by-stock basis rather than happening across the entire market simultaneously.

Some are suggesting this may have already happened in the last two weeks, as many stocks have pulled back at least 10% from their all-time highs in the past few weeks.

Of course, it’s possible we could still see a more orchestrated correction. Stimulus out of DC is still largely assumed to be on the table. But the form of stimulus is still up for debate. Whatever the case, it seems the plan is to monetize debt. At some point, one would expect consequences to come with this plan (if Bitcoin is any indicator at all… which it may or may not be).

The larger challenge of this market is its ability to gaslight analysts. In many ways, this is reminiscent of 1999. For those without the gray hair earned riding through said era, this was the period of the ‘new economy,’ where dot-com’s no longer needed to make money; they just needed to attract customers.

During the dot-com era, traditional analysis sort of flew out the window. Stocks went up regardless of the financial health of companies. New investors were jumping in with etrade and other online brokerages. Everyone was going to become a stock millionaire.

Today, there are new app-based online brokerages, free trading, and everyone is going to become a stock millionaire. Companies may make money, but the multiples are so stratospheric it would take eons to get paid back.

What’s different? This time the government is printing money. Lot’s of it.

In fact, a quick google search revealed US GDP at $9.6 trillion in 1999 (2020 numbers aren’t official yet, but it’s over $21 trillion). If we look at the amount of stimulus being conjured up, we’re looking to print more than half of 1999’s total economy.

Let that sink in.

The kind of money being created is so mind-boggling it doesn’t compute for regular people. It may as well be a zillion-kerbillion. Because we don’t have any sense of how much money it is.

Therein lies the problem. When money can go to a zillion-kerbillion, you see assets like Bitcoin become actual conversation pieces. And you see assets become mega-inflated. The question is when?

Inflation is sneaking in. We see it in housing, where people can access the capital. If the next stimulus package includes a minimum wage increase, we will see it start to spread to more areas of the economy.

Stocks, historically, have been a leading indicator of economic health. However, in a world with near-zero savings rates, stocks become one of the only alternatives to store value. So demand is sort of conjured up by circumstances.

However, this market may be out pretty for over those skis. At some point, you tumble.

If we see inflation pick up, and rates start to rise, demand for stocks could fall. And those stratospheric multiples could start to look pretty unnatural.

Judging from the pace of movement in certain assets – the sort-of frenzied FOMO attitude of many new stock buyers – and the actions of both DC and the Fed, the idea that markets could pull-back later this year is still very much on the table.

But for now, looking week-to-week, the looks like the party is still raging.

The trend for the S&P 500 suggests the last two weeks were a mini-correction, and new highs are on the way. This week looks like a test of the 3950 levels. We’ll see…

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.

The Trend is Your Friend

It’s tempting to over-analyze the markets. Every day another headline calls for attention. But the truth is, the media generates a lot of distractions at times. In the constant quest to attract eyeballs, that’s what the news/editorial cycle does. But behind the scenes, the markets are often times working on their own story.

The story of the current market isn’t a new one. It’s just colored by the news cycle. Presidents coming and going; covid; taxes; trade deficits. The list goes on. And certainly, the list is relevant. But the day-to-day, moment-to-moment stuff can lead to looking for more than perhaps there is.

The current story for the market has been going on so long it’s almost hard to accept. There’s just no other place to put money where you would expect to outpace inflation, so money moves into stocks. This demand has buoyed prices for years now, aided by the fact the Fed and other market forces have kept interest rates so low.

The question is, will rates continue to stay low and for how long?

The temptation is to believe rates will revert to a mean and begin to shift higher. This is certainly possible, but don’t get too far out over your skis on this one. True enough, the yield on the 10-year treasure has increased dramatically over the past few months when measured as a percentage. What remains to be seen is if this is the beginning of a long-term trend of rate increases, or a short-term spike in rates in response to the anticipation of a shift back toward a more global-focused Washington?

The reality is, it’s too early to call a trend shift. The bigger theme of this market has been going on, arguably, since 2009 following the financial crisis. It’s resulted in a much more central bank influenced market than perhaps many would care to admit.

Those central banks – the Fed chief among them – haven’t taken away the punch bowl yet. So while rates have drifted higher, it’s pretty early in this game. Rather than try to handicap the odds that rates will start to radically climb (something even the smart money in bonds struggles to do), let’s simply look at what we have: a trend that is still intact until proven otherwise.

So what is the trend? Simple, rates are beginning to climb, but stocks are still more attractive as a hedge against inflation (for now). However, stocks, at least by PE valuation, look expensive. So which is it? Are stocks too expensive, or are stocks attractive?

The answer may simple be yes.

Many stocks are expensive, but not all stocks are as expensive. So, if the economy continues to normalize out of covid-disruption, it would make sense the assets would rotate out of the more expensive ‘safe’ stocks into the slightly riskier but more affordable ‘risk’ stocks that have more attractive valuations.

In short, the market seems to be tipping its hat toward a re-open trade.

Granted, it’s early to call this. But the trend is your friend. And so far, the trend in equities has not failed. So this appears the most reasonable explanation to connect the technical and fundamental picture… for now.

For the week, futures are looking like a positive open. And, we have a holiday-shortened week. This typically means a little more volatility. But, superstition suggests the week will move in the direction of the open. If so, look for a positive bias this week, with a trend that will potentially re-test the all-time highs on the S&P 500. Support is at the 3750/3725 levels. Resistance should be as high as 3855/3871.

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.

S&P 500 projections for the week of 12-8-2020

Santa Still on Approach

With the S&P 500 still shooting for a 3800+ print in 2020, the Santa Claus Rally looks like it’s still on.

It may sound crazy, but volatility could continue to decline in the near term as markets slowly grind higher into record territory. There simply isn’t a significant amount of news between now and the end of the year that looks like it will derail this thing. And mean reversion is likely not reason enough on its own to lead to much more than some intra-week down trading days during a broader trend higher.

(Did that make sense? Basically, the market seems to want to go higher, but on any given day some trading could lead to a negative print here or there. It just doesn’t look like much more than that: trading. The secular up-trend still looks strong.)

This is not to say black swans don’t exist. And this is not to suggest the markets could not find a reason to get fickle and decline. (They could and certainly have before.) It’s simply looking at the data, the trends, and trying to gauge the amount of uncertainty the markets are trying to contend with.

The trick is, most of the contingencies looks like up-side surprises. With much of the country still quite locked down, the questions are more about whether or not additional stimulus is going to happen. Taxes and other policy changes are still taking a back seat for the rest of 2020. (But don’t you worry, we’ll get a chance to freak out about that stuff in Q1 of next year.)

So, at least for now, it appears most of the current negative news in the world is already priced in. That leaves more positive surprises than negative in the short term, hence the high probability the markets grind higher from here.

The number to watch on the S&P 500 continues to be 3800. The downside support area looks like 3644. If this level fails to hold, the 3600 level could be tested.

A close below 3600 for the week would likely end the rally for 2020 and set up a test of the 50-day moving average and a sideways trading range for the rest of the year. The odds of this occurring look relatively low at this time.

A look under the hood of the BigFoot Database shows the DJIA just got a new buy signal. This means the S&P 500, DJIA, and NASDAQ all have buy signals in the system. The database itself is almost 85% long, with almost 85% of those long positions having buy signals (the others are wait signals). In short, volatility is on the decline, and stocks have been on the rise. Unless something surprising happens, Santa Clause should still be coming to town!

The technical setup looks like the Santa Claus Rally should continue.

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.

Tricks, Not Treats

Apparently the markets were in the Halloween spirit last night and decided to play a trick on us, dropping close to six percent across the board. Ouch!

This massive spike in volatility has blown up a lot of technical patterns. September started the mess with more than a 10 percent pull-back from peak to trough prices. From September 24th to October 12th the S&P 500 began the climb out of the slide, nearly recovering all of September’s losses.

Those last two weeks though. Yikes. The SPX gave up all the nearly all of the gains to re-test the September lows… and although the intra-day lows didn’t quite dip lower, this trend is anything but over.

This week is likely to be messy. Only the boldest of analysts would try to call anything this week. And that is probably more bravado than skill, as the data is all over the board.

And, of course, there’s another tiny little detail we’re watching (where is the sarcasm font when you need it?): the election.

It’s entirely probable the election will not be decided this week. Across the country there are legal battles over the deadline for mail-in ballots and how they should be counted. Any close race in a key battleground state is likely to be met with lawsuits.

With this much unknown it is silly to try and call the outcome. History has show that polling data is not meaningful enough to get a good handicap on an election. And covid has changed the way we vote. In some areas its reported that mail-in ballots have exceeded total ballots cast in 2016. So, who knows?

Given the radical uncertainty this week, to call it a sideways pattern is a cop-out. But to put numbers to this seems equally silly. The ‘support’ level for the SPX is at the 200-day moving average, down at 3129… that’s over four percent lower than Friday’s close. Resistance is an equally silly number, up at the 50-day moving average at 3402, over four percent higher that Friday’s close.

So, plus or minus four percent… it sounds outlandish, but those are the numbers. It shows just how tough it is to handicap this market in the short-term (especially given an election during a pandemic in the midst of government lockdowns, stimulus, and quantitative easing).

So, for the week, the professional advice is: hang in there. This could be a wild ride.

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.

Pushing the Pause Button

Last week the S&P 500 managed a mixed bag – down for the week, with positive trading days both Thursday and Friday. What does it mean?

Technically, it looks like the up-trend has been interrupted by a sideways trend.

A couple weeks ago, when markets were aggressively recovering from the September slump, we discussed a possible push to new highs… OR… and this is the gotcha, we could see a side-step if you will — a sideways market with little significant commitment either way.

The up-trend was primarily driven by the hope for more stimulus. As those hopes have faded, a bit more of a wait-and-see attitude has emerged. This makes sense given the election is now just over a week away. (Markets aren’t known for their patience, but in this case, the policy differences between the two candidates are night and day, so absent a really good reason to ignore it, we may as well pay attention).

The underlying disposition of the BigFoot database contintues to improve. However, that rate of change has also slowed dramatically. So at this point, the momentum has stalled.

Given this stall, there’s little that would appear to drive the markets materially higher or lower for the week. That sets up a sideways range that likely stays between 3517 on the high side, and 3375(ish, this number is a little more vague) on the low side.

The bigger concern this week is some form of noteworthy bad news. Given the minimal downside support right now it’s possible the 50-day moving average would fail and the index could take a more aggressive rip down to the 100-day moving average at 3300. That’s close to a 5-percent decline. It’s a lot — but not for a year like 2020. Fortunately the odds of that happening still look pretty low. But… did we mention 2020?

More than likely this week will drift sideways and we’ll see a spike up in volatility. With the election being too close to call — and polling data becoming the next back-up plan if we run out of toilet paper — the markets are looking less at who is predicting what outcome and more at outside systemic threats. Of course, the thing about looking for black swans (systemic threats) is, by definition you don’t know they exist until after you find them. So it’s not particularly clear how one watches out for them.

On this we seem to have learned the hard way: every time you challenge 2020 by suggesting it can’t get worse… Never mind. Let’s not jinx it.

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.

Looking Past the Election

A look under the hood will show the BigFoot Database beginning to re-purchase into declining volatility and a possible break-out to the upside for the S&P 500.

Recall one of the big drivers of the BigFoot Algos is the presence of short-term volatility. When short-term volatility declines, it’s often a sign that markets are aligning for a positive advance.

Sure, the database is still pretty beat up, with approximately 46% of tracked symbols having buy signals. Still, this is up from the prior week’s 42% levels, showing signs the market is beginning to re-group at these levels in preparation for another move higher. It is the change in direction that raises the eyebrow…

How — or why — would this happen? Likely the markets are already looking past the election.

The headlines will suggest the market is banking on another round of stimulus from Washington. There’s also anticipation (or at least reporting) of a ‘blue wave’ ushering in both regime change in the white house and the Senate. If so, a round of government spending and higher corporate taxes is likely.

But it’s more complex than that. The markets aren’t tracking the headlines per se. In fact, headlines seem more inclined to sell an outcome than report the news these days. But the markets, ever single-mindedly seeking profits, are seeing the bigger picture for what it is: stimulus regardless of who is in the white house. So this is less a political prediction than a reality check. The Fed has suggested stimulus is required to keep the ship from capsizing. Now Washington is just jockeying for political points. If the market is correct, stimulus is a forgone conclusion. Now we’re arguing over when and how much.

So markets are less concerned in the short-term about Trump or Biden. They want to know when the money starts falling from the sky.

This doesn’t mean the markets don’t care who wins the election. It just means the markets aren’t looking out that far right now. “Free” money is a pretty powerful incentive to shorten time horizons. Longer-term the pace of growth for the markets will absolutely be impacted by one regime over another… but that requires too much thinking right now. We want to know where the next round of lighter fluid is coming from.

The technical picture suggests a break-out to all-time highs is possible this week. Futures are already indicating a higher open. And last week’s move in the SPX — while negative for the week — did little more damage than to allow some consolidation after the previous week’s break-out.

This isn’t to suggest a break-out to the upside is guaranteed this week. It’s simply to suggest that is what the pattern is indicating .

When looking at the numbers, the S&P 500 is now on the hunt to take out previous highs and extend toward the 3704 level. It seems unlikely to hit these levels this week – but perhaps in the next two weeks.

On the downside, look for 3440 or so for support. A breakdown below the lows of last week would signal a sideways move and would take the 3704 number off the table probably until after the election results are settled.

S&P 500 projections for the week of October 19, 2020

The wild thing about this market is it seems to have largely priced in the effects of Covid. It has more or less recoved its losses and moved back into the price channel established in 2019. We’ll see how the election plays out as to whether or not that longer-term pricing trajectory remains valid…

Updated 2020 Projections.
Note the S&P 500 has moved back into the original price trend channel.

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.

“Free” the Markets

As suggested last week, markets appear to be finding their footing. In fact, with last week’s close above trend, the S&P 500 may be looking to re-take its all-time highs in the next week or two. The question is why?

Aren’t we staring at an election year? Odds makers have Biden winning. Isn’t that a vote for a massive (and expensive) tax overhaul that will stifle the markets?

Maybe… but not yet.

In the short term… as in, the next few days… markets are betting on more stimulus. After all, FREE money means we don’t have real economic problems to deal with (there is no sarcasm font so you’ll have to read between the lines on this comment.) IF they’re right, it’s short-term lighter fluid on the stock market. Well, sort of.

A new round of stimulus probably bumps the markets to all-time highs, but the bump may be short-lived as the stimulus is sort of being baked into the prices already. Then we have to consider the ‘next’ thing the markets are going to think about, which is the possible tax fallout of a Biden win.

The POTUS probably isn’t the biggest concern. The Senate is. If it flips blue, the checks and balances that exist in the system stand to flip too. So a lot more extreme jockeying can take place.

Political opinion aside, the blue side of the aisle is on record as being in favor of higher corporate and personal taxes. A significant tax hike on either group, at least so far, does not appear priced into the markets. So you can do the math: new taxes, new headwinds… even in a TINA market.

Since investors are (rightfully) incapable of handicapping the outcome of the upcoming election, time horizons have shifted pretty short-term. So volatility is likely. And the tug-of-war will between fear of the upcoming election (FOTUE) and fear of missing out (FOMO).

For the week, looking for a continuation of last week. This means a close for the S&P 500 above 3523 will signal a re-test of the all-time highs for the index. Support is at 3419. And, given last week’s nearly 4% climb higher, it’s possible the index will challenge its all-time highs this week.

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.