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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.

Correction Territory

Don’t look now but the BigFoot Database is turning bearish.

Both the S&P500 and Nasdaq flipped sell signals in the last few days. Only the DJIA still shows a buy.

There’s been a 25% reduction in the number of long positions for the BigFoot database, as the system has silently declined from close to 85% long down to barely over 64% long today.

Compound all of this with the lousy open futures are indicating, and it’s a recipe for the major indexes to slip into correction territory this week.

This will officially ‘break’ the August trend the markets have been enjoying. In fact, several of the big tech names that lead the markets higher in the last rally are entering bear market territory.

While the fear for many is that the economy is going to break down (as we still see many supply chains broken), this is a premature call. In healthy markets, pull-backs are normal. It’s common for traders to sell off profitable positions and ‘rotate’ into other asset classes.

In periods of rotation, markets often pull back to other to previous high levels before the most recent trend. If you’ve ever been on one of our forum calls, you’ve seen this discussed in the technical market review. “Wave overlap” is a common indicator market technicians look for. It is the point at the top of bottom of a prior trend reversed course. When the most recent trend changes, it’s common for markets to move back to a prior high or low in order to ‘test’ buyers to see if those price levels will hold.

With election anxieties climbing, it is not surprising the markets are taking a breather and giving back some gains. The better question is, will this be the start of a the next bear market? Or are markets simply experiencing asset rotation?

This week will be a valuable data point. It will be the fourth week since the S&P 500 peaked and began its pull-back. It is also noteworthy that the downside projections alight with multiple prior wave peaks.

The extreme for the week is down near 3200. That’s a decline of about 3.5 percent; no fun, but survivable. That is also just a shade below the 10% retracement level, which would make the move an official correction.

Perhaps it’s a healthy move for markets. However, it’s a fairly extreme move. What the last several months have shown is that these markets can move in aggressive fashion. The declines in March happened in just a few weeks. So when it goes, it goes quickly.

And a four-week correction would be pretty quick. In fact, the SPX is already looking over-sold going into this week. So, while an outside possibility, there is still potential that some will ‘buy the dip’ at this point. Many of the large tech companies — the same companies that were viewed as the safe havens in the last pull-back — are trading at prices not seen since July.

So this week stands to be important in the analysis picture. To buy the dip or not? Given the nature of Washington, it may simply be that markets move sideways for the next several weeks. If markets find a foothold here, it sets up a sideways and somewhat range-bound scenario between now and the election.

Here are the critical numbers for the week:

Support: 3265 / 3218 / 3204

Resistance: 3343 / 3393

Odds are pretty good that things don’t melt down further from here… no guarantees of course. But there is a lot of support over 3200. A failure there and we’ll have more to discuss.

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.

Tech Corrections

Let’s call this market pull back what it is: a pull-back in mega-cap tech.

Since Big Cap Tech has become the largest players in most of indexes, a pull back in this segment of the market has the affect of dragging down about everything. So, last week, down it went.

A quick look at the ETF ticker FDN and you’ll see that tech is officially in a correction (so more than 10% decline).

This is not to say other segments of the market are immune. Many sectors of the market dropped last week. But tech seems to be the tail wagging the markets.

Technically speaking (no, this is not a euphemism, we’re talking about using technical/quantitative analysis here), the markets may have found a foothold here. If so, look for volatility to remain, but we may see pricing begin to drive back toward SPX 2425 this week.

If you want to get into the details behind this number, it’s simply the nearest round number to a mid-point of about a calendar month of trade data. Last week markets traded up over 1.5 standard deviations from the 21-period trading average (trading days, so about a calendar month). When the selling started, the markets declined to about 1.5 standard deviations below the same period. So, for this week, look for things to oscillate back towards the middle… from over-bought to over-sold back to the middle of the range.

The S&P 500 50-day moving average is at 3331, That’s a likely area for support this week (even if the markets dip below it intra-day). If this support area fails there could be an extended slide lower. We will address this in next week’s blog.

For this week, look for volatility to remain, but for the bias to be slightly positive as large-cap tech looks to likely regain some of its lost ground.

SPX may move towards the 3425 range after shedding some volatility 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.

Assessing

If I had to guess, I’d say buy the dip… but maybe not until next week. (But because we’re pro’s we can’t make recommendations without all kinds of blow-back, so this is NOT investment advice, and I’m not suggesting you actually do this – I’m just, ya know, throwing it out there in the ether for all to ponder.)

Call it a hunch.

Buried in all the chaos of last week’s abrupt sell-off is the nagging fact that markets had been on a low-volatility tear for several weeks. August had been a fantastic month for bulls. Stocks were up big almost across the board. But big tech? Or, perhaps more appropriately ‘spec tech’ ?

The expression goes ‘bulls don’t die of old age.’ Experience says this is true. But experience also says sometimes profit-taking happens. And we’re (less than) two months out from an election and tech valuations were reaching 1999 levels. This shouldn’t really come as a surprise.

From a technical perspective, all this looks like is a healthy pull-back so far. It would take the S&P 500 retreating below the 3325 level to signal a more significant trend breakdown.

Is it possible? Of course. But what fundamentally changed in the marketplace? What new information is the market digesting? Did the Fed signal a change in course? Did we learn something new about anticipated changes in leadership in Washington? Did we see any significant changes in international trade or commodity pricing?

Mostly, we saw some areas of the market got really expensive, and assets started rotating out of those areas.

Will weak areas of the market start to catch up? Hard to say.

Will tech recover? Also hard to say… but several stocks are off nearly 20% or more in a short time. So it’s possible money will jump back into the tech trade soon.

September has a lot of superstition around it. So do election years. So do years where you’ve had pandemics and the markets had full-blown bear pull-backs. And so do years when the governments throw so much stimulus at the economy it breaks all the models.

The reality is 2020 isn’t normal. Trying to fit it into some kind of analytical box is exactly what it sounds like – data fitting. This is likely a fruitless endeavor. We’re simply coloring outside the lines right now.

When looking at the BigFoot database, there has been no significant changes. There were some sells (a shift of about 4% lower in terms of overall long weightings), but the bigger move was to caution as the wait signals increased. Both the NASDAQ and S&P 500 shifted to wait signals – the DJIA still has a buy.

Thanks to Labor Day this is a shortened trading week. The typically means increased volatility. But then again, it’s September of an election year, so do we even need to discuss this?

For the week, look at major support near 3325. A breach of this level would be more serious. Otherwise, it’s likely part of a more typical pull-back than a break in trend. It’s unlikely we’ll see the markets push new highs for the week. Instead, look for a negative start to the week with some consolidation — perhaps even some recovery buying in hard-hit areas of stabile large-cap tech. Spec-tech (speculator’s tech) is likely to continue getting knocked around as novice retail investors panic out of the markets some.

Hang in there… 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.

Let the Games Begin

Last Friday finished at all-time highs for the SPX. Today, Futures look to open flat. Tech giants continue to drive this market higher. The rest of the market may even be starting to gain a bid. But there’s an elephant (and a donkey) in the middle of the room: the election.

A lot of folks are betting the future of this market on the election.

It’s tricky, because on one hand, things like tax policy and the idea of being ‘business friendly’ look so vastly different on paper. On the other hand, both parties seem to spend more than we have, make promises they can’t keep, or generally point fingers at the other team only to do the exact same thing they cry foul for when it’s their turn. So perhaps it’s less different than many care to admit.

Regardless, the reality is the election is two months away, and market participants are very interested in the outcome. It’s a classic backdrop for volatility.

Currently volatility has been on the decline and seems relatively benign. We’ll see if September’s historic reputation of being a challenging month for the markets lives up to the hype.

For now, the technical picture remains mixed: a strong uptrend that appears to be continuing, with an odds-beating sequence of positive returns that begs for mean reversion.

Since we’re already at all-time highs there really isn’t ‘resistance’ for the markets to the up-side. There’s just a general trend that continues. And that trend extends up near 3450 for the S&P 500.

Support is a slightly different game. At all time highs, we can look backwards in time for key areas the market once challenged. In this case, the stand-out support area appears to be the previous February high-water mark at 3393.

Markets are pretty tricky to call when they’re achieving all-time highs. The temptation is to believe they must fail first. This need not be the case though. In spite of all the chaos and theories that this market must go down before it can go up, markets can rise to even-all-time-higher levels from here.

The critical question to ask is: where does the money go if it’s not in the market? And are folks willing to sit on the sidelines and watch things go higher?

Mechanically speaking, markets can rise on thin volume (in some cases easier than on high volume). So a rising market does not need a lot of believers; it just needs more buyers than sellers. And since the Fed has made most everything else pretty unattractive to buy, you can do the math.

So as we send off August, send the kids back to school (or do we???), look forward to an election, and the upcoming holiday season, we’ll see how things evolve. So far, the market is not forecasting its own demise. But we’ll see if the fears of would-be-stock-buyers manifest in a self-fulfilling prophecy of bear stampedes… or not.

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.

Danger Zone

There’s two kinds of danger zone — the kind where things are dangerous, and the kind where you’re crankin’ out Kenny Loggins while having a great time. The current stock market could be both.

Futures are set to have the S&P 500 and NASDAQ both at all-time highs… again. And the week looks to be positive.

Why?

Much of it has to do with mega-cap tech climbing through the roof. It’s obscuring everything underneath the surface of this market because it is doing so well and it’s so big it just kind of eclipses everything else.

The other reasons are much of what we’ve discussed for a long time — Fed suppression of interest rates means risk is mispriced and money is forced into the markets; stimulus and money printing had to go somewhere; and the short-term favorite: irony.

Irony is not a real market rationale, but it seems to fit the bill. The irony is that the markets are going higher in spite of an unstable political, social, and economic environment.

In short, the market either knows something we don’t, or it doesn’t care as much as we do about all the social non-sense we’re struggling with.

This is not to say the issues don’t matter. In fact, they may even matter to the market. Just… not yet.

It appears that risk appears to be getting mispriced all over again. When you see a company like Tesla priced over $2100 a share with a PE Ratio of nearly 1100 (while Apple has a PE of about 38) one has to question the sanity of the markets.

The VIX has been on the decline, tech PE’s are astronomical, and the markets are at all-time highs… while unemployment is near-all-time-highs, the entire national education system is in a tailspin, and a pandemic is still happening (at least we’re told it’s a thing – and I suspect the people that have Covid will tell you it’s a thing, even if you don’t think it’s a thing).

In short, there are plenty of reasons to question the sanity of the markets. And yet they go higher…

This is the classic definition of momentum. Climb the wall of worry. Low volumes, higher volatility, and higher prices…

Well, it works until it doesn’t work. And the bigger fool theory works until you run out of fools. But how long does that take?

If history is any indicator, September we may start to see volatility return. We may see another stimulus package. We may see more manna from heaven in the form of checks to unemployed. Heck, we could even see another round of PPP loans for small businesses.

But will we see the markets keep going higher?

Statistically speaking, we’re getting into rarefied air up here. Markets have now extended gains since late July, with only 12 negative days for the S&P 500 since June 29th. That’s a pretty solid win streak with volatility dropping like a stone.

Probability suggests if we flip a coin, each individual outcome is 50/50 heads or tails. And each coin flip is an independent sample with the same probability of outcome. But gaming theory suggests the probability of flipping heads 10 times in a row, while possible, is well below 50/50.

So which is it? Does the market keep going higher, or does it correct?

The best we have is an educated guess… but here’s the guess: for this week, markets go even higher… because there seems to be little in the path of the bulls, and there are still bigger fools out there afraid of missing out.

This thing will end badly for some people. It’s reminiscent of the 1998-99 attitude in some of the tech areas of the market. “This time it’s different.” Sure… because history doesn’t repeat itself… but it rhymes.

For this week, just look for things to go higher. SPX support is at 3360, and resistance is at 3450-ish… there really isn’t resistance per say, just a big number the market hasn’t tested yet. So at some point there will be some sell off just because traders will get impatient and want some profits. Still… wild times.

As we’ve said before: keep doing what the market tells you to do until it tells you to do something different. Or, said another way… run with the lemmings, just stop when you get to the cliff.

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 New Highs

Despite the soft finish last week, the overall trend for the S&P 500 remains positive. In fact, it was really close to breaching its all-time high last week. And, as of now, futures indicate it should hit new all-time highs Monday.

The trend appears to be all that matters right now. How is the trade evolving?

In an election year, with a controversial pandemic, with the Fed printing money, and Congress debating more stimulus, there’s a lot of guesswork to this market. Stocks are pricing in what they can and waiting to see what new information shows up (what else is new? Stocks always do this). So, follow what the market is showing us.

As of today, there’s been a two-month ‘melt up’ with very low volatility for the SPX as it has recovered to near-all-time-highs again. And this has been in the face of all the economic uncertainty out there.

So the trend is pretty straight-forward: the markets march higher.

This has been a difficult market to have confidence in given the massive government intervention in the way the economy operates. Between major shut-downs in public facilities, schools, restaurants and recreation, we’ve seen some permanent changes in our economy. Some jobs are gone… like… gone gone.

And now the clock is ticking on unemployment benefits and the political gamesmanship is at hand.

Yet the trend is pretty straight-forward: the market marches higher.

If we’ve learned nothing over the past few years, it’s that the Fed has forced the market’s hand in many regards. By keeping rates low (ostensibly in the fight against deflation), money was left with little option but to seek risk in the stock markets. The risk/reward profile was — and is — simply unattractive for the rate of return what gets parked in cash or cash-like assets.

So, money flows into the stock market. Stocks go higher.

The kicker is, it keeps working until it doesn’t.

The Warren Buffets of the world — deep value investors — will say stocks are expensive and unattractive. This may even be true. But that doesn’t mean prices aren’t going higher from here.

When looking at the underlying quantitative data for the stock market, there is still a case to be made that prices go higher. Much of the performance in the indexes has been attributed to their over-weight to Large technology companies (do primarily to the way the indexes are constructed in the first place.) Smaller cap stocks and value stocks have had much less recovery that the large cap growth stocks. So there may yet be room for asset rotation and more growth in indexes.

So the first question is, does the market go higher? And if it does, do you ride get in here or wait for a more attractive entry point?

Only history will vindicate the answer to this question.

The quantitative story is somewhat in conflict with the economic narrative. The quant data says things go higher from here. Stocks are expensive, but the prices are justified by ultra-low interest rates and the fact that there is nowhere else to get much of a return on capital.

On the other hand, the economic narrative, at least in some circles, is one of structural economic damage on a global scale that will lead to a reduction in global GDP, an extended period of joblessness, soaring government deficits and debts, and large-scale credit defaults by both individuals, corporate entities, and unhealthy state and local balance sheets (and we won’t even touch the public pension debate on this one).

The question may be more one of time frame. All of the structural economic problems are real. And money printing doesn’t make them go away. Nor does infinity stimulus or universal basic income or any other free-money scheme. It just changes the pricing variables for the economy and temporarily masks a problem.

Nevertheless, the structural problems move slower than the markets. And markets can — and often do — get out well ahead of the economic data.

This appears to be the case right now as markets trend higher in spite of the uncertainties that lie ahead.

And, of course, in a week, this could all look different…

But for today, the S&P 500 is suggesting all-time highs this week, with a target number of 3422, and a challenge number of 3460. Support is at about 3333, although it appears unlikely we’ll test that low. Instead, look for generally lower volatility, new all-time-highs, and perhaps a string of a few all-time high closes for the index over the week.

And next week? We’ll do the analysis all over again. Until then, have a great 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.