Special Bulletin: September 9, 2021 (1:30pm update)

Is the Honeymoon Coming to an End?

To many investors it may feel like the stock market is filled with helium – it can only go up! The same could be said for the bond market. Oh, and let’s not forget the real estate market. Helium indeed! Or maybe those markets are high on something else.

Exactly! The financial markets are high on “hope” at this point in history. Investors are hoping the trend remains their friend and that it continues up. They are hoping the Fed leaves interest rates alone and forgets its promise to taper soon. Hope springs eternal that our officials in Washington will get something done that will stimulate economic growth. They may be hoping it “ends differently this time” too.

Sadly, many may be naively hoping our massive, and looming, national debt will just take care of itself. Click here to see it for yourself and be sobered up.

Others may be “hoping in Joe.” Sorry to disappoint, but that honeymoon is ending. Seems to me nothing else needs to be said on this point.

The Fed has forced a checkmate for investors. We have been discussing T.I.N.A. in this column for a few years. As a result of the artificially low interest rates engineered by our leaders, investors have found There Is No Alternative to having to put their money “at risk” (even if they are risk-averse) if they intend to earn a competitive return on their investments.

Make no mistake about it, the recovery engineered mid-last year by Pres. Trump and his team (Mnuchin, Powell, etc.) created this launch (which has benefited the honeymoon too) and it has been rewarding. However, consider this: Investor psychology has gone from massive panic to near rampant speculation in just a year and a half – from one extreme to the other! Perhaps an investor’s biggest risk now may prove to be F.O.M.O. – the “Fear Of Missing Out.”

By in large, the micro-technical indicators (“the footprints of smart money”) that we follow each and every day are still supportive of the uptrend, although not in as robust of a manner. On the other hand, a growing number of macro-fundamental indicators, many of which reflect the actions of dumb money, are showing alarming and climatic – even historic – levels of optimism and acceptance of TINA. FOMO anyone?

What are some of those alarming macro indicators? Here’s just a few: A record level of investor margin debt recently; record level of IPO’s (not to mention the SPAC frenzy); the S&P500 dividend yield at the same level as the 10-year US T-Note; and extremely stretched current P/E multiples for the “key 3” indexes. (Even into the 30’s!!) It’s appears to be time for more caution!

On top of all that, the stock market has been hitting all-time highs on waning volume. Price breakouts to new highs have difficulty following through when volume is light. The odds of them succeeding increase when absolute signs of strong institutional demand – well above average volume – are present. That’s been a missing ingredient lately.

Additionally, for you old-timers, the “Dow Theory” is trying to assert itself as the transportation index continues to retreat. There is still time for the transportation index to rerail itself, but it needs to do so right away.

While the S&P500 held support at its 21-day moving average yesterday, the market is still at a critical juncture and in need of additional positive catalysts to provide an incentive for investors to bid it up further. As such, we remain defensively positioned in our strategies.

Our Current Market Outlook continues at “Uptrend Under Pressure” with a yellow light. Our “Core Four” has improved with 3 green and 1 red light (see top of page) effectively causing a tie (2 green & 2 yellow), which the VIX (the tie breaker) decided. While this signal is close to going green due to the recent price improvement in equities, it is not quite there.

Remember, entrenched trends do not end without a significant catalyst – positive or negative – and can last a lot longer than people think. Yes, this bull market has been impressive. But preparing an exit strategy and learning about the proper use of certain defensive tools and techniques will ultimately prove to be valuable and prudent. Check back for our next post where we will discuss some of those “defensive tools and techniques” – e.g. inverse ETF’s, adjustable rate investments, and inflation hedges.

What to do now?  Make the market prove itself: September/October have historically often featured serious corrections. Deploy capital only in ideas that display significant volume increases on correct breakouts. Continue monitoring the US 10-year note rate as a “taper tantrum” tell. Remain on guard for a vertical violation. 

Have a Triumphant day! ® 

Ps. We have closed our Twitter and Facebook accounts. Read about our decision here and here.