A very long time ago I suffered through a high school physics class. Having thought of myself as inclined mathematically, I proudly opted to enroll in the enriched, or accelerated, version of the class. I wasn’t prepared for what came next.
Turns out the class was a bear and featured a teacher that seemed to enjoy seeing pimple faced “hot shots” squirm. Not to mention, to me, he had the driest and dullest lecture style ever! As the school year progressed, I quickly realized that I was in over my head and I had no exit strategy. I would have to work my tail off to keep up, since we couldn’t just drop classes back then. (I think I eked out a C and damaged my GPA in the process. Lesson learned.)
Early this past week our team member Matt used the term escape velocity while reviewing a stock chart with me. (Turns out that is a term from physics. Who knew?!?!) Being curious, I looked it up. Escape velocity is the minimum speed needed for an object to “escape” (or break free) from the gravitational attraction of a massive body.
As the week went on, I observed that the major stock market indexes were hitting all-time highs BUT on very light daily trading volume. Historically, that is a warning sign. Maybe this time it’s just a summer thing – or maybe not. As I reflected on that, I remembered Matt’s comment and the conversation it spawned, and it dawned on me that the stock market at present appears to be struggling with its own escape velocity.
Let’s break this down. If the total daily volume of shares traded on the NYSE and Nasdaq can be used as the markets “minimum speed” requirement, then the “gravitational attraction of a massive body” would likely refer to a stock market correction. Or at least the force that would cause a pullback. But for an object in motion (the stock market) to reverse its current trajectory (up), it would take a significant negative catalyst to make gravity take over.
What sort of catalyst could the lower volume at all-time highs be foreshadowing? Perhaps the gravitational weight of higher taxes and new regulations, our massive and historic debt load, or just greed that transitions into fear.
Someone once said, “markets go up…until they don’t.” Unfortunately, for investors, the stock markets escape velocity seems to be waning and the market may have entered a twilight zone instead. (An area of ambiguity between two distinct states or conditions.)
The market is at a significant crossroad. Like a rocket on the verge of space without another stage of boosters, it may soon peak, roll over and fall rapidly back through the atmosphere. That is, unless there is a positive catalyst to provide additional upward thrust, and soon.
Our Current Market Outlook continues at “Uptrend Under Pressure” with a yellow light. Our “Core Four” has 1 green, 2 yellow and 1 red light (see top of page) and reflects a higher risk environment.
The S&P500 held critical support at its 50-day moving average (mav) on July 19th, and then found support again at its 21-day mav this past week on August 3rd. (The “buy the dip” crowd emerged in the nick of time.)
In gauging the markets internals for staying power after both of those trips to support, we find less than ideal internal math. Hence, that is why the Current Market Outlook and our Core Four remain in a yellow condition.
The CBOE Volatility Index (VIX) remains at a level accommodating a slightly bullish view.
Our team, being extraordinarily aware of past market cycles, remains cautious but optimistic. At the same time, we are preparing an exit strategy for each of our strategies in order to protect our clients assets from the inevitable emergence of a negative catalyst – and a return of gravity.
What to do now? Be smart, don’t chase. Higher interest rates are generally bad for tech stocks. Only commit new capital to ideas that display a significant volume increase on breakouts. (Take a look at some steel and semi charts.) Keep monitoring the US 10-year note rate as an immediate inflation gauge. Be on guard for a vertical violation.
Have a Triumphant day! ®
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. Not to be used as legal or tax advice. ©2021 Triumphant Portfolio Management, LLC.
Where Are Woodward and Bernstein When We Need Them? This article was written by Newt