Special Bulletin: February 24, 2021 (12pm update)

Risks Are Still High, But So is Demand

The equity market underwent a critical test of institutional support yesterday, and is responding favorably to it today. After sliding for 5.5 days, the S&P500 made an important stand at its 50 day and 10 week moving averages. It even managed to close over its 21 day mav on the same day! The technical pattern that is shaping up as a result of this action is what we officially call a “Cross, Touch and Go” and it often leads to immediate additional gains.

One fly in the ointment is the Nasdaq’s proximity to its own 21 day mav, which was still beneath it as we went to press. But as an offset, the “rotation” to cyclical and industrial names continues.

Today’s volume will be important to monitor on the key indexes. Historically, the best moves up in the main indexes after a successful test of their key 50 day and 10 week moving averages are accompanied with expanding, even explosive, volume. 

Based on yesterday’s action in the markets internals, our Current Market Outlook was upgraded to “Market in an Uptrend” with a green light.  The long standing yellow condition has improved and given way to a green light. The TPM “Core Four” internal indicators have moved back to 3 green and 1 red. This reflects a strengthening in the “math of the market.” We have begun allocating portions of our cash holdings into new ideas but are still defensively positioned in our strategies. (Read on for why that is.)

While our signal’s upgrade to green is encouraging, it is early. It will take a few more days of strong action to confirm it is the next leg up of the rally started in November. Keep in mind this new green signal could fail very quickly. Obviously, if the institutions begin to immediately sell (especially if there isn’t any significant volume boost to the upside within a few days) then it will prove to be a short-lived green signal (a fake-out). For now, the trend is still up and it should be your guarded friend.

It is wise to bear in mind that the excessively bullish sentiment readings of the past several weeks have not gone away. At some point in the not too distant future, the stock market will succumb to a profit taking correction as the institutions will simply stop buying and flip to being sellers. Most likely what may proceed it will be the indexes hitting new highs, but on weaker volume, and with expanding daily new lows. 

Another area of concern is the massive amount of margin debt being used to leverage purchases by overly confident investors. This aggressive strategy works until it doesn’t. The recent thirst for equities remains, but now at more reasonable prices not just any price. That itself is healthy.

What can investors do now? Stay disciplined and expectant. Do not become complacent; the market is a lot smarter and faster than most investors are. Keep an eye on the major indexes moving averages for eventual price violations.

Have a Triumphant day! ® 

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