It’s officially “stonk season” in the markets. The IPO market continues to baffle, and SPACs continue to pop-up like weeds in your front yard. Q4 2020 hedge fund letters, conferences and more The Robinhooders Are At It Again Plus if you’ve seen…
Plus if you’ve seen GameStop (GME), AMC Entertainment (AMC), and Blackberry (BB) lately, you know the Robinhooders are at it again.
These speculative gambles are ridiculously frothy right now as hedge funds and institutions continue to try and cover their shorts. The moves these stocks are making are more detached from reality than the guy in a buffalo headdress at the Capitol 3 weeks ago.
Complacency is the most significant near-term risk to stocks by far, and I have been warning about this for weeks. It also reminds me of the Q4 2018 pullback ( read my story here ).
It’s also earnings season (for those who care, like analysts), and it’s time for some big swings and volatility.
Well, not entirely. Monday (Jan. 25) saw a sudden mid-day plummet and subsequent recovery, and Tuesday (Jan. 26) traded slightly down. Wednesday (Jan. 27) looks set to open lower - we will see how that ends up.
Earnings have so far impressed, though, and there were some big moves from individual stocks.
General Electric, Johnson & Johnson, And Microsoft's Earnings
General Electric (GE) popped over 9% thanks to a healthy outlook for 2021 and better than expected industrial free cash flow.
Johnson & Johnson (JNJ) also saw a nice 3% gain after beating earnings. Investors are also eagerly anticipating results from its vaccine’s trial. Johnson & Johnson’s vaccine is one dose and does not require any crazy storage protocols like Pfizer (PFE) and Moderna’s (MRNA). Strong results and FDA approval could genuinely change the tide of the pandemic and vaccine rollout.
Earnings from Microsoft (MSFT) and Advanced Micro Devices (AMD) also came in after the closing bell and impressed as well. Microsoft posted record quarterly sales, and AMD exceeded $3 billion in revenue.
Does this mean we're all clear now and can party like it's 1999?
Not exactly. Plus, if you're a stock nerd like I am, you don't want to party like it's 1999. Because that means 2000 will come—the end of one of the biggest parties, investors have ever seen. I'm talking about the dot-com bust.
Fair warning: the S&P 500 is still at or near its most-expensive level in recent history on most measures, and the Russell 2000 has never traded this high above its 200-day moving average.
GameStop Popping; Short-Term Concerns
The more GameStop pops, the more of a circus I think this market is. GameStop a $15+ billion company? Really? A correction at some point in the short-term would not be shocking in the least.
John Studzinski , vice chairman of Pimco, believes that market valuations are sound and reflect expectations of this eventual reopening and economic recovery by the second half of the year.
I agree on some level about the second half of the year. Outside of complacency, though, I have other short-term concerns.
For one, trillions in imminent stimulus could be useful for stocks but bring back inflation by mid-year. The worst part about it? The Fed will likely let it run hot. With debt rising and consumer spending expected to increase as vaccines are rolled out to the masses, the Fed is undoubtedly more likely to let inflation rise than letting interest rates rise.
All of this tells me that the market remains a pay-per-view fight between good news and bad news.
We may trade sideways this quarter- that would not shock me in the least. But I think we are long overdue for a correction since we haven't seen one since last March.
Corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).
A correction could also be an excellent buying opportunity for what should be a great second half of the year.
Therefore, to sum it up:
While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is possible. I don't think that a decline above ~20%, leading to a bear market will happen.
In a report released last Tuesday (Jan. 19), Goldman Sachs shared the same sentiments.
My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth. Hopefully, you find my insights enlightening, and I welcome your thoughts and questions.
We have a critical week ahead with the Fed set to have its first monetary policy meeting of 2021 and more earnings announcements. I wish you the best of luck. We'll check back in with you at the end of the week.
Small-Caps Are Too Hot To Handle
Figure 1- iShares Russell 2000 ETF (IWM)
As tracked by the iShares Russell 2000 ETF (IWM) , small-cap stocks underperformed the larger indices on Tuesday (January 26). The RSI is no longer technically overbought, but I still think that the Russell has overheated in the short-term. Stocks don’t just go up in a straight line without experiencing a sharp pullback. That’s just the nature of the beast.
Barron’s also claims that the Russell 2000/S&P 500 ratio has entered a powerful 15-year resistance area .
Nobody knows what will happen during this critical week of earnings, but I called a decline after the IWM began the week over a 70 RSI. Indeed the IWM is having a down week to this point, but it’s not sharply down enough for me to switch my call. Not even close.
I love small-cap stocks in the long-term, especially as the world reopens. Small-caps are also the most likely to benefit from Biden’s aggressive stimulus plan.
But the index has overheated. Period.
Before January 4, the RSI for the IWM Russell 2000 ETF was at a scorching hot 74.54. I called a sell-off happening in the short-term due to this RSI, and it happened.
After the RSI hit another overbought level of approximately 77 two Wednesdays ago (January 13), the IWM declined by another 1.5%. I said that Russell stocks would imminently cool down because the RSI was too hot, and precisely that’s what happened.
Consider this too. In its entire history as an index, the Russell has never traded this high above its 200-day moving average.
Small-caps may have priced in vaccine-related gains by now, and some stimulus optimism may have been priced in too.
I hope small-caps decline before jumping back in for long-term buying opportunities. I love where these stocks could end up by the end of the year.
SELL and take profits if you can- but do not fully exit positions . If there is a deeper pullback, this is a STRONG BUY for the long-term recovery.
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Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care
All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits' employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
The manufacturing and consumer confidence weaknesses of the United States are deeply concerning, particularly considering that all those allegedly infallible Keynesian policies are being applied intensely.
Considering the insanity of deficit spending driven by entitlement programs, the decline in the headline University of Michigan consumer sentiment index in March—from 76.9 to 76.5—is even worse than expected. Let us remember that this index was at 101 in 2019 and has not recovered the brief bounce shown by the reopening effect in March 2021. Consumer confidence is still incredibly low, and a decline in the expectations index fully explains the most recent decline. Persistent inflation, high gas prices, and declining real wages may explain the poor expectations of the average citizen. Furthermore, this poor consumer confidence reading comes after poor control group retail sales last month.
No, this is not a strong economy. The consumer confidence index, labor participation, and unemployment-to-population ratios, as well as real wage growth, remain significantly below the pre-pandemic level, and this after $6.3 trillion in new public debt that will likely reach $8 trillion by the end of 2024.
The manufacturing weakness of the United States is also a problem because this should be a period of high growth, considering the opportunities generated all over the world. Industrial output bounced 0.8 percent in February, but the January figure was revised to a larger 1.1 percent slump. If we factor in the decline in the Empire State survey, to -20.9 in March, it looks like the manufacturing decline will persist.
The shape of the U.S. economy also reflects the impossibility of the soft-landing narrative. Inflation remains well above target, and bond yields are reflecting the reality of persistent inflation. Furthermore, money supply growth stopped declining months ago.
If the money supply rises and government spending continues to rise, the Federal Reserve will be unable to cut interest rates, and the impoverishment of citizens by a loss of purchasing power will continue.
This is the result of an insane fiscal policy that increases spending and taxes. Weak growth, manufacturing decline, and worsening consumer confidence.
Demand-side policies and Keynesian experiments are leaving a once-strong economy on the same path as the eurozone: stagflation. A warning sign should be the fact that the increase in public debt completely justifies the gross domestic product recovery.
This is the problem of extraordinary monetary and fiscal experiments. Governments embrace massive spending and debt monetization under the premise that they will implement control policies if the warning signs appear, but when they do, they never stop spending. Economists close to the government said that the administration would reconsider and adjust its budget if inflation rose, and alarm bells rang. Now we have heard all the alarm bells, and the administration continues as if nothing happened. The Inflation Reduction Act became the Inflation Perpetuation Act; the rise in government borrowing is now evident in the 10- and 30-year curve; and the private sector is in an obvious contraction.
Trusting governments to moderate spending after an expenditure binge is simply an extremely dangerous bet that always ends with worse conditions for citizens. Once they start, they cannot stop, and the inevitable end is higher taxes, weaker growth, lower real wages, and a decline in the purchasing power of the dollar. All the figures in the U.S. economy scream “buy gold” because the government will always prefer to destroy the currency than to moderate the budget deficit and government size in the economy.
Greenback Surges after BOJ Hikes and Ends YCC and RBA Delivers a Dovish Hold
Overview: The US dollar is surging today against
most of the G10 currencies, and although the intraday momentum is stretched
ahead of start of the North…
Overview: The US dollar is surging today against
most of the G10 currencies, and although the intraday momentum is stretched
ahead of start of the North American session, there may be little incentive to
resist before the end of the FOMC meeting tomorrow. The Bank of Japan's rate
hike and the end of Yield Curve Control were not seen as the start of the
tightening cycle. The two-year JGB yield slipped to a two-week low and settled
below its 20-day moving average for the first time since mid-January. The Reserve
Bank of Australia delivered a dovish hold by dropping the reference the future
tightening. The yen (~-0.95%) and Australian dollar (~-0.85%) are the weakest
of the G10 currencies. Emerging market currencies are lower, led by the
Philippine peso (~-0.65%). The offshore yuan is weaker for the sixth
consecutive session.
Japanese, Australian, and New
Zealand equities bucked the regional trend to advance today. Stoxx 600 in
Europe is slightly lower, and if sustained, it would be the fourth consecutive
losing session. That would be the long losing streak since last October. US
index futures are nursing small losses. Ten-year JGB and Australian bond yield
fell almost three basis points today. European benchmark yields are mostly
slightly softer, though the periphery is lagging the core today. The US 10-year
yield is little changed near 4.32%. The high for the year is near 4.35%. The US
two-year yield did set a new high for the year yesterday near 4.75%. It is near
4.72% now. The greenback's strength is capping gold, which is trading inside
yesterday's range and straddling the $2150 area. May WTI soared to $82.50
yesterday as its recent rally was extended amid Ukrainian strikes on Russian
refiners. Diesel futures rose for the fourth consecutive session yesterday and
gasoline futures extend its rally for a sixth session. May WTI is consolidating
in a narrow range around $82.
Asia Pacific
The Japanese press reports
turned out to be fairly accurate: the Bank of Japan hiked its overnight target
rate to 0%-0.1%. It
scrapped the Yield Curve Control and confirmed it would stop buying ETFs. The
one surprise was that the central bank indicated it would continue to purchase
long-term bonds as needed. Governor Ueda, on one hand, said that the sustained
2% inflation target is not in hand, which sounded dovish. He also recognized
that if the positive trends for wages and prices lift inflation expectations,
and higher prices results, rate hikes may be necessary. The 10-year yield
softened by almost three basis points (to ~0.73%). The Nikkei rallied 1%, and
the yen was sold. The US dollar reached about JPY150.50.
As widely expected, the
Reserve Bank of Australia left its cash target rate at 4.35%, where it has been
since it was lifted by 25 bp last November. Economic activity has slowed, and price pressures are
moderating, but the RBA seems to be in no hurry to unwind the November hike.
Still, it dropped the reference to possible future hikes. The dovish hold sent
the Australian dollar to a nine-day low near $0.6510. The futures market is not
100% confident the RBA will do so before September. However, the odds of an
August cut have been marked up to around 97% from about 78% yesterday.
The dollar is rising against
the Japanese yen for the sixth consecutive session. It matches the longest advancing streak
since last August and lifted the greenback to two-week highs near JPY150.70.
The greenback approached JPY151 in mid-February through early March. The high
from 2022 and 2023 was closer to JPY152. The intraday momentum indicators are
stretched ahead of the North American open, but there may be little incentive
to resist before tomorrow's FOMC meeting. What is being seen as a dovish
hold by the RBA has sent the Australian dollar to nearly $0.6500. The
trendline off the mid-February and early March lows comes in today a little
below there. The low earlier this month was set slightly below $0.6480. The
intraday momentum indicators are stretched. Initial resistance now is seen int
he $0.6520-25 area. The greenback's gains, especially against the yen, have
weighed on the Chinese yuan. The dollar is challenged the CNY7.20 cap that
has not been violated this year. The PBOC set the dollar's reference rate at
CNY7.0985 (CNY7.0943 yesterday). The Bloomberg average was CNY7.2020 (CNY7.1993
yesterday). The dollar is rising against the offshore yuan for the sixth
consecutive session. It has reached CNH7.2130, its highest level in two weeks. The
high for the year was set on February 14 near CNH7.2335.
Europe
The focus will not shift to
Europe until Thursday. Three
central banks meet then, Norway's Norges Bank, the Swiss National Bank, and the
Bank of England. It is true the UK sees February CPI tomorrow. The
year-over-year rate is expected to fall toward 3.5% from 4.0% and the core rate
is seen falling to 4.6% from 5.1%. The UK's three-month annualized rate may
near 2% and the six-month annualized increase maybe around 1.6%. Still, the
market does not expect the BOE or the other west European central banks to
change policy. Still, we suspect the risk is for a SNB move to get ahead of the
ECB. The macro backdrop is conducive for a move with softer growth and low
inflation.
The March ZEW survey in
Germany showed a little improvement. The
assessment of the current situation remains poor. It edged up to -80.5 from -81.7. At its worst, during the pandemic, it fell to
-93.5 in May 2020. It had recovered and peaked at 21.6 in October 2021, and had
already begun weakening again before Russia's invasion of Ukraine. It was at
-10.2 in January 2022. The expectations component is a different story. It rose for the eighth consecutive month to 31.7, which is the highest reading since February 2022. The high last year was set in February at 28.1.
The euro met sellers in the
US morning yesterday as it pushed above $1.09. The selling knocked it down to new
session lows near $1.0865 It has been sold to $1.0835 today, around where the
(50%) retracement of the rally from the February 14 lows and the 200-day moving
average are found. A break of this area targets $1.08. Note that in the futures
market, the non-commercial (speculative) net long euro position has risen by
50% since the mid-February low through March 12 that is covered by the most
recent CFTC report. Meanwhile, the non-commercial net long sterling position
has risen every week this year but one, and at nearly 70.5k contracts (GBP62.5k
per contract or almost $5.6 bln position), it is the largest net long position
since 2007. Sterling extended its losses yesterday to nearly $1.2715, and has been sold to almost $1.2665 today, the lowest level since March 4. The
$1.2670 area corresponds to the (61.8%) retracement of the recovery off the
year's low set on February 14 near $1.2535. The intraday momentum indicators
are stretched, but there is little chart support ahead of $1.2600.
America
The focus, of course, is on
tomorrow's Fed meeting. No
one expects the Fed to do anything. It is more about what the Fed says, and
here, the dot plot is important. Keen interest is in the number of rates cuts
the median dot signals. Three cuts were signaled in December. While CPI and PPI
were slightly above market expectations, we do not think that they deviated
much from what the Fed anticipated. To us, a key consideration is Fed Chair
Powell's acknowledgement that officials did not need to see better data to
boost their confidence that inflation was headed back to target. It just needed
to see good data. Other macro forecasts may be tweaked. The 4.1% unemployment
rate anticipated for this year looks low. It was at 3.9% in February. The
median dot was for the headline and core PCE deflator to be at 2.4% at the end
of the year. They stood at 2.4% and 2.8%, respectively in January and are
expected to be unchanged when the February series is reported next week. The
median dot in December was for the economy to grow 1.4% this year. The median
forecast in Bloomberg's monthly survey was for 2.1% growth, which is the same
as the IMF's projection. On tap today, February housing starts and permits,
which are expected to tick up after weather-related weakness in January.
Canada reports February CPI
today. Given the base
effect, the 0.6% median forecast in Bloomberg's survey translates into a 3.1%
year-over-year rate. It was at 2.9% in January. The low print in 2023 was in
June at 2.8%. The underlying core measures are expected to be flat. The swaps
market has about a 50% chance of a cut in June. It nearly fully discounted on
March 5, the day before the Bank of Canada met. The summary of its
deliberations will be published tomorrow. The market has about 60 bp of cuts
discounted for this year, which is two quarter-point moves and around a 40%
chance of a third. A 100 bp of cuts was fully discounted as recently as
February 20.
The US dollar hovered around
little changed levels against the Canadian dollar yesterday. Neither rising US equities (risk-on) nor
an extension of oil's rally did much for the Canadian dollar. Resistance near
CAD1.3550 has been overcome today and it the greenback looks poised to re-test
the CAD1.36 area that capped the greenback in late February and earlier this
month. A band of resistance extends toward CAD1.3620-25. Yesterday,
the US dollar rose for the third consecutive session against the Mexican
peso, which matches the longest advance in six months. The nearly 0.9%
rally was the most since mid-January. Mexico was on holiday yesterday and the
thin markets may have exacerbated the move. The US dollar rose to a six-day
high of almost MXN16.87. This effectively recouped nearly half of the
greenback's losses this month. Today, the dollar is approaching the next
retracement (61.8%) and the 20-day moving average are near MXN16.93. Brazil was
not closed and fell for the third consecutive session. In fact, the dollar
poked above BRL5.03, its highest level since last November 1. Nearly all
emerging market currencies fell yesterday. The South African rand (~-0.95%) was
the weakest followed by the Mexican peso (~0.75%). Emerging market currencies
are no match for the dollar's surge today. The MSCI Emerging Market Currency
Index is off for the fifth consecutive session.
In a new book, experts in a variety of fields explore nocebo effects – how negative expectations concerning health can make a person sick. It is the first time a book has been written on this subject.
“I think it’s the idea that words really matter. It’s fascinating that how we communicate can affect the outcome. Communication in health care is perhaps more important than the patient recognises,” says Charlotte Blease, who is a researcher at the Department of Women’s and Children’s Health at Uppsala University.
Along with colleagues at Brown University in the United States and the University of Zurich in Switzerland she has written the book “The Nocebo Effect: When Words Make You Sick”. Nocebo is sometimes called the placebo’s evil twin. A placebo effect occurs when a patient thinks they feel better because of receiving medicine and part of that perception is due not to the drug but to positive expectations. The concept of the nocebo effect means that harmful things can happen because a person expects it – unconsciously or consciously. This is the first time the phenomenon has been addressed in a scholarly book. Researchers in medicine, history, culture, psychology and philosophy have examined it, each in their own particular area.
Credit: Catherine Blease
In a new book, experts in a variety of fields explore nocebo effects – how negative expectations concerning health can make a person sick. It is the first time a book has been written on this subject.
“I think it’s the idea that words really matter. It’s fascinating that how we communicate can affect the outcome. Communication in health care is perhaps more important than the patient recognises,” says Charlotte Blease, who is a researcher at the Department of Women’s and Children’s Health at Uppsala University.
Along with colleagues at Brown University in the United States and the University of Zurich in Switzerland she has written the book “The Nocebo Effect: When Words Make You Sick”. Nocebo is sometimes called the placebo’s evil twin. A placebo effect occurs when a patient thinks they feel better because of receiving medicine and part of that perception is due not to the drug but to positive expectations. The concept of the nocebo effect means that harmful things can happen because a person expects it – unconsciously or consciously. This is the first time the phenomenon has been addressed in a scholarly book. Researchers in medicine, history, culture, psychology and philosophy have examined it, each in their own particular area.
“It’s a very new field, an emerging discipline. Even if the nocebo effect is documented far back in history, it perhaps became especially obvious during the coronavirus pandemic,” Blease says.
A previous study of patients during the pandemic (see below) shows that as many as three quarters of the reported side-effects of the coronavirus vaccine may be due to the nocebo effect. The study involved more than 45,000 participants, approximately half of whom were injected with a saline solution instead of the vaccine but despite this still experienced many side-effects such as nausea and headache. In the book, the authors highlight that one issue that disappeared in the discussion of side-effects during the coronavirus pandemic was that many of these were actually due to the nocebo effect.
“Whether this is due to expectations – the nocebo effect – remains to be understood. However, it is curious that so many participants reported side-effects after receiving no vaccine. Regardless, some people may have been put off by what they heard about side-effects,” Blease comments.
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