Will the market manage to break out of the sideways price action channel that it has been trading within throughout the last few weeks?

Our Global Macro Strategy

The time has come again for us at Dow Experts to share with you our latest ETF correlation analysis and overall market observation, in order to help you to prepare for what’s coming in the month of June. However, before we analyze the current situation in the market, as usual, we would like to look back at some of the most important market developments throughout the last 12 months in order to put some context around why we are looking at the market the way we do.

As discussed in some of our previous analyses the market movements in the past year altogether have been nothing short of spectacular all across the board. After seeing substantial continued gains on all major US indices for 6 months in a row in the March-August period of 2020, in what was referred to as the “hope phase” of the COVID-19 recession the US equity market found itself sitting at all-time highs in the beginning of the Fall back in 2020. What followed then were some volatile price declines in the beginning of September, which were more than expected at the time as we all know that nothing can go up or down in a straight line forever. The generally positive summer narrative among traders and investors had started to fade and they shifted their focus to the series of actual political, economic and public health problems that the US and the world for that matter were facing at that time.

The continuous and progressive surge of new COVID-19 infections globally throughout September, October and November back in 2020 saw many countries including the likes of UK, Germany, Italy, Spain, USA etc. issuing orders for 2nd lock-downs, which in turn significantly increased the uncertainty, volatility and the risks in the market. Investors decided to take some of their chips off the table in order to lock in some of the previously generated gains and this led to couple broad-based market declines in the period September-November. The failure of Republicans and Democrats to reach a consensus on the 2nd round of stimulus also proved to be a net negative for investors’ confidence, as everybody knew that without the new stimulus bill the US economy was basically going to fall apart in these unprecedented times. Another key development that didn’t help the stock market was the former President’s, initial reaction after the Presidential elections in the US and his unwillingness to accept his defeat in the 2020 US Presidential Elections by officially congratulating the President-elect Joe Biden. All of the heated post-US election discussions, allegations and lawsuits on behalf of Donald Trump continued to build tension not only around the country, but internationally as well. Macro investors and leading economists around the world qualified the political developments in the US as a serious increase of the systemic risks for all investors out there, as everybody recalled the controversial outcome of the previous Presidential Elections campaign back in 2016 and the huge international scandal that followed.

Things really got out of hand in the beginning of the new year as on Wednesday, January 6th 2021, a large group of Trump supporters attacked and basically stormed the US Capitol building. Hundreds of rioters crashed through the barricades, climbed through windows and walked through doors, wandering around the hallways of the Capitol feeling victorious on their march against the “tyrannical and heavily oppressing law-making system” that they believe controls their lives and limits their freedoms. Among the rioters were popular white nationalists and noted conspiracy theorists who have devoted their lives on spreading dark visions of pedophile Satanists running the country. Others were more anonymous, people who had journeyed from Indiana and South Carolina to heed President Trump’s call to show their support. This act of terror and aggression was publicly condemned by public figures, politicians etc. across various different platforms and channels.

On the international scene, the UK and the EU managed to reach the so important for everybody trade deal in the very last “minutes” of 2020, which ended up protecting over $1 trillion in annual trade from tariffs, quotas and taxes between the UK and the EU.

In the absence of many positive catalysts in the beginning of 2021 and a 2nd lock-down in place throughout most of Europe one could ask why was the market continuously moving higher in such a relentless manner. It’s a two-part answer having the loose monetary policy that the Federal Reserve has been implementing on one side and the general optimism and positivism among retail traders regarding the future of the stock-market as a product of this low-interest rate environment. It’s a fact that retail traders tend to spend more time looking at the reasons why stocks should continue to go higher, rather than actually realizing what is the current economic, political and Geo-political situation globally.

However, the relentless monetary and fiscal support by both the Fed and the Government has created this strong belief that “nothing can go wrong, when you have the support of the Fed”. Well, unfortunately it is not that simple as that because while you can print as much money as you want, you cannot print more GDP growth, consumer spending, job creation, wage growth etc. Additionally, while the US trade deficit has continued to hit record highs month after month, both individuals and businesses are also experiencing the highest levels of indebtedness in history. All of that debt will have to be repaid at one point in the future, which in turn automatically lowers the future expected returns of both companies and individuals.

All you need to do in order to see how decoupled the equity markets are from the real economic and political environment out there, is to check the price action on the SPY chart at the time when the rioters stormed the capitol. You would expect that such a negative and unexpected development would cause a massive selloff in the equity markets, but instead the market kept on moving higher not only on Wednesday but throughout the rest of the week as well. A lot of people believe that this is a sign of strength for the markets, but in reality it actually shows how dangerous and unpredictable the market has become!

The retail trading phenomenon!

It is also important to note that due to the continuous government support to individuals through the $1200 and $1400 checks, the low to no commissions, the volatile price swings and people’s longstanding desire to make money quickly now retail traders account roughly for 25% of the trading volumes in the stock market. Just as a reference, throughout the whole 2019 the retail traders in the US accounted for less than 10% of the overall trading in the stock market. This is as equally good for the markets and the economy, as it is a worrying signal for the reliability of the movements that we observe every day. While some retail traders are generating consistent returns from the market, a large percentage of the retail trading force out there is relying way too much on things like speculation, hype, fear of missing out etc., which in turn leads to wild swings in their performance. Furthermore, now when they represent such a large percentage of the trading done in the market that could lead to wild price swings on some of the assets out there as well.

We have been talking for months now about the fact that the retail trading force in the market has seen a remarkable increase in numbers, volumes and participants throughout the last 12 months and we have been warning about the potential long-term implications that this could have on the stability in the financial markets as well as on the overall respective volatility that we are seeing each and every day. Up until now, the retail trader as a market participant has never been able to affect the price movements in the market due to the insignificantly low amounts, sizes and volumes that he/she usually trades. However, this is no longer the case as the January retail trading frenzy in the stock market and the ridiculous volumes and price increases on stocks like Gamestop, AMC, Bed Bad & Beyond and Blackberry showed exactly how powerful retail traders could be if they act together in unison with one another.

The whole thing started with the creation of a thread on Reddit, called WallStreetBets (WSB), where retail traders got together and decided to start buying some of the most heavily shorted stocks out there in order to push the prices of these stocks higher and force the large hedge fund managers to start covering their SELL positions and thus effectively creating what is known in the market as a short-squeeze. Short-squeezes are nothing new in the market as we have plenty of examples from the past where traders were caught on the wrong side of a short position. What was new this time around though was that the short-squeeze was initiated by over 8.5 million retail traders communicating openly in the WSB group on Reddit, in a coordinated and organized effort in the market. While 1 retail trader is not powerful enough to move the market as a result of the low liquidity that he has access to, 8.5 million small accounts acting as one can easily become a formidable force in the market.

The retail push was so powerful that it caused AMC’s stock to move up from $2 up to over $20, thus registering the staggering 900% increase in less than 2 weeks. However, AMC’s case was actually not the only case of crazy stock price fluctuations as stocks like Blackberry Limited and Gamestop went up by 346% and 2758% respectively.

As you can understand, this bullish momentum could not have been kept on for very long as such massive short-term rallies are usually very vulnerable and fragile, which tends to lead to volatile reversals and strong and quick declines. Furthermore, let’s not forget that retail traders (non-professionals) are characterized as traders that usually have poor risk and money management skills and that are generally unable to control their emotions in the market, which is technically a recipe for disaster when working in such a volatile environment. Thus, we saw heavy retail buying interest across a wide range of prices for AMC and all of the above-mentioned highly speculative stocks that were part of the massive short-squeeze that occurred in the market. The powerful fear of missing out (FOMO) phenomenon led uneducated traders and investors to pile on the long side of the trade disregarding important investment rules and concepts like capital allocation strategies, diversification, risk management etc. As a result, we saw strong bearish reversals across all of these stocks at the end of January and in the beginning of February. In the case of AMC Entertainment for example, the stock lost over 65% of its market cap in just 4 trading sessions, dropping from $20 all the way down to $7. The other leading horseman of the retail trading frenzy, Gamestop, dropped with over 85% from its $483 all-time high.

While it seemingly looked that prices and volumes had somewhat stabilized in Q1, we explicitly stated in our February, March and April reports that the “reddit trading phenomenon” was far from over and that we definitely expected to see another pick up in the retail driven volatility in the market. We also want to point out that we warned all of our followers to exercise extreme levels of caution in the coming months in order to avoid getting caught on the wrong side of these highly speculative trades. Any major rally for any of these stocks will most likely be heavily sold into. Most of the above-mentioned stocks have either completely broken, outdated or simply inefficient business models for the current environment and it will be very difficult for them to survive let alone to fully recover.

The latest $1.9 Trillion stimulus package is in the process of deploying another $1400 checks to US citizens in order to help them get through these difficult times. We expect this to lead to another massive wave of retail liquidity into some of the most famous stocks out there, which will inevitably push the market to new all-time highs. However, this is an unsustainable and dangerous pattern of trading and behavior in general.

This is one of the main reasons why we want our followers to exercise extreme caution when deciding what to buy and sell in the market at the moment. Don’t let emotions and the crowd-like mentality to influence your investment behavior. Always trust the numbers, the ratios and the technical and fundamental signals that you get from the market.

Our performance in the last 12 months

Today’s analysis will focus on the strong positive 10-year correlation between the SPY (SPDR S&P 500 ETF Trust) and the XLY (Consumer Discretionary Select Sector SPDR Fund), which currently stands at 94%. As you know, the Dow Experts have developed a modern-market approach, based on the Dow Theory, created by Charles Dow more than 100 years ago. Yet, while the basic Dow Theory was based purely on the correlation between the Dow Jones Industrial Average and the Dow Jones Transportation Average, our modern-market approach is based on more than 30 correlations, including all of the key sector ETFs in the market, such as Technology, Services, Consumer discretionary and non-discretionary, Financials, Energy and others. Furthermore, our modern approach focuses on the usage of both fundamental and technical analysis because we believe that the combination of these two ways of analyzing the market into one rational analysis approach is vital for one’s success and profitability in the market nowadays. The correlation-confirmation model we have developed allows us to identify market reversals, as well as trend continuation patterns. Following the Dow Theory 2.0 we are able to issue specific high-probability trading setups, which in turn could help our followers to benefit from both bullish and bearish markets.

As usual, you can find a summary of the returns that our Stock-picks have generated throughout the last few weeks and months:

Latest:

Macy’s Inc. (M) – recommended @ $13/share in February and the stock went up to $21 or 61.5% in 3 weeks!

GameStop Corp. (GME) – recommended @ $50/share in February and the stock went up to $347 or 594% in 3 weeks!

Morgan Stanley (MS) – recommended @ $70-72/share in February and the stock went up to $94 or 30% in 12 weeks.

Kraft Heinz (KHC) – recommended @ $35-37/share in March and the stock went up to $44 or 19% in 8 weeks

Visa Inc. (V) – recommended @ $205/share in March and the stock went up to $232 or 13% in 6 weeks.

AMC Entertainment (AMC) – we analyzed the stock back in February as a result of the huge interest and inquiries from out followers. At the time, the stock had already collapsed from $20 per share down to less than $8 losing over 65% of its market capitalization in just 4 trading sessions. As that was not normal market activity, we warned our investors to be careful and to not over-commit at those levels, as the stock might very well decline further towards the $4 level. We’re always looking at first protecting your capital and then finding opportunities to grow it. However, our analysis showed that a potential 2nd wave of the retail trading reddit frenzy could push the stock at least 40-60% higher in the coming months. Following our analysis, the stock has ended up moving from the $7-9 range up to over $72 per share. This was once again not a normal market activity and even if our followers did not end up closing the stock at the highest level, they could have easily generated at a minimum of 100% return in just couple of months if they had followed our analysis.

Blackberry Limited (BB) – recommended the stock back in February and advised our clients to wait for the stock to drop to the $7-9 support zone before opening their LONG positions. The stock touched the $8 level on 3 occasions through the March-May period, which gave our followers 3 great entry opportunities. The most recent upward push of the price took the stock from $8 back in May up to $20 in early June. This represents a phenomenal 150% return on our recommendation in 3 months.

Brookfield Renewable Corporation (BEPC) – recommended back in February for our clients to wait for the price to come down from $52 to $43 per share, before committing fully to the stock and opening their long positions. The anticipated 17% drop occurred in less than 4 weeks, thus we were able not only to protect our followers, but to also allow them to buy at the lowest possible price.

Lowe’s Corporation (LOW) – recommended back in February for our clients to wait for the price to come down from $164 to $150 per share, before committing fully to the stock and opening their long positions. The anticipated 10% drop occurred in less than 4 weeks, thus we were able not only to protect our followers, but to also allow them to buy at the lowest possible price.

Chipotle Mexican Grill (CMG) – recommended back in February for our clients to not rush in and wait for the price to come down from $1527 to $1250 per share, before committing fully to the stock and opening their long positions. The anticipated 18% decline materialized in less than 4 weeks, thus we were able not only to protect our followers, but to also allow them to buy at the lowest possible price.

Visa Inc. (V) – bought @200, it went up to $227 in 4 weeks = 13.5% return

The Walt Disney Company (DIS) – bought @127, it went up to $183 in 8 weeks = 44% return

Altria Group Inc. (MO) – bought @36, it went up to $43.50 in 4 weeks = 21% return

Cisco Systems Inc. (CSCO) – bought @35.50, it went up to $45 in 4 weeks = 26.7% return

Kraft Heinz Co. (KHC) – bought @31, it went up to $35 in 4 weeks = 13% return

PayPal Inc. (PYPL) – bought @175, it went up to $222 in 4 weeks = 26.9% return

Advanced Micro Devices Inc. (AMD) – bought @75, it went up to $98 in 4 weeks = 31% return

Caterpillar Inc. (CAT) – bought @160, it went up to $229 in 3 months = 43.1% return

Broadcom (AVGO) – bought @360, it went up to $427 in 4 weeks = 18.3% return

Deere & Company (DE) – bought @229, it went up to $369 in 3 months = 61% return

Alibaba Inc. (BABA) – bought @210, it went up to $320 in 16 weeks = 52.4% return

Nike Inc. (NKE) – bought @110, it went up to $140 in 8 weeks = 27.3% return

American Express (AXP) – bought @98, it went up to $125 in 4 weeks = 27.6% return

Delta Airlines (DAL) – bought @31, it went up to $43 in 4 weeks = 38.7% return

Take Two Interactive Software (TTWO) – bought @ 156, it went up to $203.90 in 4 weeks = 30.7% return.

Keysight Technologies Inc. (KEYS) – bought @103, it went up to $154 in 3 months = 49.5% return

Electronic Arts Inc. (EA) – bought @124.5, it went up to $140 in 4 weeks = 12.4% return

Older:

FB bought @ $247 – 7% return for 3 weeks
NFLX bought @ $475 – 13.5% return for 3 weeks

ATVI bought @ $77 – 7% return for 3 weeks

GOOGL bought @ $1,470 – 7% return for 3 weeks

CRM bought @ $240 – 12% return for 3 weeks

NKE bought @ $110 – 19% return for 3 weeks

ADBE bought @ $468 – 10% return for 3 weeks

SBUX bought @ $82.50 – 10.30% return for 3 weeks

PEP bought @ $132 – 8.3% return for 3 weeks

BAC bought @ $23 – 11.7% return for 3 weeks

AAPL bought @ $110 – 10% return for 3 weeks

DAL bought @ $28.50 – 15% return for 3 weeks

Throughout the last year our analyses have helped hundreds of our followers to be better equipped for tackling the unprecedented market environment and volatility that we have experienced recently. Our innovative approach delivers highly qualitative market analyses by looking across 30+ correlations, multiple different sectors, industries and asset classes which enables us to have a multi-layered confirmation on the next direction for the market.

This is the reason why we were able to spot the broad-based market weakness at the end of February, 2020 and recommended for our followers to be cautiously bearish and further gave them strategies to protect their capital from the upcoming downturn. Subsequently, in late March 2020 we were also able to identify that the market had already extended far too much to the downside and that a strong rebound was to be expected in April. In both of these scenarios, the new and innovative Dow Theory 2.0 not only protected our followers, but also allowed them to generate outstanding returns as well.

Our stock-picks end up reaching our target profit levels in more than 90% of the cases generating 25% return on average with a 4-8 weeks holding period. The stock picks for the first half of 2021 have so far generated over 30% return on average per recommendation.

If you take a second and think about the fact that having a $20-40 subscription with DowExperts could have generated you a 10-25% return on your investment (ROI) on multiple occasions throughout the last few months, you would understand that this is an unprecedented opportunity for you as an investor to benefit from our professional and highly complex market analyses at these substantially discounted starting prices!

What’s ahead?

Now let’s look ahead and see what the Dow Theory 2.0 has in store for us for the month of June and how we could further optimize our investment portfolios moving forward in order to reduce our risk-exposure and maximize our profitability in these uncertain times. The proper re-balancing and sector rotation is exceptionally important in such volatile market conditions, as you need to always make sure that your capital is properly allocated, if you want to be well diversified.

Ray Dalio, the CEO and founder of Bridgewater Associates, or in other words the largest hedge fund in the world says that diversification as a concept is probably one of the most valuable and important things that you need to pay attention to as an investor. The main reason for that is that if you really know how to minimize your overall risk exposure and allocate your capital with the proper tools and percentages in the right markets, then you could put yourself in a situation of almost guaranteed success.

While Ray’s quote on diversification is indeed powerful, we believe that there is one other investor whose perspective on how the markets function could really do help us to put the current irrational market behavior into context, and his name is Warren Buffet. Widely known as the most successful investor of all time, Buffet is famous for his long-term belief in the US equity markets that no matter what happens stocks will go higher in the long run. However, this has been misinterpreted as a statement by retail traders and beginner investors as if it means that it is always a good idea to invest in stocks. Well, for that reason one needs to look a little bit deeper and find out what is the true meaning of a certain statement before he decides to follow it, as Warren Buffet also says this “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” So, what does that mean in actual real-life terms and how does it apply to what we are seeing at the moment. Well, it basically means to not follow the crowd blindly letting emotions like hype, excitement, greed or fear control your investment behavior. In most cases people tend to overreact to both good and bad news, which leads to substantially overextended movements in the market that could be explored and taken advantage of only by the intelligent investor who has his eye on the big picture.

A very useful group of market indicators that we like to use in evaluating the stability of the markets are the Market Breadth Indicators. Market breadth refers to a set of technical indicators that evaluate the price advancement and decline of a given stock index. Market breadth represents the total number of stocks that are increasing in prices as opposed to the number of stocks that are undergoing a decline in their prices. The stocks belong to a particular index on a stock exchange. Earlier in the year the market breadth analysis by Renaissance Macro Research showed a major breakout on the Russell 2000 index, which practically meant that small and mid-cap companies were actually advancing the most out there.

“The small-cap gains have helped push RenMac’s NYSE breadth indicator into new high territory, he said, while the firm’s IPO index has made a new relative strength high. Breadth is a measure of how many stocks are participating in a move in an index or on an exchange. DeGraaf also pushed back against arguments that concentrated outperformance by small-caps is a danger. Such concentration, in fact, is a regular feature of rallies, he said, arguing that increased breadth courtesy of the small-cap rally is a reassurance. Investors should instead worry when breadth is weak and just a few names are leading equities higher as the rest of the index loses money.”

The Russell 2000 stands nearly 18% higher year to date and has rallied more than 160% off its March lows. Even though that throughout the last few weeks we have seen a general normalization of the movement in the US indices, the Russell 2000 is still among the best performers YTD, as the S&P 500 and NASDAQ have appreciated only 12.34% and 7.19% so far this year. The most recent strength and gains have further put the index into a position to stage a big breakout above its all-time highs, unlike the S&P 500 for example, which has been struggling to break above the $4,230 major resistance line.

While we observed a significant under-performance of the Technology sector earlier in the period February-March the not-so-hot and fancy Industrial sector and its XLI ETF have been on a tear recently stealing the spotlight. We included the XLI into few of our monthly analyses, since the beginning of the year as we believe that the recent outperformance of the Industrial sector is part of the cyclical rotation out of growth stocks and into some of the heavily beaten down industrial value stocks. Additionally, the large infrastructure bill that President Biden will find a way to pass through Congress and Senate will be a phenomenal tailwind for all major industrial and manufacturing companies out there. Furthermore, with the full reopening of the economy and all of the pent up demand for absolutely everything out of the house related, we believe that the XLI (Industrial Select Sector SPDR Fund) and XLE (Energy Select Sector SPDR Fund) sector stands to gain the most. Thus, we want our followers to be aware of this important cyclical shift so that they could re-balance their portfolios accordingly. However, always remember, that the fact that a certain stock, industry or a sector has experienced strong gains and momentum, is not a definitive characteristic of successful business operations, and long-term financial success for all of the underlying companies.

The two ETFs that we will be analyzing closely today are the XLI (Industrial Select Sector SPDR Fund) and the XLE (Energy Select Sector SPDR Fund), as this would give us a great indication as to what is the current underlying stability and strength in the broader market. The two indices share a strong 10-year positive correlation of 75%, which will allow us to compare their respective charts and find out what the market has planned for us in May.

We will first analyze the broader economic and fundamental developments in the last month in order to evaluate what is the most likely scenario for the market for the month of June. The market environment has continued to change on a daily basis in the last few weeks with hundreds of political, economic, Geo-political, public health updates being released throughout the week. The hottest topics that have affected the market the most have been monetary and fiscal stimulus measures, medical innovations and improvements (vaccines), general economic data readings, inflation talks, president Biden and his struggles with passing on all of the stimulus bills that he wants, UK’s economic direction post Brexit and last but not least the new strains of COVID-19 that seem to be spreading 30-50% easier than the original virus. Analyzing all of these details closely will have an important role in determining our overall bias for the weeks ahead. Later, we will investigate the XLI and XLE sector ETFs independently and we will see how they stack up against one another in terms of correlations, confirmations and signals. Last but not least we will recommend 2 stocks in each of the two sectors for our followers to consider taking advantage of in the coming weeks!

Economic Outlook

We at DowExperts have continued to urge all of our followers to be cautious when placing their capital in the market ever since the SPY initially topped at around $358 back in the beginning of September, 2020. Our main reasons for doing so at the time were the worsening economic reports, the increase in the daily numbers of new COVID-19 infections, the uncertainty surrounding the US Presidential Elections, and the one around Brexit. Furthermore, the market reached very pricey valuations on an earnings basis earlier in the Fall, and this was also making us less interested in committing large amounts of capital to work. We preferred to wait for a better entry point on our favorite stocks instead of buying at the all-time highs, as this would have significantly hurt our risk-reward ratio. The Shiller 10-year P/E ratio of the S&P 500 was sitting at around 25 in January 2020 whereas it was at almost 34 at some points in September, October and November last year. The market continued to climb and to become even more expensive reaching a Shiller 10-year P/E ratio of 37.53. From a valuation perspective this puts the stock-market valuation in the Top 5% of the most expensive markets since 1871. The only time in history when the S&P 500 had a higher Shiller P/E ratio was right before the “Dot-com Bubble” burst, as the P/E then was almost 45! Furthermore, it is important to note that the Shiller 10-year P/E ratio has been a very accurate financial metric for predicting the future price movements of the S&P 500 as it shares a 99.7% positive correlation with the composite. It is very important for intelligent investors to always keep track of how expensive the market actually is in relation to historical averages and recognize what are the drivers for the market to be cheaper or more expensive now than before. However, this is easier said than done and usually only professionals are able to look at the market and apply an objective evaluation of the situation, while most of the retail traders and beginner investors prefer to focus on things like hype, emotion, momentum, greed, fear rather than focusing on actual economic and financial data.

The market did end up dropping with 10% in September last year, thus thanks to our analysis all of our followers were able to protect their and position their portfolios accordingly.

So, isn’t it crazy to think that during the full-blown global economic shutdown created by COVID-19 while tens of millions of people have lost their jobs and the unemployment rate in the US initially climbed to levels not seen since the Great Depression (1929), the US equity markets have not only rallied in a completely astonishing way with more than 80% off their lows, but are also now much more expensive than they were back in January, 2020. Just to remind everyone that the US economy was in a tremendous shape before COVID-19 as we were seeing consistent 200K+ jobs created every single month, high productivity levels, GDP growth and the lowest unemployment levels in history. You don’t have to be a financial guru or an economic expert to identify that this doesn’t sound right and the logical question then would be, so where does this positivism in the stock market come from. The answer to this question is a combination between an aggressive monetary and fiscal stimulus by the Federal Reserve and the government and people’s greed and desire to get rich quick.

The Fed – The never ending printing “game” and how to protect your capital from a massive loss of purchasing power

One year ago, in times of an unprecedented broad economic shutdown caused by the COVID-19 pandemic, central banks around the world realized that the risks of a global economic depression were not only real but that they were elevating by the day back in the March-April 2020 period, as every day the world stayed shut cost billions of dollars of actual realized losses for virtually every sector out there. Thus, the Federal Reserve, which is the largest and most influential central bank in the world decided to adopt an actively supportive “by all means necessary” approach basically announcing their readiness to provide an unlimited financial stimulus for the US economy in order to avoid another depression.

“We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” says Jerome H. Powell, Chair of the Federal Reserve Board of Governors.

In simple terms, that means that they are willing to continue to increase the M2 monetary supply, by printing more dollars for as long as it is necessary. Now, while this is definitely helping the economy in the short term and is seemingly keeping everybody above water, many people fail to understand and grasp the significant threat that this monetary policy imposes on the global financial system in the long run. You would ask, why is it bad if the government is giving me “free money”, and how is that hurting me? Well, the answer to that question is a little bit more complex and it requires deeper understanding of the global economic forces in play. By consistently increasing the monetary supply the central bank is effectively reducing the purchasing power of every dollar currently in existence. Ever since the US abandoned the Gold Standard back in 1971, the value of each US Dollar has been determined by only 2 things – what can you buy with it and how much is there in circulation – as there is nothing physical actually backing it. So, think about it for a second.. if you have $1 in your pocket and there is a total of $100 in circulation that means that your dollar represents 1% of the total market cap of the US Dollar, which gives it tremendous value and relative purchasing power. Now, if the central bank decides to print another $100 and the total circulation goes up to $200, that means that effectively your $1 actually lost 50% of its purchasing power without you having any say in that.

Well, that is not fair, is it? The bigger problem is that this has been done on a global scale for years now and you, the average person have absolutely no idea, that you are actually losing money while you sleep, eat, party, work… literally every single second. Up until the beginning of 2020, those who understood what was going on were willing to look the other way and accept the 5% average annual increase of the M2 monetary supply in the US as a necessary evil and were able to partially neutralize the 5% annual loss by buying a 10 Year Treasury bond yielding around 2% per year, thus dropping down the percentage loss to roughly 3%. With the proper investment strategy and capital management these 3% are easily recoverable. However, 2020 drastically changed the playing field as the M2 monetary supply in the US increased with 24% last year alone, which basically means that if you had $100 million dollars in cash at the beginning of last year and you did nothing with them throughout the year, then you lost $24 million from your purchasing power in just 1 year. The bad news is that this “accommodative” monetary policy will stay in place for at least another 2-4 years until the economy fully recovers from the shock that it experienced last year. Now, even if we accept the fact that the average rate of M2 monetary supply increase annually will be less than last year’s massive 24% but it will be significantly higher than the last 5 years’ average and take let’s say 15% as an average number, then you would still lose roughly around 30-60% of your purchasing power in the next few years. This is one of the main reasons why all risk assets like stocks, safe havens like gold and Bitcoin have continued to move sharply higher, as professional investors are trying to run away from the massive currency devaluation that we are witnessing at the moment.

What is the “Smart Money” doing?

Leading tech companies like Paypal, Square and Microstrategy and their respective CEOs, David Schulman, Jack Dorsey and Michael Saylor have made major steps in showing everyone what the alternative is and why for example Bitcoin offers absolute protection against all of these monetary policy gimmicks. With its limited supply of 21,000,000 coins, BTC introduces the element of pure scarcity and offers a unique and uncorrelated to the global financial markets way for not only diversifying your portfolio but for also hedging yourself against the issue of the annual M2 monetary supply increase. Bitcoin is considered by many to be the first scientifically proven pristine asset that provides an asymmetric growth potential and return. Additionally, what makes BTC truly attractive is it’s decentralized nature, which basically means that no government could bring it down as there is no centralized entity to bring down and as long as the Internet exists, then Bitcoin will be an active monetary force and real store of value instrument. The fact that a top tech company like Square invested $50 million from its cash reserves into the purchase of 4,709 BTC throughout 2020, signals the beginning of a new trend that will soon catch up with all of the rest cash-rich companies out there. Furthermore, an even bigger player in the Bitcoin space emerged throughout 2020 and that was the CEO of Microstrategy, Michael Saylor, as his business intelligence company managed to purchase the whooping 70,470 BTC for approximately $1.125 billion at an average price of $15,964 per bitcoin. Now, before you start putting labels like “these guys are crazy, this is ridiculous” etc. take a minute and realize that for the most part these individuals are exceptional business professionals with extensive and successful multi-decade experience in growing and protecting capital. Thus, if they are putting their own money where their mouth is, the least you can do while sitting at home and scrolling through the Internet is to think about all of that for a second and realize that these brilliant investors, CEOs and businessmen are actually giving you and me the recipe for how to protect and grow our own capital. As long as of course we know where to look and how to interpret the events of the day.

The Tesla and BTC debacle

Couple months ago we predicted that Tesla Inc. will probably be the next big corporation to invest a meaningful portion of its cash reserves into Bitcoin and it actually happened. On February 8th, 2021 Tesla announced in an SEC filing that it had bought $1.5 billion worth of bitcoin.

The company also said it would start accepting bitcoin as a payment method for its products.

However, there has been somewhat of a breakup between Tesla and Bitcoin since then as the company’s CEO, Elon Musk, has basically flip-flopped his position on whether or not he is pro or against BTC multiple times in a series of speculative and inconsistent tweets. Tesla announced that it will stop accepting BTC as a payment, due to environmental concerns related to the impact that BTC mining has on the environment. This was highly unexpected as it has been widely known since the early days of Bitcoin that the mining process requires a significant computational and electric power, and to come up with an excuse like that was very strange to say the least for Elon Musk. Many people have argued that the reason why Tesla’s CEO did that was related to Tesla’s main source of revenue – the sale of government regulation credits. Tesla’s credits are generated by laws in 11 states that mandate carmakers reach a proportion of electric vehicles by 2025, or purchase equivalent credits from companies beyond that benchmark. As an EV manufacturer, Tesla has a significant surplus and made twice as much money in 2020 selling credits than electric cars. Without those government subsidies, Tesla would be still operating at a loss. Tesla’s own executives admit it’s not sustainable. The fact that the company has actually made more money from buying and selling BTC, than from its core operations is definitely a warning sign for investors. It is important to point out that Dr. Michael Burry, who became famous after the release of the movie “The Big Short”, which describes the events of the housing bubble and the subsequent crash, and who was the first and only major investor that went against the housing market warning everybody back in 2005-06 that the housing bubble is about to burst has now revealed in his most recent 13F SEC filings that he has opened a $530 million short position on Tesla.

Pretty soon, you will see the likes of Apple, Alphabet, Amazon etc. also allocating a significant portion of their cash reserves to Bitcoin as this is the only real way for them to protect their shareholders value in the current environment, as BTC is the only uncorrelated to the monetary policy scarce asset in the world. This in turn will significantly increase the global demand for BTC in the coming weeks, months and years as when a multi-billion dollar company decides to plug its cash power into the Bitcoin network, it will do it in massive volumes, thus purchasing tens of thousands of BTC.

Now, with all of that being said you should keep in mind that Bitcoin has already gone up roughly around 15x in the last 12 months, thus it might not be a great idea to go ahead and start buying at the top. As you can see some of these highly respected institutional investors got in at around $15-20K.

Throughout the last 12 years of its existence BTC has created a very clear pattern of behavior where usually after reaching new all-time highs and going parabolic for a certain period of time then a major 60-80% correction usually takes place for 12-14 months. This virtually means that the price for BTC could retrace all the way back to around $20-25K during this corrective movement. Thus, be patient and use the information that we are providing you with in order to prepare for what’s coming up ahead and build your capital allocation plan.

Monetary assistance

One of FED’s measures was to include $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. Furthermore, the United States Federal reserve has decided to slow large bank capital distributions throughout the remainder of 2020. The banks that will be affected the most by the policy will be JP Morgan Chase, Citigroup, Wells Fargo and Bank of America. The banks will all be barred from share buy backs and will have to put a cap on dividends.

The central bank wanted to make sure that these banks, each having over $100 billion in assets, and owning a large market share of America’s banking industry, are going to have have enough capital as lenders to weather any further problems in the economy caused by the coronavirus pandemic. This has signaled further concern that the US economy may still have trouble ahead carrying into 2021.

The Fed has also cut the benchmark interest rates to virtually zero and rolled out a series of emergency and unorthodox lending facilities designed to backstop markets and keep credit flowing to businesses. The Fed’s balance sheet has already reached $7.2 trillion, which is the largest it has ever been. Additionally, the Fed resumed its Quantitative Easing program aimed at purchasing massive amounts of securities a key tool employed during the Great Recession, when the Fed bought trillions of long-term securities. As a result of the COVID-19 outbreak both the treasury and mortgage-backed securities markets have become completely dysfunctional, and the Fed’s actions aimed to restore smooth both investors confidence and market functioning so that credit can continue to flow. The initial commitment by the Federal Reserve was to buy at least $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities over “the coming months.” However, the followed historic market declines and broad-based panic caused the Fed to modify its monetary policy, thus making the purchases open-ended. It also expanded purchases to include commercial mortgage-backed securities, which was another unexpected and unprecedented move, as it basically means that there is no limit as to how much the Fed is willing to inject into the economy.

The Federal Reserve also slashed the reserve requirement for banks and begun buying up commercial paper (a form of short-term corporate debt). It also started buying municipal bonds for the first time and took its first steps into certain types of riskier corporate bonds, and it’s promised to buy an unlimited amount of government debt for the duration of the crisis. It will also backstop loans from bank lenders participating in the Paycheck Protection Program.

Fiscal Help – HEROES Act and American Rescue Plan

Regardless of the powerful monetary stimulus provided by the Fed, the economy needed a government intervention on the fiscal side as well in order to stay above water in these difficult times and the US government knew that. Thus, it delivered massive liquidity packages throughout Q2 and Q3 of 2020 including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Last year in May there was a major government fiscal initiative called the $3 trillion Heroes Act, which was introduced by House Democrats and managed to pass the house. However, the Heroes Act faced strong opposition by the Republicans, which stopped it from further advancing in its original form. The major focus of the initial bill was the $875 billion in additional funding for state and local governments and $20 billion each for tribal governments and U.S. territories. The new legislation also aimed to include another $75 billion for testing, new provisions for hazard pay for essential workers, $75 billion in mortgage relief, $100 billion for rental assistance, plus another $25 billion for the Postal Service and provisions for a second round of $1,200 stimulus checks. In addition to all of that there was also $3.6 billion for elections, $10 billion for the Supplemental Nutrition Assistance Program and $10 billion for small businesses. After series of debates and fights in Senate regarding the sizing of the new stimulus package the House Speaker Nancy Pelosi said the newly updated bill reflects a package that’s $1.2 trillion less than the Democrats’ original HEROES Act in May, 2020 which failed to advance amid opposition from Republicans. The new bill is called the updated HEROES Act (which stands for Health and Economic Recovery Omnibus Emergency Solutions).

The new bill would have also restored $600 in extra weekly jobless benefits, which until expiring in July, 2020 provided a lifeline to tens of millions of adults who lost their jobs when the pandemic crippled the economy in March. The House passed the bill last September, but in the beginning of October, the odds of a stimulus package passing before the November 3rd elections became slimmer after President Donald Trump called off negotiations. “I am rejecting their request,” he said on Twitter, referring to the Democrats’ stimulus proposal. Mr. Trump later tweeted that he would be open to approving “standalone” funding for stimulus checks, as well as a few other measures, including aid for the airline industry.

Ever since Joe Biden was inaugurated as the 46th US President, he was pushing heavily for the new Fiscal stimulus package to be accepted and put into motion asap. President Biden had proposed a $1.9 trillion fiscal stimulus package, which initially faced serious opposition from Republicans as many believe that this number is way too high. Some of the key areas of fiscal support that Biden’s proposal, which was also named “American Rescue Plan” focuses on are bigger stimulus checks, more aid for the unemployed, the hungry and those facing eviction, and an additional support for small businesses, states and local governments, with increased funding for vaccinations and testing. However, the American Rescue Plan was accepted in March, 2021 which is considered as a major positive for both the economy and the market in the months ahead.

February

Despite the initial push back Congress is now moving quickly to match President Joe Biden’s pace to bring the country out of what it could be the worst economic recession in history. “I’m going to act, and I’m going to act fast,” Biden said Friday, February 5th at the White House after meeting with congressional Democrats on his $1.9 trillion American Rescue Plan. “We need an answer that meets the challenge of this crisis.” Moving quickly, Congress is set to pass in the coming weeks another round of economic relief for the American people, including a third stimulus check for up to $1,400.

March

The Senate approved a $1.9 trillion stimulus package Saturday, March 6th,2021 and it is expected to go to the House for a vote as early as Tuesday, March 9th.

The American Rescue Package was the fifth significant federal bill to address the economic fallout from the COVID-19 pandemic in the United States. The package includes $1,400 stimulus checks for individuals, including dependents, subject to income limitations, as well as an additional $300 weekly unemployment benefit for sidelined workers. This additional stimulus is expected to provide a large boost to spending in the months ahead.

April – June

President Joe Biden, has found a lot of resistance from Congress for his $1.7 trillion Infrastructure Plan, with which he aims to “rebuild” the America’s transportation network, education system and also support the elderly through various different programs. There has been a consistent back and forth on the subject throughout the last few months as Republicans have been strongly against the size of the plan. While it is still unclear what the potentially reduced final Infrastructure Plan would include, it will probably be somewhere close to the $900 billion, according to reports. This would mean that it would be roughly half of Biden’s last $1.7 trillion offer was to the GOP

The current framework

The combined and relentless approach on the monetary and fiscal side has substantially increased investors confidence that not only the Fed but also the US government are staying on top of this current crisis and are both ready to do whatever it takes to help businesses and individuals survive this economic destabilization. This has been the major reason for the continued appreciation of the stock market in the US in the last few months. However, we at DowExperts believe that while it is tremendously important for the government and the Fed to continue to support the economy in this active manner, at the same time we have to face the fact that neither of them is able to create real economic growth and activity by simply pouring endless amounts of capital into the economy. Although the unemployment rate has declined for 9 months in a row from the 7.9% reading back in September, 2020 down to the latest 5.8% reading that we got for May, 2021 more than 10 million workers remain jobless or out of the workforce because of the pandemic, according to an estimate from the Economic Policy Institute. Thus, it will take a very long time for the economy to get back to its pre-COVID levels of activity and productivity. At the same time, it is important to note that consumers around the world have amassed an extra $5.4 trillion in savings since the coronavirus pandemic began, setting the stage for a spending boom that could power a strong uplift in economic growth this year. The United States boasts the largest share of excess saving, amounting to $2.6 trillion, or 12% of US GDP, with the United Kingdom close behind at 10% of GDP.

When you realize that the main drivers of this historic rally throughout the last 12 months have been strong liquidity injections by the government and the Fed; speculation about a quick economic recovery, without any real proof that this is even a realistic scenario; greed caused primarily from the fear of missing out; and the general misconception that the fact that the economy is “fully recovered”, well you must ask yourself whether or not you believe that this is a sustainable and healthy environment for the market to continue to rally in the future as well. At any rate, regardless of the highly speculative environment up until now it does seem as we will be experiencing a very strong 2nd half of the year with all of that consumer spending that is expected to take place. Thus, most of the Consumer Discretionary, Industrial and Energy stocks will logically see high demand for their products, which in turn will lead to strong Financial performance results in Q2 and Q3. We will be giving you our Top-rated stocks from both the XLI and XLE ETFs so that you could further improve your portfolio returns in the weeks and months ahead.

Our investing sentiment

Following our investing sentiment has proven to be a very efficient strategy for our followers.

In our analysis for October, 2020 we issued our cautiously bearish sentiment for the market letting you guys know that the market will most likely trade lower in October than where it was in September. In November, we moved from cautiously bearish to cautiously bullish and made some of our best Stock-picks of 2020. December was a neutral month for us, as we were not too excited to allocate our capital to the market at the end of the year, while everything pretty much was sitting at all-time highs. As you can see, we were once again spot on with our monthly analysis. In the beginning of the new year we were neutral to rather bearish, advising our clients to not rush and buy when prices are high, but to rather patiently wait for better entry points to present themselves. Back in March, we moved from neutral to bullish and all of the picks that we made, have performed strongly in the last few months.

Now, looking at the market sitting at all-time highs many investors are fearful of putting their capital to work as it seems that they will be unable to get a favorable risk-reward ratio on the stocks that they like. However, today’s market is very different than the market 20 years ago and you can almost always find good quality stocks trading at or below their fair value with solid business results and projections, if you know where to look of course. As one of our favorite investors, Jim Cramer, says “There is always a bull market somewhere”. We are seeing the reopening theme as a very powerful catalyst for both the Industrial and Energy stocks, thus we will be giving you some of our best picks in these sectors of the market. We hope that you have followed our recommendations and protected your portfolio accordingly from some of the recent tech-related market declines. The Technology sector has staged a big comeback throughout the lows that it registered earlier in the year, and we believe that there are some great opportunities in the technology sector that are trading at very attractive valuations. However, let’s keep our focus on the more cyclical and value oriented Industrial and Energy stocks out there.

We at DowExperts believe that there will be long-term implications from the extremely loose monetary policy that the Fed has been implementing in recent years. There is a saying that goes the following way “one day the chickens are gonna come home to roost”, which literally fits what our long-term view on the global and more specifically US economy is. In other words, these piling amounts of government, corporate and personal debt will have to be repaid at some point in time in the future, which in our view sounds and seems as utopia. Furthermore, the expected boom in consumer spending in the coming months will undoubtedly bring higher inflation numbers with itself, which will force the Fed to start tightening the monetary policy by raising the benchmark interest rates. This in turn will be a major problem for all borrowers out there as debt will become much more expensive, than it is now. Following the logical and rational analysis here, it is not crazy to assume that there will be many companies and individuals that will be unable to service their debts. What does this lead to… foreclosures, bankruptcies, slower growth, lower returns etc.

Now, please don’t take the last few sentences as if we are issuing a death sentence to the US equity markets, because that is not the case. We are just trying to put everything that has happened, is currently happening and is expected to happen in the future into context and help you build your own rational investment philosophy. Thus, we are issuing our bullish sentiment for the current month, as we believe that the investors will inevitably come back to some of the their 2020 favorite stock names, as well as to some long-forgotten cyclical names, which will push their prices higher. We believe that the market will be definitely trading higher in June.

Dow Theory 2.0 – Correlation Confirmation Approach

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals and technicals as well as other all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether XLI and XLE are good ETFs to own at the current levels we have decided to analyze their performance closely as they share a lot of similarities when it comes to price action. The two ETFs share a very strong and positive 75% 10-year correlation, which indicates that this correlation could be used as a confirmation for some of the signals that we are getting.

XLE

What is the XLE?

XLE offers liquid exposure to a market-like basket of US energy firms. “Market-like” in the context of the energy sector means concentrated exposure to the giants in the industry, including companies in the oil, gas and consumable fuels, and energy equipment and services industries as identified by GICS. XLE pulls its stocks from the S&P 500 rather than the total market, so its portfolio mainly favors large-caps. Holdings are weighted by market cap, subject to a capping methodology that ensures no single security exceeds 25% at each quarterly re-balance.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 15 months taking the price from the March 23rd lows of 2020 around $23 to the $56 highs in the beginning of June, 2021. This represented an outstanding 143% gain for the ETF in a little over a year. However, we need to remember that the Energy sector altogether was heavily beaten down during the pandemic and despite the 143% appreciation of the ETF, XLE is still trading within the multi-year downtred channel that started back in 2014. The price needs to break above the $60 multi-year resistance line in order to truly confirm that the next long-term bull market in Energy is here. Despite all of that, if we look at both the 12-month as well as YTD performance of the XLE ETF the numbers are quite impressive as the ETF has been the best performing sector of the market with the staggering 39.23% YTD performance. The road to the current 52-week highs was not easy though as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Energy space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. With the increased rapid vaccine development and distribution it seemed that we are slowly getting out of the woods and XLE bottomed at the end of October, 2020 at around $28 per share. There were few 10-15% corrective movements that took place during the strong uptrend that followed, but the uptrend remained intact on all occasions. The ETF has regained its popularity as investors have continued to become more warry of a potential tighter monetary policy environment moving forward. In times of rising interest rates and stronger underlying economic output Value stocks often outperform Growth stocks and as a result investors tend to overweight their portfolios with more of the lower-multiple, cyclical stocks out there. With the multi-year bear market that XLE has been in, most of the companies have very low P/E, P/S and PEG multiples, which makes them good Value plays in contrast to the high-flying Technology stocks which were the big winners last year. The ETF is a go-to choice for both small retail and large institutional investors looking to add some stable cyclical energy exposure to their portfolios at a fair price.

The ETF is currently sitting at $56 per share, which is just below at its 52-week highs. We have seen the XLE finding a lot of buying interest around its 50 DMA, which is currently sitting at the $51 level and also coincides perfectly with the upward sloping diagonal trendline support at $52. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $48-52 area and is expected to continue to bring a lot of buyers back to the market every time the price drops there. The ETF has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The shares have moved up with more than 69.6% since then, which really shows that there is a lot of momentum behind that move. Recently, most of the leading Energy companies reported strong Q1 financial performance results, surpassing the consensus estimates on both the top and bottom line as a result of the high oil prices and also the increased demand for Oil related products.

The most recent break out of the $46-52 consolidation zone should be viewed by investors as a great opportunity to buy into some of the cyclical heavyweights at a discount and at a relatively fair P/E valuation. The recent failure of the price to break below the $46 support both in March and April and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the coming weeks.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLE and XLI will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit companies like Chevron tremendously, as the more heavy construction and transportation there is, the more oil is being used, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Despite the fact that, the XLE ETF hasn’t yet managed to push above its multi-year downtrend resistance, we are strong believers in the future growth prospects of the sector and we expect the Energy stocks to continue to outperform the broad market through the rest of this year.

Additionally, we are seeing XLE as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The most recent price corrections in the Energy sector should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from their overbought conditions and are now moving higher again, thus signaling that the uptrend will most likely be continuing higher soon. In addition to that, it is important to note the fact that the XLE and the Energy sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Energy companies will be the primary beneficiaries of the reopening theme in the economy as the fact that people are eager to start traveling again, will inevitably lead to extremely high demand for Oil in the coming months. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of the XLE ETF.

XLI

What is the XLI?

The XLI tracks a market-cap-weighted index of industrial-sector stocks drawn from the S&P 500.

It provides investors with an exposure to the industrial sector in the US that is cheap to hold and very easy to trade. The fund invests in companies within the S&P 500 by limiting its small and mid-cap exposure in order to concentrate mainly on the biggest industrial players on the market. The XLI provides a great exposure to the industrial sector in the US and it is suitable for both traders and long-term investors thanks to its impressive assets, high trading volume and a low expense ratio. We have been analyzing the performance of the XLI for a long time now. We must say that the ETF has been a great representation of the overall performance of the industrial sector in the US. Due to the huge growth in the US economy over the past 11 years, the XLI had gone up from $15 to $85 (466%). Therefore, the XLI has been extremely profitable for those who like investing in ETFs and getting a direct exposure to one of the biggest sectors within the economy.

Some of the biggest gainers so far this year have been indeed Industrial giants like Boeing (BA), General Electric (GE), Honeywell (HON) appreciating with 161%, 54%, 58% respectively. Was that just a simple rebound from extreme oversold conditions for these stocks or was that the beginning of the full recovery for these companies? Well, quite frankly we at Dow Experts believe that it is a bit of both. It is true that these stocks were obliterated during the huge market declines in March, 2020 on the back of high levels of uncertainty in regards to the reopening of the global economy and the restarting of their business operations, thus they were definitely due for a meaningful pullback from these depths on the charts that they were sitting in just a month ago. At the same time, we have seen the US and Global economies reopening with people going out of their homes and slowly getting back to a more active and busy lifestyle, which is a positive sign for the economy and a positive sign for some of these industrial stocks, as they rely on the economy functioning properly.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 16 months taking the price from the March 23rd lows in 2020 of around $48 to the $106 all-ime highs in the beginning of June, 2021. This represented an outstanding 121% gain for the stock in less than a year. However, we need to remember that the Industrial sector altogether was heavily beaten down during the pandemic and there were a lot of capital outflows from the sector. However, since it bottomed out the XLI has been the strongest performing ETF out there. The road to the current 52-week highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Industrial space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. Factories were shut, production lines were stopped and supply chains were disrupted.

However, with the increased rapid vaccine development and distribution back at the end of the Fall last year it seemed that we are slowly getting out of the woods and XLI saw a significant improvement in the overall investment sentiment among both retail and professional investors. There were few massive 10-15% corrective movements that took place during the strong uptrend that followed, but the uptrend remained intact on all occasions. The XLI ETF managed to regain its popularity back with the improved reopening outlook as after all manufacturing, construction, aerospace and defense, agriculture are some of the most important industries that shape to a large extent the stability of every economy. The XLI is now a go-to choice for both small retail and large institutional investors looking to add some stable cyclical Industrial exposure to their portfolios at a fair price.

The shares are currently sitting at the $103 level, which is just below its 52-week highs of $106.81 per share. We saw that the ETF has continued to find a lot of buying interest along the upward sloping 20 DMA, as it seems that the shares are in the process of accumulating a lot of bullish momentum, which will end up helping XLI to break above the resistance lying at $107. Such a break would be a very good sign for the bulls, as it would clear the path up towards the $115 and $120 marks. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $97-102 area, which is expected to continue to bring a lot of buyers back to the market every time the price drops there. The ETF has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The shares have moved up with more than 25% since then, which really shows that there is a lot of momentum behind that uptrend. Most of the leading industrial companies reported strong Q1 financial performance results, surpassing the consensus estimates on both the top and bottom lines.

The most recent rejection from the $107 all-time high resistance, shows that there might be some profit taking ahead in the ETF’s price action, after the remarkable push higher that we’ve seen YTD.

However, the $97-102 range should be viewed by investors as a great opportunity to buy into one of the best cyclical industrial ETFs at a discount and at a relatively fair P/E valuation. The failure of the price to break below the $100 support back in May and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the next few months.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLI and XLE will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit most of the leading industrial companies out there, as the more money the government is willing to spend on the rebuilding of US’s Infrastructure the better it is for all of the government contractors that will be awarded to complete these massive projects.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that some of the Fundamental winners out there would indeed be the industrial and energy stocks. Despite the fact that, XLI has already appreciated with over 120% from the March, 2020 lows, we are strong believers in the future growth prospects of the sector and we are seeing the $97-102 region as a great long-term accumulation zone for the ETF.

Additionally, we are seeing XLI as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The expected short-term price volatility in XLI should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a RTX’s daily chart (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already started the process of retracing from their overbought conditions and are expected to start moving higher again in the coming weeks. In addition to that, it is important to note the fact that the XLI and the Industrial sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Industrial companies like Raytheon Technologies, Honeywell International, Caterpillar, Deere will be among the primary beneficiaries of both the reopening and government spending themes. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of the XLI ETF.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 3% from its 52-week highs, we would like to point out that buying at these levels would be more suitable for risk-oriented investors while risk-averse investors should wait either for a clear break above the $107 resistance or for a correction down towards the $100 region before jumping in on the Long side. Thus, we are currently looking at the $97-102 range as a great accumulation zone for the ETF. Our take profit levels in the coming months are going to be $115 and $125 respectively.


In order to further assist our followers in boosting their investment results, we have analyzed the performance of some of the biggest companies within the XLE and XLI that have a big impact on the overall performance of the two ETFs.

You can find them in our Stock Picks for June rubric.



Sincerely,

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