New Year, Same Risks

Happy New Year to all of you, our dear followers and subscribers!

The time has come again for us at DowExperts to share with you our most recent ETF correlation analysis and overall market observation, in order to help you to prepare for what’s coming in the month of January. As discussed in some of our previous analyses the market movements in the past few months 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 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. However, 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.

The continuous and progressive surge of new COVID-19 infections globally throughout September, October and November saw many countries including the likes of UK, Germany, Italy, Spain, USA etc. issue orders for 2nd lock-down, 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 last 10-12 weeks. The failure of Republicans and Democrats to reach a consensus on the 2nd round of stimulus has also proven to be a net negative for investors’ confidence, as everybody knows that without the new stimulus bill the US economy will basically fall apart in these difficult times. Another key development that hasn’t helped the stock market has been President Trump’s 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 have continued to build tension not only around the country, but internationally as well. Macro investors and leading economists around the world have qualified the recent political developments in the US as a serious increase of the systemic risks for all investors out there, as everybody recalls 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 this past Wednesday, January 6th 2021, when 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 has been 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 at the moment and a 2nd lock-down in place one could ask why is the market so far away from its March lows. The answer is embedded in the general optimism and positivism among retail traders regarding the future of the stock-market. 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. 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 as a sign of strength for the markets, but in reality it actually shows how dangerous and unpredictable the market is at the moment.

It is also important to note that due to 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 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. 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 past 12 months

Today’s analysis will focus on the strong positive 10-year correlation between the SPDR S&P 500 ETF Trust (SPY) and the Communication Services Select Sector SPDR Fund (XLC), 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 sectors 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:

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 $183.5 in 4 weeks = 14.7% 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 $265 in 4 weeks = 15.7% 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 $127 in 4 weeks = 23.3% 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 few months 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 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 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. Every single one of our Stock-picks for April reached its respective take profit levels that we laid out in our analyses, thus marking an outstanding appreciation of 25% on average in the first 4-6 weeks and has continued to further appreciated ever since! Our stock-picks for May and June also reached their initial and secondary take profit levels, thus also generating 25% return on average with a 4-8 weeks holding period. The stock picks for September generated on average 10-12% return for 2-4 weeks after publishing our analyses. Most of the ones for October and November dropped to the levels that we pointed out in our monthly analysis , thus triggering our buy orders and putting us in a great position to generate 15-25% return in a 4-6 weeks period.

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!

Getting ready for an even better 2021

Now let’s look ahead and see what the Dow Theory 2.0 has in store for us for the month of January 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 the 20th century, 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.

The two ETFs that we will be analyzing closely today are the SPDR S&P 500 ETF Trust (SPY) and the Communication Services Select Sector SPDR Fund (XLC), as this would give us a great indication as to what is the current underlying stability and strength in the market. The two indices share a strong 10-year positive correlation of 94%, which will allow us to compare their respective charts and find out what the market has planned for us in January. It is important to note that some of the largest companies in the Communication Services sector like Facebook, Alphabet, Netflix, Activision Blizzard etc. have been among the biggest winners in terms of individual stock gains so far this year. At the same time, the SPY has been largely affected by the strong out-performance of its Technology stocks, thus it would be interesting to see how the SPY and XLC stack against one another in these volatile and unprecedented times and whether or not the significant outperformance of the Tech sector has affected the otherwise strong correlation between the SPY and XLC. However, also lets not forget that some of the biggest winners of the “new normal” world that we are living in have been the companies providing products and services for the newly established stay-at-home economy. Thus, the gains in their respective stock prices have been backed up by solid company performance numbers and favorable business trends. However, as their stocks continue to set new highs every other day, their valuation metrics also change and the main question that we need to find the answer to is: “How far could these stocks go?”. Thus, we would like to look closer at the broader market as well as this particular sector and use our confirmation correlation approach in order to build our capital allocation program for January. Furthermore, we believe that by investigating more closely the broader market and both the Communication Services Select Sector and the broader SPY ETF we would be able to clarify if the remarkable gains that we have seen in the last few months are sustainable or if this was just another overenthusiastic and emotional move that is about to collapse very soon. 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 the underlying companies.

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 January. 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, US Presidential elections Brexit deal and last but not least the new strain of COVID-19 that seems 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 SPY and XLC 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. 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. From a valuation perspective this puts the current stock-market valuation in the Top 10% of the most expensive markets since 1871. 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.

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 70% off their lows, but are also now much more expensive than they were back in January. 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

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 are not only real but that they elevated by the day back in the March-April period, as every day the world stayed shut cost billions of dollars of actual realized losses for virtually every sector our 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. 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. And while 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 overcomable. 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.

The New Movement

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.

Pretty soon, you will see the likes of Apple, Alphabet, Amazon, Tesla 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.

Monetary assistance

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.

One of their 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.

Fiscal Help – HEROES Act

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 the last few months including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and a $484 billion Coronavirus relief package aimed at helping Small Businesses survive. The latest major government fiscal initiative is called the $3 trillion Heroes Act, which was introduced by House Democrats and passed the house in the beginning of May. 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, 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 also restore $600 in extra weekly jobless benefits, which until expiring in July 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 in September, but in the beginning of October, the odds of a stimulus package passing before the November 3 election 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.

Prior to Mr. Trump’s negotiation flip-flop, the Democrats and the Trump administration had been in talks about the bill’s funding priorities, although they were far apart on issues including support for state and local governments. Senate Majority Leader Mitch McConnell has indicated that he would not support any legislation that cost more than $2 trillion.

The most important thing here is that even thought the bill failed to progress earlier in the fall, the legislation will most likely become the basis for another stimulus round considering the clear win of the Democratic presidential nominee Joe Biden. However, the rather unclear situation with the number of seats that each party will have in the House and the Senate, resulting from the fact that Donald Trump has contested the results of the elections and certain pieces of his appeal are still being reviewed.

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 to 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 to 7.9%, 6.9%, 6.7% and 6.6% in September, October, November and December respectively from the 14.7% highs in April, more than 10.7 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. In reality this means that all of the companies out there will see downward revisions of their revenue and earnings expectations for the next at least 2 quarters, which will ultimately slower their growth, lower their intrinsic value and will inevitably lead to some price declines. Let’s not forget that more than 80% of the publicly traded companies in the US officially withdrew their fiscal 2020 guidance when they delivered their Q1 earnings reports in the last couple months. This is one of the many warning signs that we at DowExperts identify and recognize as an indication that the road ahead could be much tougher than everyone expects.

When you realize that the main drivers of this historic rally throughout the last 8 months are 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 “recovering”, 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.

In our analysis for October, 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 so far this year. 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. We hope that you have followed our recommendations and protected your portfolio accordingly. We at DowExperts believe that the economy is not going to fully recover until we start seeing actual consumer spending, consistent job creation, lower unemployment rate, productivity and manufacturing growth and many other economic indicators that are currently painting a very dark picture as a whole. Thus, we are issuing our cautiously bearish sentiment for the current month, as we believe that even if the market doesn’t manage to break some of the next key support levels ahead, it will be definitely trading sideways or downward in January.

Technical Analysis & Correlations

SPY

The SPY has got assets under management of $284 billion at the moment and its average daily trading volume is $21 billion. In other words, it is an extremely liquid ETF that invests in the biggest companies within the S&P 500, giving an opportunity for investors to get an exposure to the most well-known companies out there without having to pick individual stocks by themselves – a very suitable option especially for less experienced investors.

By looking at the daily charts of both the SPY and XLC, one could see very similar movements as prices are basically flirting with their all-time high levels in the beginning of the new year. As we all know, the coronavirus outbreak has been one of the main catalysts for the market so far this year. The initial hit of the COVID-19 pandemic earlier in the year resulted in a 35% correction for the SPY, dropping from its highs at $339 towards the key support at $221. Back then the ETF found lots of buying interest around these lows, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY ended up appreciating with 62% in just 5 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to some of the leading stocks that we are monitoring, the SPY experienced a rather volatile roller-coaster move last Fall. After reaching new all-time highs around the $356 mark in the beginning of September, the SPY then changed course and produced one of the sharpest declines since March. The market dropped with nearly 10% in a matter of couple weeks.

Then, the second wave of optimism came in and pushed the market almost back to its prior highs from the end of September to mid-October. While we were seeing the bullish sentiment strengthening, the underlying fundamental positioning of the market was quite weak as it was filled with uncertainty – COVID-19, the Presidential Elections, Brexit etc. The price failed to make a higher high, which was the first major signal that the strong bull trend might be close to an end. In the last two weeks, the SPY declined progressively with 8.5% on the back of the rising fear and uncertainty in the market. The ETF started rebounding from the $325 support zone as the irrational behavior of some market participants led to a volatile spike to the upside on Novemebr 4th. That particular movement was not a product of any real positive catalysts, as the delayed final results and the potential for a contested election are not necessarily considered as net positives for the market. Speculation and the fear of missing out (FOMO) on the rally were the major reasons for this sharp rise in the equity markets. However, we saw that the downward sloping diagonal resistance line at $348 managed to contain the initial spike, thus creating the possibility of a triple top reversal pattern on the chart. However, this reversal did not materialize as the SPY has continued to rally higher and break its all-time high records ever since then.

The price for the ETF reached a 2020 high of $378 before right before Christmas, and then settled at around $370 at the very end of the year. It seems that the new year has brought new bullish sentiment with itself as the price has been steadily grinding higher. The SPY ETF is currently sitting at the $380 mark after breaking the highs at $378. The middle Bollinger band on the daily chart is currently acting as a short-term dynamic support around the $373 level. If we see the price breaking below this level, this will be a confirmation of the rejection by the all-time high and will then send the price lower towards the key support lines at $364 and $353 respectively. If we see a break there then we could expect a larger move lower for a test of the $338 strong support zone.

We believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the outcome of the presidential elections and the transition from one administration to the other, the economic recovery etc., thus we could be in for a sideways and choppy price action in the coming months. However we keep our long-term bullish stance on the SPY ETF, and believe that all of the corrections that we expect to see in the short term are going to give us great opportunities to buy one of the most well diversified ETFs and some of the stocks in it at a good discount. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent up move and are signaling that the downward corrective movement might be coming very soon.

XLC

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months has taken the price from the March 23rd lows of around $40 to the $65 all-time highs in the beginning of September. This represented an astonishing 65% gain for the ETF in such a short period of time for the market. However, right after these levels were reached, the price started a strong corrective downward movement, which ended up sending the ETF down with over 9.3%. The ETF is currently sitting at the $65.50 region after being rejected by the strong horizontal, psychological and all-time high resistance at $68. This rejection could be taken as a signal for the fading bullish momentum and for a potential price correction ahead. This comes as a rather substantial difference with the technical picture on the SPY chart, which should definitely be a cause for a concern as the two ETF’s share a remarkably high correlation percentage rate of 94%. Thus, when one of the ETF’s is breaking its all-time highs but the other is not confirming that, this is an important divergence that investors should be paying closer attention to as it might be the correction signal that all of us are looking for. Such a correction could be anticipated as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 8 months it will be more than normal such downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the effect of the outcome of the US presidential elections, the economic recovery, Brexit etc. – and that we could be in for a sideways and choppy price action in the coming months, we see that the winners would most likely continue to win. We remain cautiously bearish on the XLC ETF in the short term and believe that any price corrections will be giving us great opportunities to buy this strong performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our 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.) are currently showing exhaustion of the recent upward movement and are signaling that the uptrend might face some headwinds very soon. However, it is important to note the fact that the XLC and the Communications sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Communication is everything nowadays and the companies in this space are the ones shaping up our future. This makes us rather cautiously optimistic for the performance of the ETF as even if there is a short-term price decline coming soon, we believe that this ETF will be able to hold its ground better than some of the other ETFs out there.

Acknowledging the fact that we are once again approaching the all-time high levels in a time filled with plenty of uncertainty and high volatility, we would consider waiting for a minor 5-7% correction before we jump back in on the long side. Thus, we are not advising our followers to go ahead and start buying the stock of the ETF right now so close to its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we have analyzed the performance of some of the biggest companies within the SPY and XLC that have a big impact on the overall performance of the two ETFs.

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

Sincerely,

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