Is the cyclical rotation from growth into value stocks over?

Looking back

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 March. 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 back in 2020 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 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 knows that without the new stimulus bill the US economy will basically fall apart in these difficult times. Another key development that didn’t help the stock market was the former President’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 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 has the market continued to move higher relentlessly. 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.

The retail trading phenomenon

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.

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, has already dropped with over 85% from its $483 all-time high. While it appears that prices and volumes have somewhat stabilized, we definitely don’t think that the retail driven volatility in the market is over, thus we would like take this opportunity to warn our followers to exercise extreme levels of caution in February. Any major rally for any of these stocks will most likely be heavily sold. 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.

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 XLI (Industrial Select Sector SPDR Fund), which currently stands at 92%. 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:

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. 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 last year 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!

Looking ahead

Now let’s look ahead and see what the Dow Theory 2.0 has in store for us for the month of March 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.

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. As per the most recent market breadth analysis by Renaissance Macro Reasearch we can see a major breakout on the Russell 2000 index, thus showing that small and mid-cap companies are 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 for the year to date and has rallied more than 140% off its March lows. The most recent strength and gains have further put the index into breakout territory, unlike the S&P 500 for example, which has yet to break above the $4,000 major resistance line.

While we have been observing a significant under-performance of the Technology sector, the not-so-hot and fancy Industrial sector and its XLI ETF have been on a tear recently stealing the spotlight. We decided to include the XLI into this month’s analysis, 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 value stocks. 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 SPY (SPDR S&P 500 ETF Trust) and the XLI (Industrial 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 91%, which will allow us to compare their respective charts and find out what the market has planned for us in March.

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 March. 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, the new US President and his first 100 days in office, 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 SPY and XLI 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 last year. 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

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. 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.

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.

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.

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.

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.

Monetary assistance

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 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 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.

Ever since Joe Biden was inaugurated as the 46th US President, he has been pushing heavily for the new Fiscal stimulus package to be accepted and put into motion asap. President Biden has 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.

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 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%, 6.6%, 6.3% and 6.2% in September, October, November, December, January and February respectively from the 14.7% highs in April, 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. 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. 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 11 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 “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, 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. Since the beginning of the new year we have been 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. Now, looking at the broad-based selloff in the Technology sector, many of our favorite names are trading at around 20% discount from their all-time highs, which is a phenomenal opportunity to build our positions. We hope that you have followed our recommendations and protected your portfolio accordingly. Furthermore, we have seen a general weakness in the broader SPY ETF as a result of the heavy Tech exposure for the ETF, which has also led to declines in other non-tech stocks, which happened to catch our attention.

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 rather neutral to negative picture. However, the recent tech-related market declines, have created certain opportunities outside of the Tech sector as well that are definitely worth taking advantage of. Thus, we are issuing our cautiously 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, which will push their prices higher. We believe that the market will be definitely trading sideways or higher in March.

SPY – XLI: S&P 500 vs. Industrials

SPY

As you know, the SPY is an exchange-traded fund created to follow the movement of the S&P 500, which in turn is a stock market index that measures the stock performance of the 500 largest companies listed on stock exchanges in the United States. The SPDR S&P 500 Index Trust (SPY), launched in 1993, is the oldest, largest, and most liquid ETF, with over to $286 billion in assets and an average daily trading volume of $26 billion. The fund tracks the most popular US Index, the S&P 500 and invests in the large and mid-cap stocks selected by the S&P Committee. 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.

This ETF is always a go-to place for understanding the dynamics of the ETF market as a whole. There are 11 individual sector ETFs that are derived from the SPY, in order to differentiate and place the 500 different companies into their respective sectors and industries. This as a result has created a closed circle of strong correlations, which we use daily as a market indicator with potential 11 layers of confirmation. Furthermore, the strong correlations that we have identified within the different sector ETFs out there have been placed into a large correlation matrix, where we could easily identify and estimate what’s the likelihood of a certain signal to be accurate. This helps us to navigate our investment decisions and rationale in a more productive and efficient manner.

The SPY is heavily dominated by the Technological sector as it currently represents 31.37% from the fund, with the rest of the Top 5 spread across Healthcare (15.25%), Consumer Cyclicals (13.14%), Financials (13.03%) and Industrials (8.42%). However, surprisingly enough even though that the XLK has the largest representation in the SPY, the most strongly correlated sector to the SPDR S&P 500 Index Trust is the Consumer Cyclical (XLY) sector with a 94% 10-year positive correlation followed by the Industrial sector (XLI) with a 93% correlation.

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 in the last 4 weeks 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 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

SPY

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months has taken the price from the March 23rd lows of 2020 around $218 to the $395 all-time highs in the beginning of March, 2021. This represented an astonishing 81% gain for the ETF in less than a year. However, the road to the current all-time highs was filled with many different hurdles and the bulls had to overcome quite a lot of obstacles in order to keep pushing the prices higher. There were 3 larger correction movements of around 10% that took place during this strong uptrend as well as multiple smaller 3-5% declines but the trend remained intact. At any rate, the ETF has continued to break high after high as the leaders in this ETF are indeed some of the best performing individual stocks in the market with the likes of Apple, Microsoft, Alphabet, Facebook, Tesla, Netflix, Walt Disney etc.

The ETF is currently sitting at the $394 region in a 2nd attempt to break the $395 all-time high level. After being rejected by the strong horizontal, psychological and all-time high resistance at $75, the SPY has managed to find a lot of buying interest and it looks like its ready to break higher. This most recent rejection could be taken either as a signal for a fading bullish momentum and for a potential price correction ahead or as a momentum gathering period throughout which the bulls are trying to build some strength for the next push higher. A more meaningful correction should not be completely discarded as a potential scenario as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 12 months it will be more than normal to see such downward corrective movement. However, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market. We expect most of the big tech names and retail trading favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the SPY and the XLI will definitely perform well in March.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We remain cautiously bullish on the SPY ETF in the short term and believe that any price corrections should be treated as great opportunities to buy this strong performing benchmark 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. However, we need to point our that some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are yet to confirm that the next leg higher will be coming, which is something that we need to see first, before jumping in again on the long side. Despite the strong uptrend on the price chart the daily RSI has failed to make a higher high since November, 2020, which is definitely a signal for a fading bullish momentum. Furthermore, the RSI has been moving lower since January. At any rate, SPY is still trading above its 50 DMA and 100 DMA, which on the other hand is clearly showing that the strong uptrend is still intact. In addition to that, it is important to note the fact that the SPY is heavily influenced by the largest sectors by market cap out there – XLK and XLC. We are bullish on both of these sectors, thus we believe that the SPY will experience a relatively stable push higher.

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 like to point out that buying at these levels would be more suitable for risk-oriented investors, while risk-averse traders should wait for a minor 5-7% correction before jumping back in on the long side. Thus, we are advising our risk-oriented followers to go ahead and start buying the stocks of some of the companies with the highest percentage weight in the SPY ETF right now that also have solid business models and good overall positioning.

In order to make that job easier for you, we have already analyzed all of the stocks in the SPY ETF and have chosen the 2 best stocks that have the highest probability of outperforming the market and their respective sector in the coming weeks. You could find them in our Stock Picks rubric.

XLI

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months has taken the price from the March 23rd lows of 2020 around $47 to the $97 all-time highs in the beginning of March, 2021. This represented an astonishing 106% gain for the ETF in less than a year. However, the road to the current all-time highs was filled with many different hurdles along the way as the bulls had to overcome quite a lot of obstacles in order to keep pushing the prices higher. There were 2 larger corrective movements of around 15% that took place during the first half of this strong uptrend but interestingly enough the corrective declines have definitely narrowed down throughout the last 6 months, as we have mostly seen smaller 3-5% declines. The uptrend has remained intact, and it definitely looks much healthier now than it was 10 months ago. At any rate, the XLI ETF has continued to break high after high and to outperform the broader market as the leaders in this ETF, Honeywell International, Boeing, Caterpillar, 3M Company, Deere & Company etc. have been among the major beneficiaries of the cyclical rotation from growth into value stocks that the market has been going under.

The ETF is currently sitting at $97 and further pushing into uncharted territory. After breaking above the strong horizontal, psychological and all-time high resistance at $90, at the end of February, the XLI has managed to find a lot of buying interest and it looks like the strong bullish momentum is here to stay. This most recent price break could be taken as a signal for a potential trend continuation move all the way up towards the round number of $100. The $90 level has already started acting as a strong support and is expected to limit any future price declines. However, a more meaningful correction should not be completely discarded as a potential scenario as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 12 months it will be more than normal to see such downward corrective movement. However, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market. We expect most of the big tech names and retail trading favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the SPY and the XLI will definitely perform well in March. Furthermore, lets not forget that the two ETFs share an extremely strong 91% 10-year positive correlation and if one of the indices breaks its previous all-time highs there is a 91% chance of the other ETF to follow suit, statistically speaking.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We remain cautiously bullish on the SPY ETF in the short term and believe that any price corrections should be treated as great opportunities to buy this strong performing industrial 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. However, we need to point out that some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are getting close to overbought territory, which might be taken as a short-term positive, by confirming the strong bullish momentum, but it should definitely be looked at with caution from a mid to long-term perspectie as it might indicate that a potential correction lies ahead. The most recent technical break of the prior ATH levels on the price chart has been strongly supported by the daily RSI, as it has continued to push higher, thus moving in a solid uptrend. Furthermore, XLI is trading above its 50 DMA and 100 DMA, which is also clearly showing that the strong uptrend remains in place.

Acknowledging the fact that we are once again sitting at all-time high levels in a time filled with plenty of uncertainty and high volatility, we would like to point out that buying at these levels would be more suitable for risk-oriented investors, while risk-averse traders should wait for a minor 5-7% correction before jumping back in on the long side. Thus, we are advising our risk-oriented followers to go ahead and start buying the stocks of some of the companies with the highest percentage weight in the XLI ETF right now that also have solid business models and good overall positioning.

In order to make that job easier for you, we have already analyzed all of the stocks in the XLI ETF and have chosen the 2 best stocks that have the highest probability of outperforming the market and their respective sector in the coming weeks. You could find them in our Stock Picks rubric.

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 XLI that have a big impact on the overall performance of the two ETFs.

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

Sincerely,

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