February 2021 Update
Stephen Biddle - Feb 10, 2021
The monthly S&P500 chart formed a bear bar in January. Although it did not close on its low, it is still a sell signal bar. This reversal is coming at the top of a 10-year bull channel...
Money is a tool. It's something that supports your life!
The monthly S&P500 chart formed a bear bar in January. Although it did not close on its low, it is still a sell signal bar. This reversal is coming at the top of a 10-year bull channel...
We’re neither bullish nor bearish. We are indifferent to which way the market is headed. If it is rising, we’re long equities. When it reverses that trend, we will be underweight equities and long bonds and cash.
Interesting Charts
"Zombies" are firms whose debt servicing costs are higher than their profits but are kept alive by relentless borrowing. Such is a macroeconomic problem. Zombie firms are less productive, and their existence lowers investment in, and employment at, more productive firms. In short, a side effect of central banks keeping rates low for a long time is it keeps unproductive firms alive. Ultimately, that lowers the long-run growth rate of the economy." - Axios
2) Now is not the time to move into Fixed Income heavy weightings
Source: Iam McMillan, CMT (@the_chart_life). 11 Jan. 2021. Twitter
3) Second stock to the right, and straight on 'till morning...
4) Take that, McDonald's! With more time to spend at home, there's more time to trade.
Source: SentimenTrader (@sentimentrader). 13 Jan 2021. Twitter
5) What goes up, must eventually come back down...
Source: Tiho Brkan (@TihoBrkan). 19 Jan. 2021. Twitter
6) The GS Non-Profitable Tech basket consists of non-profitable US listed companies in innovative industries. Tech is defined quite broadly to include new economy companies across GICS industry groupings. The basket is optimized for liquidity with no name initially weighted greater than 4.65%.
Source: Bianco Research, L.L.C, 2021, https://www.biancoresearch.com
7) Breakouts continue to fail.
Technical Comments
The monthly S&P500 chart formed a bear bar in January. Although it did not close on its low, it is still a sell signal bar. This reversal is coming at the top of a 10-year bull channel. There are two other ways to draw a trend channel line as well. Some will focus on the one based on the January 2018 and February 2020 highs. Others will see the rally as a wedge top, where the 1st two legs up were in February and September 2020. Whenever there is more than one way to draw a channel, more computers will look for a reversal. With 3 channels, traders expect a pullback and it probably began this month.
I said that this month is not a strong sell signal bar because it did not close on its low. Furthermore, the context is not great. Yes, the reversal is coming at the top of bull channels, which means the SPX is failing at resistance. However, the yearlong bull channel is tight. The 1st reversal down from a tight bull channel typically leads to a bull flag, or a trading range, and not a bear trend. If the SPX enters a trading range for several months, the bears would then have a better chance of a trend reversal down.
Bad bull flag usually limits the extent of rally.
I want to bring up another point that I have made several times since October. October was a High 1 bull flag buy signal bar. But it was a bear bar, and September was a bear bar as well. Furthermore, the bull flag was coming in a buy climax since the March low, and 10 years into a bull trend. I have been saying that a breakout in this situation typically only lasts about a couple bars, and then traders expect more of a pullback. The bear bar in January at resistance is consistent with this.
Another example was the pair of bear bars after the January 2018 buy climax. Although the rally that followed lasted 6 bars (months), it only went above the top of the buy climax for 2 months, before reversing down 20%.
How low can the S&P500 go?
If this is the start of a trading range for a few months, the bottom of the range is often at support. That usually means the bottom of the most recent leg up, which began with the November low at around 3200.
Look at all of the selloffs since 2011. None has lasted more than 3 months. Yes, there was a 35% correction last year, but it only lasted 2 months. Traders will expect a selloff from here to be brief, like all of the others. The S&P500 will probably fall 10%, like it has done many times since 2011. Can it fall 35%, like last year? Probably not, at least not without first entering a trading range for several months. And even then, a 35% correction is a 5- to 10- year event. That makes it unlikely in 2021. What about the bulls?
Does the S&P500 have to go down? Can’t it continue up, despite the sell signal bar? Of course, but the sell signal bar in a buy climax at resistance makes a minor reversal more likely, than an immediate continuation of the bull trend.
The Portfolios
January was a busy month in our portfolios. We took profits where available and we also sold Google, Pan-American Silver. Centerra Gold, BMO Premium Yield ETF, BMO Healthcare ETF, and QQQ
We added Curiosity Stream, Draftkings, Jumia Technologies AG, Nike Inc, Seven Generations Energy Ltd, BMO Equal Weight US banks ETF, Ishares Materials Index ETF, Ishares Capped Energy ETF and Ishares Global Base Metals Index ETF.
Snapshot of some of the new names:
Curiositystream Inc.
This is a factual information company. The company provides documentary series and features tops from space exploration to adventures. It delivers shows of the non-fiction genre to demystify science, nature, history, technology, society and lifestyle.
Draftkings Inc.
They are a digital sports entertainment and gaming company.
Jumia Technologies AG
An e-commerce company that operates online marketplaces for African consumers to buy and sell goods..
Nike Inc.
Nike is in the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services.
Seven Generations Energy Ltd.
A Western Canadian energy company that focuses on exploration, development and production of oil and natural gas properties.
Returns on our 60/40, 70/30, and 80/20 portfolios before fees: As of February 5, 2021
And Something Interesting...
This month’s newsletter includes a link to an article written by Lance Roberts. He talks about the actions of the Federal Reserve and what will happen in the end, The Fed, Zombies, & The Pathway To Japanification. Click here to read.