Last week we saw the overall stock market hit a speed bump on Wednesday and Thursday only to jump to a new closing high on Friday. The S&P 500 is just floating up. I am concerned that this could lead to a top towards the next round of earnings reports or around Labor Day if it continues at this pace as it would bring the stock market to an extreme overbought condition.
I came into this year about 60% invested and have increased that exposure to 70%. If things get extremely overbought I’m likely to chop that down to 50% and put on hedges. One way I would do that is by shorting stocks that are lagging the market averages, and many of those popular fad stocks of last year are still doing that. They would get smashed in a 10-20% market correction.
That said, there are some sectors that are leading the market and outperforming. For instance, real estate is still doing that, as you can see from the RWR ETF, which I own in my IRA.
My views on the market are flexible. If you can recall last year around May I actually shorted some real estate stocks as they were lagging the market as a partial hedge, but by December I became a believer in the long-term outlook for real estate and bought various REIT’s for investment positions.
The views of the small Robinhood trader are rarely flexible, though, as they remain fixed in herd trading in the same group of stocks, not even being deterred by recent stock market volatility. They are in other words complacent. But, seeing the Nasdaq make a new high last week helps to keep them that way.
Notice the COMPQ/SPX relative strength ratio on the bottom of this chart. Despite the new high in the Nasdaq on Friday, this ratio remains in a downtrend and has actually been flat the past few days. The Nasdaq is lagging the S&P 500. This means that it isn’t really going up as well as the S&P 500 is, much less ETF’s such as RWR, and will therefore just fall harder than the S&P 500 does whenever there is another market pullback.
The popular fad stocks are doing even worse. One ETF, which invests heavily in them is the ARKK ETF and you can see how poorly it is doing relative to the rest of the stock market.
Stocks inside this ETF are ones I may be looking at for short sell candidates in a few weeks.
To point out two. Take a look at PENN.
PENN is on the Robinhood top 100 most owned list and is barely rallying at all.
And TSLA is number one on the list, acting as dead money.
Last week I talked with Ike Iossif about his money flow indicators for the S&P 500 and they are dissipating. The reality is super low interest rates and QE operations are creating market distortions.
“This marks the first time on record junk-bond yields have dropped below the rate of inflation.” https://t.co/b3osDDOMAr pic.twitter.com/6SMX7kDoVk
— Pedro Nicolaci da Costa (@pdacosta) July 9, 2021
Meanwhile, gold and mining stocks appear to finally be stabilizing. I talked about that in this video I put on Youtube yesterday.
BTW – the folks at Equity Research put out a report with a triple price target on my top stock pick for the month. For the info on that click here.
-Mike
