Special Risk Capital Management LLC

Mixed Signals Continue July 3, 2021

July 2, 2021 – First off, Happy 4th of July to all of those in the USA. (Be Safe Y’all !)

I continue to see mixed signals as to the overall market strength. From a macro perspective this market is richly overvalued. Case in point, the P/E (price to earnings ratio) of the stocks in the S&P 500 is 38; typically anything above 23 to 25 is considered “overvalued”. “Overvalued” is from a historical view since stocks have been below 10 during a recession and more “typically” hang out in the upper teens to low twenties. 38 is rich; very.

Yes, we are at record highs but leadership continues to be held in a smaller group of stocks. 48% of stocks in the S&P 500 are below their 50 day moving average, and only 30% of stocks outperformed the S&P 500 Index. Narrowing participation is a precursor to a market correction. Next, small retail option traders (called ROBO traders) continue to buy naked calls to open, while hedge funds are . . well hedging.

In pending doom? No, because the price trend remains up / higher, but caution is advised. I’m a trend follower so I’ll stay the course, but no one gives me “brownie points” for being patient when (not IF) a corrections does come.

The chart above shows the trend. Everything looks good right now. What I think we’re seeing is primarily a slow down in the overall market and summer time is the perfect time (seasonally) to slow down. Having the market catch up to itself is a good thing, so I’m thinking we’re just in those summer doldrums and may not be headed for anything serious. But a major news flash could change that. The market is vonerable to bad news in here.

The good news is that we’re back to a more reasonable state where stocks out perform Treasury Bonds. Note that Technology sectors are back near the top of short term sector strength. A positive sign.

That’s about it for now. Have a good week. …………. Tom …………

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.