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A Skittish Market Remains Vulnerable July 18, 2021

Posted by Tom in Thoughts.
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July 16, 2021 – I know that (by now) I sound like a “broken record” repeating the same thing. The markets have internal weakness. We’re seeing glimpses of that with headline news stories. Whether it be concerns about inflation, Covid resurgence or political issues they all have some effect on the market. But for now, minor and short term; folks are nervous. The latest are fears of a second outbreak of Covid. To be super sure, that could be a very real and significant issue and have a major effect on the overall economy. It brings to mind a saying that I’m particularly fond of: “It’s not what happens, it’s what you do about it.” I don’t wish to be a victim of a complacent market.

So, is this market trying to tell us something? We’ve been on a very long run; to be sure, a recovery run. But are we getting ahead of ourselves and expecting too much for the current and near term conditions? The market is rich and priced for an economic come back. Here’s a chart from “Advisor Perspectives” and an old aquaintcy, Doug Short.

Now this chart goes back a waaay long time (1870) but it’s a reminder that “trees don’t grow all of the way to the sky . . . just toward it”. The red line is the normalize regression line (i.e. “average”) and the lower histogram shows the deviation from that line. You may have heard the term “regression to the mean”, well the “mean” is that red line. It’s like a rubber band that snaps back to it’s relaxed state. Anyway . . . . in historical terms, we’re extended.

As J.P. Morgan once said: “The markets can stay irrational longer than I can stay liquid.” (or something to that effect). Meaning that this can go on farther than anyone expects. But as mentioned previously, the leadership (the # of stocks) that are propelling the indexes higher are getting smaller and smaller. It looks like an “All Amazon & Apple, all of the time” type of market. (not that these are bad companies)

The chart below does start to show some areas of weakness:

click to enlarge chart

From top to bottom- Sentiment: beginning to weaken, Money Flow: Bearish, Volume Flow: close to a crossover, Price Strength: lightly Bearish, Trend Channel: Price breaking below, Trading Volume: light. I’m keeping an eye on the first 14371 level (NASDAQ Composite Index) for an indication to “lighten up”. IF we continue to correct, I’ll lighten up some more. This is the summer and things tend to slow down (volume wise), so a knee jerk reaction to news could send things down in short order. For now, I’m following the trend, but cautious about where we are in the typical cycle. Just a reminder, we are beginning the reporting cycle of second quarter earnings and much is expected.

Have a good week. ………. Tom ……… Price chart by MetaStock, used with permission.

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