Special Risk Capital Management LLC

Inflation ! … or … ? November 13, 2021

Nov. 12, 2021 – I’m going to start off a little differently this week and talk about sector strength and how it typically relates to major market tops.

The big word this week was Inflation.  Is its sudden and significant rise a sign of bad news for this market and what are the warning signs?  First off I want to emphasize the description of “major” as it relates to market tops.  These are not short term 5% to 10% corrections, but ones that are due to longer term weakness in the overall economy, and typically last at least 6 months but can go on for years.

Let’s look at a few signs of a major top.  Usually we’ll see that high quality (i.e. government) bonds out perform stocks.  We’ll also see “safe haven” sectors like Utilities and Consumer Staples out perform as well.   Another sign is that the VIX index (based on the put / calls in the options market) takes a sudden and big move up and it will stay there.  I note that (so far) that’s not the situation in this market . . . .  could be later, but not now.  One other characteristic that happens early on is if major investors see trouble ahead “Value” stocks will out perform “Growth” stocks.

What do we have now?  Well Call option activity is very, very high (a sign of optimistic / speculation).  Treasury bonds remain high historically (i.e. low interest rates).  VIX gyrates but does not stay very high for very long, and growth is out performing value.  Take a look at the relative strength comparison chart below over the past 6 weeks.

Chart courtesy of Stock Charts

Small Cap(ital) growth stocks are doing better than Large Cap value; large cap value stocks which would be a “safer bet” for investors.  OK, perhaps a sign of speculation, which could be worrisome, but so far not a sign of weakness.

Next let’s look at the usual Short Term Sector Strength table below.

And what do we see?  Technology sectors strong as well as Mid cap and Small cap indexes.  Yes, Gold is up there as well and if inflation is to continue to be a worry gold should continue to do even better.  Gold would also be a bell weather for a market top driven by inflation; we’ll keep an eye on that. Lastly we’ll look at how the stocks in the S&P 1500 Index (considered to be the most “investable”) are doing right now.

Not much to get concerned about here at the present time.  The last chart is of the NASDAQ Composite Index, the chart I usually lead off with.  We’ve had a brief drop over the past 3 days with inflation concerns but markets don’t go up in a straight line either.

Third quarter earnings have been pretty to very good.  Some corporations have given weak guidance for the 4^th quarter so IF we are to see a big correction we may have to wait until after the 1^st of the year if earnings falter.  As always, things can change quickly but let’s also keep things in perspective and not get carried away with headlines.

Have a good week.    ………..  Tom  ……………

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