Winter Cold; Market Hot

Winter struck in all its glory this past week.  Most people, other than parts of Southern California, Arizona. South Florida & Hawaii, felt the sting. Very cold weather mixed with snow, and we all got to feel the wicked deep freeze that often occurs in February.

As you are probably aware, Texas was without power and today has very little clean water.  I wonder how those people were able to put in their stock and ETF trades last week?

The cost to charge your Tesla (NASDAQ:TSLA) went as high as $900, or what Elon might say… ludicrous mode.

During this rarely seen event; the market went through consolidation, as we suggested might be the case last weekend. There is, however, a much bigger picture being played out here. Equity inflows, small-cap stocks, modern family Biotechnology, and Crypto are all seeing much speculation, attention, and lots of play.

Investors bought $26.5 billion in equity funds last week, marking a tenth straight month of net buying in equity funds, Refinitiv Lipper data showed.

Another example of speculation can be seen in New Issues (IPOs). During 2020 there were 480 IPOs issued on the US Stock markets, a new record and 106% more than in 2019. And this during a pandemic? That was 20% higher than the previous record of IPO’s in 2000, which had 397.

So far in 2021, the estimation is that there have been 160 already. Notice I said since 2000? Does anyone recall that period when if you had a “.com” in the name of your company you could go public even without revenue or earnings?

Also, you may note, that many of the IPOs these past 2 years have had no earnings but have been met with a vociferous appetite by investors whom I will call “speculators”.  We all know that you need not have any positive earnings to be a hugely successful stock, so long as your business model, area of endeavor or CEO can talk up why you MAY make billions in the future (i.e., TESLA). Sometimes, it even happens.

Add on top of this Bitcoin hit $57,000 Friday after starting the year at $29,000 a rise of almost 100% in 7 weeks.

Small cap stocks are still on a tear (our Small Cap All-Stars model is up almost 30% YTD), and this adds up to a very HOT Wall Street.

Why you ask?

There are a host of reasons, but I will attempt to add to my thesis from a few weeks ago which discussed in some depth the amount of stimulus in the markets and more on its way. This benefits smaller businesses that may need it the most and will impact their balance sheets more quickly.  Here are some other reasons:

1. Fixed Income yields are steadily rising and are providing negative returns to investors. Even retirees understand they will not be able to live on fixed income returns and have pulled money out of bond funds and moved into stocks and index funds and get some type of return.
2. Inflation is rearing its ugly head; Home building prices like lumber and copper are soaring; home resale values are rising at the fastest rate in many years. Food and agricultural prices are rising at the fastest rate in 20 years.
3. The Federal Reserve and Central Banks are taking a loose monetary position with interbank interest rates at zero. This easing cycle is pumping up the speculative fervor as everything from small caps, to used cars, to vacation houses to collectibles like watches, artwork, and even private jets are in high demand and fetching much higher prices than just several months ago.
4. Supply side disruptions have caused everything from certain kinds of food, oil, gasoline, medicine (think Vaccine) to be in high demand but going thru supply issues.
5. Gas is much higher at the pump, and now we have new concerns about states, like Texas, being unable to supply energy in the case of volatile weather conditions.

Even though I am not a meteorologist, I do know this; the weather will warm up soon, the supply-demand issues will get rectified, and we will see calmer times.

However, the potential rise in inflation and high consumer demand may drive the prices for goods and services higher.

Right now, the monetary cycle we are in is propping up the dollar, interest rates are trending up, and the stock market holding onto most of the gains from the past 10+ months.

We are more confident each day that when the time comes when the speculative fervor subsides, and rising rates will result in a correction or bear market, MarketGauge can and will be your best source for information on how to maneuver in the changing market landscape.

We have taken advantage of the good markets so far in 2021 and most, if not all, of our investment strategies are performing well above their benchmarks. This with us having locked in nice gains on small caps, NASDAQ, Sector ETFs, and a host of Mish’s trades which have seen doubles and some triples in a very short time.

Here are this week’s latest highlights:

• Risk Gauges are in full bullish mode with the four key US equity benchmarks digesting positive yearly returns last week.
• The large caps / Dow Jones Average (DIA) led US equities in the last five trading days, closing up+ .1% and was the only US equity benchmark to close above the 10 DMA and positive for the week.
• Long Bonds (TLT) got hit hard, closing down -3.8% putting pressure on gold while lifting bank stocks which love the higher margins on higher rates.
• The rise in interest rates continues to pressure Utilities, Consumer Staples, and Consumer Discretionary sectors
• Transportation (IYT) did well confirming that markets are expecting a reopening of the economy and that a much-needed infrastructure bill could be passed.
• Market Internals / McClellan Oscillator turned weak and is on the cusp of a sell signal
• Growth stocks (VUG) gave up its leadership position over Value (VTV) this week.
• Gold (GLD) sold off once again hitting six-month lows before bouncing off oversold levels, pressured by rising rates and Bitcoin going crazy.
• Emerging Markets (EEM), continues to maintain leadership in Global Equities markets which is not surprising considering their sensitivity to inflation which is on the rise.
• As we’ve highlighted for months, soft commodities (DBA) have been strong and finally broke out above its 200-week moving average, which has not happened since mid-2014, however on a relative basis is still weak versus equities and has plenty more upside possible.
• Copper, Wood (not Cathy), and Industrial metals soared, fanning the inflationary flame and the housing explosion.

Have a great weekend and best wishes for your trading.