It was definitely a good day for the stock market...as the S&P, Nasdaq and Russell 2000 all closed at record all-time highs. We must say that the “internals” of the market weren’t all that great. The breadth for the S&P 500 was 3.4 to 1 positive...and it was just 3 to 1 positive for the Nasdaq Composite & NYSE Composite indexes. Again, those are not horrible numbers, but you’d like to see something above 5 to 1 positive on a day when the market was up more than 1%.
HAVING SAID THIS, the “internals” were better than they were on a couple of other days this week...and the S&P Equal Weight index rallied just as much as the S&P did yesterday (after lagging on several days earlier in the week). That equal weight index did not make a new record high like the S&P 500 did, but it’s less than 1% below its January all-time highs, so there is not a big divergence right now...and thus it’s not something that is raising a yellow flag.
This is a long-winded way of saying that this week’s rally in the stock market has been a good one, BUT that the less-than-stellar “internals” is telling us that the upside follow-through could be limited as we move through the rest of February. In other words, the stock market has simply retraced the losses that took place during the GME (et el) short squeeze that created a mini de-leveraging process the previous week. Therefore, it is not a lock that the stock market is going to see more upside follow-through.
Let’s face it, it’s great that earnings are going to be a lot better than they were in 2020...and that we’re seeing some signs of better economic growth than last year. However, since 2020 was SUCH a bad year, the kind of improvement we’re talking about would merely compare to your favorite baseball team moving from last place to third place in the standings. (Moving back to the pre-pandemic levels would still leave earnings only slightly better than 2018 & 2019...and would only take economic growth back to a level that was still part of the worst recovering since WWII.)
Sure, that kind of improvement will still be quite positive...because you have to start somewhere. (It’s VERY difficult to go from “worst to first.”) However, the stock market isn’t being priced like it’s a third place team. It’s being prices like the World Series Champion. So until the team (the economy & earnings) actually starts playing like first place team...instead of a third place team...we are going to have to be careful about expecting a lot more upside movement in the stock market right now.
The employment report could have an impact on the markets today, but since you’ll be inundated with opinions on that data by a zillion other firms on Wall Street this morning, we thought we talk about something else in the second part of our piece today...the commodities market.
We have been quite bullish on the commodity sector since late this summer. However, it is becoming quite overbought on a short-term basis, so investors should be careful about this rally over the near-term. For instance, the weekly charts on both the CRB commodity index and on WTI crude oil have reached the most overbought levels they’ve seen in a few years...and very close their most overbought levels since the 2011 highs.......The CRB is also getting close to a couple of key resistance levels. The first resistance level is its trend-line going all the way back to 2011...and the second one is its pre-pandemic highs. Therefore, given its overbought condition, it could/should be tough for the CRB to break these two key resistance levels on its first try.
Of course, the CRB (and WTI crude) could still rally a little bit further over the very-near-term...and actually test those key resistance levels. However, given the recent rally in the dollar...which yesterday moved even higher above the key 91 resistance level that we’ve been harping on recently...the odds are rising that several commodities are getting ripe for a short-term decline.
We want to reiterate that we believe that we are in the early innings of a new long-term bull market in commodities, but nothing moves in a straight line. If the dollar continues to rally from its extremely oversold, over-hated and over-shorted condition for several weeks (like we think it will), it should lead to at least some sort of pull-back in this asset class over the coming days and weeks.
With this in mind, we believe investors should not be as aggressive as they have been recently on the long side in commodities and commodity related equities. Instead, they should be looking to buy them on weakness...instead of chasing them up at these levels. This strategy is something that worked-out quite well for us in the bank stocks in recent weeks...and we think it will work well in the commodities and commodity related stocks over the coming weeks. (It should also work well with the emerging markets...which have a very strong inverse correlation with the dollar as well.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.