Since we have a number of new readers, we want to reiterate that we try to offer items from both sides of the bull/bear ledger each weekend. Therefore, some of our comments conflict with one another. However, we still give people a good idea of which side of that ledger we stand at any given time. Thank you.
THE WEEKLY TOP 10
Table of Contents:
1) The stock market is not healthy…and a bear market next year is all but inevitable.
2) AMZN & APPL should be very important for the direction of the stock market into year end.
3) The bank stocks are vulnerable right now…on a short-term basis.
4) The energy stocks could fall a bit further, but it’s creating another buying opportunity.
5) “Death cross” for the HYG high yield ETF. That is a bearish development.
6) We’re also seeing a bit of a rise in the measures of “stress” in the financial system.
7) Bitcoin: We’re bullish, but we want to play devil’s advocate this weekend as well.
8) The aerospace/defense sector could pleasantly surprise investors next year.
9) The Federal Reserve’s credibility.
10) Summary of our current stance.
1) The action in the stock market has become very unhealthy. Too many stocks are rallying in parabolic ways. This is not good (even for the stocks of great companies), and it reminds us of the late 1990s. There is too much liquidity in the marketplace…and we now think the odds are EXTREMELY high that a bear market will begin at some point in the next 12 months.
The stock market continues to hold up very well after its big October rally. However, when you see a stock like Rivian (RIVN) double its market-cap in a week, it’s not a good sign for the longer-term. Anybody who thinks that the resurgence of the meme stocks is anything but a sign of an unhealthy market is a fool. The ONLY reason why so many stocks see strong rallies over a very short timeframe is because there is way too much liquidity sloshing around the system. It has absolutely nothing to do with economic growth or earnings growth.
That liquidity is going to become less plentiful going forward. This does not mean that the stock market cannot continue to act in an unhealthy manner for many months. However, this situation is too much like 1999…….No, the next bear market might not be as bad as the 2000-2003 bear market, but a bear market IS on the horizon….and it will begin at some point in the next 12-15 months. Therefore, while investors are enjoying these very nice gains, they should also be thinking about what they will do when the upcoming bear market begins.
This is the comment we made in our “Morning Comment” one morning last week. It was short and to the point…and we don’t see any reason to expand on it this weekend. Thank you.
2) Even though the froth in today’s market has become excessive, it does not mean that the stock market cannot rally further for many weeks (or even many months). When looking at whether the market can rally a lot more before the end of the year, we’ll be watching AMZN and AAPL. These two stocks should be a good indicator for the rest of the market into year-end.
Last week, we highlighted how several key technology stocks were getting extremely overbought (NVDA, AMD, MSFT). All three stocks rallied further last week…and thus became even more overbought (especially on their weekly charts). If these stocks begin to pullback soon…in order to work-off those overbought conditions (which is quite likely in our opinion), it could cause the entire tech group to suffer. That, in turn, should cause the entire stock market to suffer as well.
HOWEVER, if any pullback in these highflying names creates a rotation WITHIN the tech sector…instead of a rotation OUT of the tech sector…the broad market could continue to rise nicely over the rest of this year. Maybe the most bullish development of last week was the fact that some of the big-cap tech stocks that had lagging a little bit in recent weeks...saw some key breakout moves. THIS raises the odds that any rotation away from some of these highflying names (some of which have seen parabolic moves) will indeed stay within the tech sector.
The two stocks we’re talking about are AMZN and AAPL. AMZN had been stuck in a sideways range for over a year…and AAPL had been range-bound for four months. (AMZN did try to breakout of its range in July, but that turned out to be a “head fake.”)…..However, both of these names broke out of their respective ranges this past week. Therefore, if they can hold those gains (and thus avoid another “head fake”), they should attract any momentum money that would exit from stocks like NVDA, AMD and MSFT on a near-term basis.
Needless to say, another reason to keep a close eye on these two stocks is that they should be good indicators for consumer demand during the holiday season! Therefore, the action in AMZN & APPL over the next couple of weeks is going to be important on BOTH the technical AND the fundamental side of things…..
Of course, we’ll want to make sure that these breakouts from last week hold. As we mentioned above, AMZN has already given us a “head fake” this year, so if these two names roll back over quickly, it’s going to raise some serious questions about the tech group…especially if they roll back over at a time where the other highflyers digest their (huge) recent gains……This would not necessarily mean that the longer-term rally in tech is over, but it would create some near-term headwinds for the broad market.
Looking at the chart on AMZN, its break above the $3600 level took it out of the range it has been in since July of 2020! This raises the odds that it will not be a head fake this time…..We do need to point out that it’s getting a bit overbought near-term, but not extremely so. Therefore, even if it sees a mild dip, it shouldn’t be a problem…..What we’ll be watching is if it can break above its July highs. If it can above its July (“head fake”) highs (whether it’s now…or after a very-short-term “breather”), it’s going to be VERY bullish for AMZN on a technical basis.
As for AAPL, the news that they’re going to produce a driverless car helped the stock breakout of it own range. The sideways range for this stock was not a long as it was for AMZN, but it was still a multi-month range, so it’s still bullish development. Like AMZN, AAPL saw a “head fake” breakout a short time ago, so we want to be a little careful on this one as well. However, if it can continue to rally soon (either immediately…or after a short-term “breather”), it should attract a lot of momentum money for this stock as well.
We remain VERY concerned about the stock market for 2022, but if stocks like AMZN and AAPL can pick up any slack that is likely to come from some of the highest-flying tech stocks over the near-term, any problems could/should be put off until next year.
3) We remain quite bullish on the bank stocks on an intermediate and long-term basis, but we’re seeing some cracks in the armor in the short-term charts, so we’re turning a bit more cautious about their near-term potential. Not only do the charts look a bit concerning, but if the lockdown in Austria starts to spread to other parts of the world, it’s going to cause interest rates to fall and the yield curve to flatten. That won’t be good for the banks.
One area of the stock market we’re starting to become a bit concerned about on a short-term basis is the banking sector. We have been very bullish on this group for most of the last year, but it is showing signs that it could/should see a pullback…one that lasts more than just a few days.
On the fundamental side of things, Austria will go into a complete lockdown once again next week…and other countries are facing similar issues. If lockdowns start to spread to other parts of the world…especially if they spread to the U.S. (even if they’re much more mild lockdowns on this side of the Atlantic)…it could/should cause a “flight to safety” trade. That would push investors into U.S. Treasuries…and thus pull long-term interest rates lower. That would not be great for the bank stocks.
On the technical side of things, the rally we have seen in the bank stocks since September has stalled-out in recent weeks. The move has merely been a sideways one…rather than a downside move…but it has still been enough to take the KBE bank ETF below its short-term trend-line from mid-September. It also saw a negative cross on its MACD chart recently. Negative MACD crosses have been followed by pullbacks in the KBE several times this year, so this group could be ripe for a near-term drop.
We do need to point out that the KBE would have to drop below $55 (and give it a minor “lower-low”) before we would say that a near-term pullback would become a longer-term affair, so we don’t want to overstate this negative potential just yet. However, we now think that investors should avoid adding to these names right here. Instead, they should look to add to these stocks on weakness.
Longer-term, we still love the bank stocks, so we are definitely not raising a big red warning flag on the group at all. We’re just saying that it looks a bit vulnerable on a short-term basis…and the decline could/should last for more than just a few days. Therefore, we want to be more careful with the bank stocks (and other financial stocks) over the next couple of weeks.
4) It was a tough week for crude oil and the energy stocks. Concerns about the European lockdowns raised the biggest concern, but the group was overbought, to it was not a surprise that they pullback last week either way. We think the energy stocks (and the underlying commodity) could fall a bit further, but we also believe it will provide another good buying opportunity soon.
After a strong run into late October, WTI crude oil had become quite overbought…with its RSI chart reaching 80. Therefore, it was becoming ripe for short-term pullback. This past week’s news about a lockdown in Austria (and possible lockdowns in other parts of Europe) was a catalyst for a further drop. However, we remain bullish on a longer-term basis on crude. Very simply, there are no signs that the Biden Administration is going to ease the restrictions on Iran any time soon…and (more importantly), there are no signs that the Saudis are going to increase production. President Biden can release the SOR, but that will be like spitting into a pond…and the U.S. does not have the ability to raise production enough to make a difference in the coming months.
On the technical side of things, it would take a much more significant drop before it would come close to any important support levels. For instance, WTI would have to drop below $71 to take the commodity below its 1-year tend-line going back to the November 2020 election. That $71 dollar level is also a Fibonacci 61.8% retracement of the rally off the August lows. The RSI chart on WTI is getting somewhat oversold. It will have to fall further before it reaches a level that has been followed by nice bounces this year, so we could/should still see a bit more weakness. However, it should become very oversold if it gets down into the low $70s, so that $71 level should provide some very nice support.
As for the energy stocks, the XLE energy ETF had also become quite overbought in late October, so it’s not a surprise that it has seen a pullback either. The group has fallen 7%...and like WTI, it could see some more downside movement. However the $51.50 level should provide some strong support for the XLE. That is where the one-year trend-line…and the 200-DMA…AND a 50% retracement level of the rally from August all reside. Therefore, we’ll be looking to add to the energy names once again if/when the XLE drops down into the $51.50-$52 range.
Moving to the XOP oil and gas E&P ETF, it would have to drop more than 12% to test its one year trend-line. We doubt it will fall that far, so we’re looking at the 97 level (Fibonacci 38.2% retracement of the August low…which was a “double-bottom” low). Below that level, we have the 50% retracement level of $92.30.
We have seen several material drops in the energy sector since we turned bullish on it in October of last year, but each one has provided an EXCELLENT opportunity to buy these stocks on weakness. We believe this drop will be no different. Yes, they can (and likely will) fall a bit further, but we think that they’ll be headed higher once again before they get too far into December.
5) We are still worried about the action in the high yield market. The HYG high yield ETF has not bounced-back to the same degree that the stock market has after its September decline. This has left the HYG very close to an important support level, so if it breaks down much further over the coming days and weeks, it will raise a warning flag on this asset class (which, in turn, would raise concerns about the stock market as well).
Back in early October, we worried about the fact that the HYG high yield ETF was testing its lows from May. If it had broken that level, it would have taken it below its sideways range. Given that the high yield market is frequently a good leading indicator for the stock market, it would not have been good for stocks either. However, the HYG was able to bounce off that level rather quickly. Therefore, it did not send up a warning flag…and sure enough, the stock market bounced strongly over the following weeks.
Our concern, however, is that the HYG has not gone back up to the top end of its range. Unlike the stock market, the HYG did not retest or break its 2021 highs. Instead, it rolled back over in mid-October and dropped back down to those May lows near $86. Thankfully, the junk bond ETF bounced back yet again early this month, but this rally quickly lost steam as well.
Now, the HYG is back down and testing that key support level, thus if it falls further in the coming days or weeks, it’s going to break down…..We do admit that it would have to break below its March lows of 85.75 to confirm a breakdown, but the divergence between the stock market and the high yield market over the past month or so is a negative development…and it bears watching as we move through the rest of the year.
Another VERY concerning development is that the HYG has seen a “death cross”…with a declining 50-DMA crossing below a declining 200-DMA. This is only the third “death cross” in the last five years…and EACH ONE of those “death crosses” were followed by substantial declines in the HYG. Those “crosses” were also followed by corrections in the stock market. With this in mind, we’ll be watching this asset class like a hawk over the coming days and weeks.
6) Another reason why we’re concerned about the divergence between the stock market and the high yield market in recent weeks…is that several indicators of financial stress are starting to rise……Given how well the stock market is acting right now, it’s hard to think that the market will reverse before the end of the year. However, if these other indicators of stress continue to deteriorate, the situation could change very quickly.
The recent weakness in the high yield market is not the only thing that is raising our concerns about the credit markets. We are seeing some other indicators creeping towards levels that will create problems for the stock market if (repeat, IF) they continue to deteriorate. The LQD high grade ETF, the U.S. corporate BBB/10yr Treasury yield spread, the Citi Macro Risk Index and the BofA Global Financial Stress indicator are all moving towards levels that should be watched closely ove the coming weeks.
As we highlighted last weekend, one investor recently initiated a very large position in the LQD investment grade ETF in the 128/131 put spread. The LQD did fall further in a significant way early last week, but it also bounced later in the week. This action has formed a classic “head & shoulders” pattern in the LQD. If it breaks the “neck-line” of that pattern (at the $131.50 level), it’s going to be very negative for this (the highest quality) part of the U.S. corporate bond market. If the highest quality bonds begin to see some serious stress, what do think it will mean for the lower quality bonds?
The U.S. BBB bonds are those that stand at the lowest end of the investment grade market (one notch above junk). The spread between those BBB corporate bonds and the U.S. 10yr Treasury Note yield has been widening out over the past two months. Don’t get us wrong, it has not widened out in a major way, but big reversals have to start somewhere. If it breaks significantly above its March highs, it will start to create concerns in the bond market.
The BofA Global Financial Stress Indicator has also been rising in recent months. Like the BBB/10yr Treasury spread, it’s going to have to rise further to raise concerns, but it has been rising for five months already, so it is something we’re watching closely…..Similarly, the Citi Macro Risk Index has been rising since June…and it has been doing so in a fairly meaningful way. If you look at the increases this index saw in early 2018, Q4 of 2018, late summer of 2019 and early 2020…they were all followed by pullbacks in the stock market. In fact, except for August/September of 2019 (when the market fell over 6%), they all coincided with a full correction in the stock market.
We want to reiterate that these indicators have not reached levels that are creating a yellow warning flag (much less a red one), but if they deteriorate further, it will definitely signal that the situation in the financial markets are not as utopian as some of the biggest bulls are trying to portray right now. THIS will be especially true if the HYG breaks down further
7) We remain bullish on Bitcoin on a long-term basis. In fact, we like it on an intermediate-term basis as well (going into the end of the year and into early next year). Sure, it could fall further over the very-short-term, but it would have to fall a lot further to do any technical damage, so we’re not all that concerned about Bitcoin on a near-term basis either. However, we want to play devil’s advocate on cryptocurrencies this weekend. We just think it’s important to consider one important risk that they will face in the years ahead.
Bitcoin and other cryptocurrencies got hit pretty hard this past week. At one point, Bitcoin fell more than 17% at one point...and it finished the week below $60,000. We did not hear any good reason for the decline, so it looks like it’s merely some profit taking after its strong run over the previous six weeks.
If Bitcoin drops much below its late-October lows of $59,000, it would give it a “lower-low” and would thus leave it vulnerable to a further decline. However, it would take a drop below the $50,000 by the end of the month to take it below its trend-line from the July lows. Therefore, a further short-term decline would not do any technical damage.
In other words, we remain bullish on the cryptos…but we also think it’s important to raise some questions about their longer-term viability. The number one concern we have…and something that few people ever talk about…is that governments actually have very few real powers. One that they DO have, however, is the control over their currency. Therefore, cryptocurrencies are a major threat the powers-that-be…all over the world. People who do not understand that this could become a problem in the future, don’t understand the world of geopolitics.
The reason we’re highlighting this problem right now is that one of the stalwarts of the powers-that-be in the U.S., Hillary Clinton, warned this past week that cryptos can destabilize nations and weaken countries eventually. Of course, younger people will say that this is EXACTLY why cryptos will succeed…as governments will not be able to control them. However, those people do not know the degree people in power will go…to keep their power. (You don’t have to be a conspiracy theorist to know that history is filled with examples of crises…that were invented to help those in power…keep their power.)
Again, we’re just playing devil’s advocate, but it’s something to consider…at a time when we seem to experience a crisis every few years.
8) The news that Austria is going to go into lockdown again hit Boeing (BA) quite hard last week. This, in turn, caused the entire the aerospace/defense sector pullback as well. However, if this group can regain its balance…and can breakout of their recent four-month sideways range to the upside…the group could surprise people and outperform nicely in 2022.
We’d like to talk about one sector that doesn’t get a lot of attention in today’s market…where so many investors are focused on the highflying stocks. We’re talking about the aerospace sector. As we highlighted last weekend, Boeing (BA) is trying to breakout of the doldrums the stock has been in for several years now. When you combine this with the heightened tensions with China (this week’s Zoom meeting between Biden and Xi notwithstanding)…it gives us reason to think that this defense/aerospace sector could be a very good one in 2022.
It was great to see the leaders of the U.S. and China hold meetings early this past week, but there is no question that tensions between our two countries are elevated. There is also little question that China is growing its military capabilities in a significant way (and have been for a long time now). No, we’re not saying that we’re going to go back to a major arms race (like we had with the former Soviet Union several decades ago), but “peace through strength” is not something that only GOP administrations follow.
Looking at the charts, the ITA aerospace and defense ETF bumped up against the resistance levels of two different technical patterns. If you go back to early June, the ITA can be seen forming a “descending triangle” pattern…and it the $108 level is the top line in that pattern. If you start from early August, the ITA has been in a sideways range…and the $110 level is the top line of that range.
The ITA did not break above those resistance levels last week. Instead, the news that Austria is going to go into lockdown again hit Boeing (BA) late in the week. This, in turn, caused the entire the aerospace/defense sector pullback as well. However, if this group can regain its balance…and can breakout of their recent four-month sideways range to the upside…the group could surprise people and outperform nicely in 2022.
The aerospace/defense sector might not seem like the sexiest one in the world right now…given the recent action in stocks like RIVN. However, the ITA rallied over 90% from the March 2020 lows to its highs in June, so investors can still garner PLENTY of positive performance from this group. This could/should be particularly true in 2020 if/when the tensions between the U.S. and China continue to rise.
9) A lot has been made over the past two weeks about it will mean if President Biden choses Jerome Powell or Lael Brainard to lead the Fed going forward. We believe that any market reaction won’t last much longer than a NY minute. However, we do believe the choice could have an impact on the Fed’s credibility…when the next (inevitable) crisis, bear market, or UFO takes place.
Now that earnings season is winding down, the focus seems to have moved to President Biden’s choice for the next Fed Chair. To be honest, we do not think the markets will react in a significant way to either Jerome Powell or Lael Brainard. Sure, we might see a very short-term reaction, but it shouldn’t last very long.
The main reason we think any near-term reaction will be short-lived is because we believe the issue of inflation with decide the timing and speed of any rate hikes much more than who is leading the central bank. To be honest, the Fed is already skating behind the play when it comes to inflation, so a more dovish Chair would actually be bearish for the markets on a longer term basis in our opinion.
Both candidates are exceedingly qualified. However, whether it’s true or not, choosing Brainard will be seen as a political move…one that Biden has made to try to impact the mid-term (and the 2024) election. For us, we do not believe that Lael Brainard would be influenced by politics (at all). However, the appearance of political influence WILL be out there…and it will hurt the Fed’s reputation. More importantly, it could lead to a lower level of confidence in the Fed when the next crisis, bear market, or other UFO (UnForeseen Occurrence) takes place. (And their WILL be more UFO’s in the coming years.)
Chairman Powell did an excellent job during the most recent crisis (the pandemic) and the last thing we need in the next one is a lack of confidence in the Federal Reserve…..Again, any movement in the markets in reaction to this choice will be very short-lived in our opinion, so we’re not worried about it causing any lasting issues. We also that it would be unfair to describe Lael Brainard as a “political” decision (if that ends up being the choice).
However, whether it’s fair or not, many people will view it as a political decision…and that will not be good for the Fed. We think the best thing for the economy and the markets is to re-appoint Chairman Powell…and nominate Lael Brainard as the Vice Chair…and then move her in to replace Treasury Secretary Yellen when the Secretary decides (on her own) to retire.
10) Summary of our current stance……We want to begin this last bullet point this weekend by warning people about getting excited about the recent decline in oil prices. No, we’re not talking about the fact that we think oil prices will likely bounce-back before too long. We’re actually talking about the fact that we might be wrong about oil prices. Oil prices just might continue to decline, BUT THIS WOULD NOT be a reason to be bullish for the stock market! That’s right, strong rallies in WTI…that were followed by strong declines…frequently coincide (and sometimes lead) a significant decline in the stock market.
For instance, WTI rallied 144% in 1999 and into 2000…and then proceeded to drop 50%...and we know what happened to the stock market. It rallied almost 200% in 2007 into 2008…which was followed by a 75% decline (and another 50% drop in stocks). The 75% decline into early 2016 in crude oil culminated in a 13% drop in the S&P 500. The 80% rally/44% decline in crude in 2017/2018 ended with a 19% correction in the stock market……Today, the price of oil has rallied about 600% since late April 2020. (We started at the April 28th level of $12.34…not the April 20th lows of minus $37!)
If this rally is followed by a significant decline in crude oil (which is not our base case), it will NOT be good for the stock market. However, we have to admit that substantial drop in crude oil will not CAUSE a drop in the stop market. It will just be telling us that risk assets in general have fallen out of favor.
In other words, given how important monetary stimulus has been to most risk assets over the past decade…and that this stimulus is going to become less plentiful over the coming months…we would expect the next decline in crude oil to coincide with a significant drop in the stock market.
This does not mean that the decline in the stock market will start soon. It might not take place for many weeks…or even many months…but it’s coming. The continued parabolic rallies that we see in the stocks of companies are not making money yet…and have barely started making a product (like RIVN)…shows that the stock market is not a healthy one. (We would also say that parabolic rallies in great companies…like NVDA is another sign of an unhealthy market. We’re sorry, but 68% rallies in just 7 weeks…after a stock had already rallied 50% by early October…is the sign of an unhealthy market. This is especially true given that NVDA is now trading at 76x forward earnings.)…….Again, NVDA is a GREAT company, but without all of this excess liquidity, NVDA would not rally about 70% in 7 weeks…period.
The market is being led by massive amounts of excess liquidity…and that liquidity is about to start becoming less plentiful. This is taking place at a time when the world’s second biggest economy has gone from promoting massive levels of risk taking, debt and leverage…to clamping down on all three. This is not just a recipe for a stock market correction. It’s a recipe for bear market. As the pro-risk, pro-leverage atmosphere starts to reverse further over the coming weeks and months, it’s going to be a big problem for the stock market (and other risk assets).
However, the biggest problem we’re facing right now is the potential that the Fed and other central banks will try to keep the stock market rallying in a parabolic way. If that happens, it will create the kind of bubble that will make 2008 look like a tea party. Let’s hope the powers that be are smart enough to know that not even THEY will escape the repercussions of that kind of fall out.
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.