Markets Report: "never short a dull market"
A slow and steady rally.
Stocks rallied this week, and the NASDAQ 100 is just -2% below its all-time high. This slow grind higher is somewhat reminiscent of 2017, a year when stocks rallied slowly and persistently.
*A 0.1% daily gain over 250 trading days = an annual gain of +28.3%!
But is the phrase “never short a dull market” valid? Is it truly unwise to short a market that appears calm and stable?
In today’s Markets Report I’ll share my outlook for stocks, Bitcoin, commodities, bonds, and currencies — and explain how I’m positioning my portfolio in response.
U.S. Stocks
Stocks bottomed 2 months ago, and what a rally it’s been! Tech is leading the market higher, and the NASDAQ 100 is now just -2% below its all-time high.
These types of rapid recoveries were historically bullish for the NASDAQ:
Maximum drawdowns were small:
Options
The $ value of all Call volume - the $ value of all Put volume is elevated, but not extremely high:
The stock market’s recent choppy price action featuring 1-day “pullbacks” pushed the CBOE’s Total Put/Call Ratio a little higher:
Breadth
Here are the % of S&P 500 stocks above their 200 and 50 day moving averages.
*These popular breadth indicators closely track the S&P’s distance from its 200 and 50 day moving averages. The logic is simple: the more stocks above the 200-DMA, the more the S&P will be above its 200-DMA. The more stocks below the 200-DMA, the more the S&P will be below its 200-DMA.
Few S&P 500 stocks are oversold or overbought, which is no surprise after the past 3 weeks’ choppy price action washed out momentum:
Sentiment Surveys
AAII Bulls-Bears is in neutral territory:
Similarly, Investors Intelligence Bulls-Bears is also in neutral territory:
According to the NAAIM Exposure Index, asset managers still lean bullish:
Other Sentiment
The CNN Fear & Greed indicator remains elevated, but isn’t in “extreme greed” territory:
Likewise, the S&P 500’s Daily Sentiment Index is elevated:
Corporate Insiders
Not much change among corporate insiders:
Same chart, but using a log scale for the Insider Buy/Sell Ratio:
Fund Flow
*Fund flows aren’t automatically contrarian. It depends on what type of trader is buying/selling and why. Some ETFs are traded by mean-reversion traders, while other ETFs are traded by trend followers. Moreover, many ETFs are small relative to the underlying market, so fund flows don’t always reflect broad sentiment towards that market.
With tech stocks leading the rally, QQQ is witnessing inflows:
VIX ETFs are often traded by mean-reversion traders; they buy when VIX is low and sell when VIX is high.
VIX ETFs continue to see inflows, which suggests that these mean-reversion traders are still betting on a jump in volatility:
TQQQ is also traded by mean-reversion traders who buy when TQQQ falls and sell (take profits) when TQQQ rallies.
TQQQ is still seeing outflows, which suggests that these mean-reversion traders are still taking profits:
Trend
The trend is your friend, until it ends. Stocks continue to trend higher, with tech stocks leading the way:
Why does trend matter? Because at least from a trend following perspective, it’s better to buy when the market is trending Up (e.g. above its 200-DMA) than when the market is trending Down (e.g. below its 200-DMA).
*There is nothing “special” about the 200 day moving average, except the fact that it’s popular. It is not significantly different from the 195, 190, 185, 180, 205, 210, 215, or 220 moving averages.
Long above vs. below the S&P 500’s 200 day moving average:
Long above vs. below the S&P 500’s 50 day moving average:
Long above vs. below the S&P 500’s 20 day moving average:
Earnings & Valuations
Some traders say that valuations and fundamentals are useless, and that “only price matters”. While this is true for day traders (valuations have zero impact on the market’s short term direction), fundamentals matter for traders and investors with longer term horizons.
Valuations for large cap stocks (S&P 500) remain elevated compared to their 10 year average:
Here’s the S&P 500’s forward earnings expectations. In the long run, earnings and stock prices move in the same direction:
