This is a copy of the (Monday) January 25, 2021 update for our MarketCycle Wealth REPORT website; it was originally posted to that site several days before the roughly 1500 point drop in the Dow.

This month’s blog will show the daily thinking process that we go through at MarketCycle Wealth Management and also at our paid membership site: MarketCycle Wealth REPORT (link below).  Every year, we post this free copy to readers of our blog.

MarketCycle Wealth  REPORT

For January 25, 2021  

Important note about the REPORT signals:  The individual asset signals shown below are determined by combining the following 11 criteria…

1. The trend direction of the individual asset
2. Relative strength of the individual asset against all other assets
3. Relative strength of all regions and countries relative to their peers
4. Where we are in the current cyclical market cycle
5. Where we are in the longer-term secular cycles
6. Where we are in the inflation cycle
7. Global Central Bank activity
8. Global currency relative strength and trends
9. Accelerated inflation data
10. Accelerated economic data
11. How much measurable risk is currently in the market

STOCKS…

United States:  BULLISH    

Developed Markets (ex-U.S.):  BULLISH

     Japan:  BULLISH

Emerging Markets (commodity producers):  BULLISH

     China:  BULLISH

     India:  BULLISH

Leader in RELATIVE STRENGTH:  United States 

GROWTH or VALUE:  GROWTH

Strongest SECTORS:  technology, consumer cyclicals, consumer staples and healthcare 

Global private equity:  BULLISH

• SECULAR U.S. stock outlook (effective October 1, 2011):  Bull markets will be stronger than usual
• SECULAR Emerging Market stock outlook:  Bear markets will be more severe than usual

BONDS…    

U.S. Treasury-bond, 30 year:  CAUTION  (can offer portfolio protection and hedging)   

U.S. Treasury-bond, 10 year:  CAUTION

U. S. fixed-rate corporate bonds:  BULLISH  

U.S. floating-rate assets (and TIPS):  BULLISH

U.S. high-yield corporate bonds:  BULLISH

U.S. preferred shares:  BULLISH

U.S. convertible bonds:  BULLISH  

Emerging Market high-yield bonds:  BULLISH

• SECULAR fixed-rate outlook:  Bear markets will be more severe than usual. 

COMMODITIES…

Gold:  BULLISH   (can offer portfolio protection and hedging)

Oil & energy:  BULLISH

Industrial metals:  BULLISH

Lumber:  BULLISH

U.S. home price appreciation:  BULLISH

• SECULAR commodity outlook (effective October 1, 2011):  Commodity bear markets will be more severe than usual 

CURRENCIES…

U.S. Dollar:  BEARISH 

Euro:  BULLISH

Yen:  BULLISH

Emerging Market currencies:  BULLISH

Note:  USDollar and EURo currencies could resolve by simply moving sideways for an extended period, temporarily reverting back to their prior signals. 

RISK ASSESSMENT…  

• Calculated future U.S. economic-RECESSION probabilities (markets can correct without being in recession):  LOW
• Global (ex-U.S.) Economic Weakness Indicator:  BULLISH
• U.S. Federal Reserve’s Survey of Professional Forecasters:  BULLISH  
• Are energy costs HIGH enough to crush the economy?  NO
• Are energy costs LOW enough to stimulate the economy?  YES
• Number of Hindenburg Double Omens within past 6 months:  N/A
• If post correction, does the VIX Rate-of-Change show that a near-term bottom may be in?  N/A
• High-yield to T-bonds – price divergence:  BULLISH
• High-yield to T-bonds – spread:  BULLISH
• S&P-500 to T-bonds – spread:  BULLISH
• Global (ex-U.S.) stocks to T-bonds – spread:  BULLISH
• Percent of S&P-500 stocks above-to-below the 200 SMA – divergence:  BULLISH
• S&P-500 Price to Momentum – divergence:  BULLISH
• S&P-500 monthly RSI – divergence:  BULLISH
• S&P-500 Advance/Decline Price Line:  BULLISH
• S&P-500 Advance/Decline Volume Line:  BULLISH
• Small-cap Advance/Decline Volume Line:  BULLISH
• Small-cap direction of 300 day Simple Moving Average:  BULLISH
• Micro-cap to large-cap divergence:  BULLISH
• Small-cap momentum:  near-term = caution
• Mid-cap momentum:  near-term = caution
• Large-cap momentum:  near-term = caution
• Dow Theory divergence:  BULLISH
• Home construction divergence (triggers early):  BULLISH
• Lumber price divergence (triggers early):  BULLISH
• Copper price divergence:  BULLISH
• Cyclically Adjusted Price-to-Earnings Valuation Ratio:  BULLISH
• Warren Buffett Valuation Metric:  BULLISH
• Q-Ratio Valuation Metric:  BULLISH
• U.S. 3-month:10-year interest rate yield-curve:  BULLISH
• Likely future direction of U.S. interest rates:  FLAT then UP
• 12 month trend of inflation levels:  INFLATIONARY 
• Inflation/Deflation Extremes Indicator:  BULLISH  
• Volatility trading-range:  BULLISH
• Un-employment trend (leads employment data):  BULLISH
• U.S. Leading Economic Indicators EXPANSION or CONTRACTION:  EXPANSION
• U.S. stock market combined SEASONALS (updated monthly):  BULLISH
• Is there too much BULLISH ENTHUSIASM in the stock market?  YES 
• ∗∗ Calculated chance of a near-term U.S. stock market CORRECTION (a multi-month 10-30% loss):  AVERAGE 
• ∗∗ Calculated chance of a near-term U.S. stock market RECESSION (a year-long 20-50% loss):  NONE  (U.S. recessions usually lead to global recessions, but not vice versa.)
• ∗∗ Calculated chance of a global DEPRESSION (a multi-year 50%+ loss):  NONE  (Depressions are always global.)
• Minor OVERSOLD Indicator most recent buy-the-dip date:  March 23, 2020   
• Major OVERSOLD Indicator most recent buy-the-dip date:  March 23, 2020 
• U.S. SECULAR THEME… “MY” Ratio (investing demographics) is bullish until 2029
• U.S. very-long-term SECULAR THEME… inflation or deflation:  INFLATION 

Additional BLOG COMMENTS for January 31, 2021:  The risk assessment area has been a very positive “bullish sea-of-green” but we had also clarified that the probability existed for a rapid near-term pullback of 5% or more and I had been sharing this information in private client ‘Market Updates’ for 6 weeks prior to the 1500 point drop.  This pullback is now well underway.  Of note, every single country in the world is currently in expansionary mode and even Spain is coming out of contraction.  We’re very bullish for the intermediate-term (months) and the longer-term (years) while being a bit cautious in the near-term (days to weeks).  Pullbacks should be viewed as buying opportunities.  There has been fairly strong support for the S&P-500 @ 3715 (where it halted on Friday) and also at 3600.  Pullbacks routinely occur at  least 1-3 times per quarter and we hadn’t experienced a pullback for far too long.

S&P-500 shown as of Monday, January 25, 2021… the market needs to move up at a 45° angle; the current trend had been too steep for too long.

There has been way too much bullish euphoria; the market normally prefers to “climb a wall of worry.”  This absolutely does not mean that a crash is due, but some of the built up steam needed to be released via a brief pullback followed by some sideways volatility.  With excessive euphoria, the reckless fear of missing out (known as “FOMO”) replaces the more rational fear of losing one’s hard earned money through stupidity.

PAJAMA TRADERS:

It is this type of excessive euphoria coupled with a full 3 months without a normal stock market pullback that allowed pajama traders, as a coordinated group, to create the GameStop/AMC curfuffle that is being non-stop reported in the news (in an attempt to fill the Trump news void).  Unfortunately, some of these traders may get trapped in margin calls (owing on brokerage loans) that they will be forced to pay back, but nobody is talking about that.  So, rather than these inexperienced pajama traders “paying off college loans,” some of them may, in fact, just end up paying back a lot of borrowed money to their brokerage.  We’ll see.  Of note, the IRS reports that 94% of all option traders (like the GameStop traders) eventually lose 100% of their money.  People work hard to save their money and then toss it away on high-risk bets.  It’s sad.  [UPDATE for February 5, 2021:  It appears that high level institutional traders, hedge fund types, actually were involved in this attack on other hedge funds that were excessively short on certain stocks… and that they possibly exploited and took advantage of the inexperienced retail players.]

Traders often want to embrace risk at exactly the wrong time, which is why MarketCycle re-calculates and monitors risk levels on a daily & continual basis.  Sadly, most investors don’t even understand what risk actually is and that inexperience is what causes temporary euphoria and its resultant problems.

EUPHORIA?  You bet.

Popular opinion is that the USDollar is collapsing and that we should run for the hills.  It is not; it is in fact still continuing to gyrate sideways, as it has done for many years now.  But I can already see that MarketCycle will eventually be rotating into additional global positions and dynamically currency hedged instruments.

The USDollar will likely continue its sideways slide, although it might drop a bit lower in 2021 as the Federal Reserve continues to refuse to raise rates in the face of slowly building inflation.  If you look at the far right (green line) you will see that it has actually strengthened a bit in the past month.

Finally, this performance chart, starting from the bottom of the 2008 Financial Crash, shows the S&P-500 in RED (which is up 450%) compared to the USDollar, EURo and Emerging Market (Asian) currency ETFs which ultimately produced 0% profits if held for the past dozen years:

Thanks for reading!

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Graham & Dodd:  “The essence of investment management is the management of risks, not the management of returns.”

Ralph Wagoner:  “The market is like an excitable dog on a very long leash in New York City, darting randomly in every direction.  The dog’s owner, who ultimately determines the primary direction (trend), is walking from Columbus Circle, through Central Park, to the Metropolitan Museum.  At any one moment there is no predicting which way the pooch will lurch.  But in the long run, you know he’s heading northeast at an average speed of three miles per hour.  What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog and not the owner.”

–  WEALTH MONEY MANAGEMENT  –  TREND FOLLOWING  –  GLOBAL MACRO  –  HEDGE FUND 

Thanks for supporting us…  Steph Aust