“If they are telling you to sit still and stay passive, it might be because it’s easier for them, not because it’s better for you.” – Willie Delwiche
Bottom Line: The rotational correction in stocks continues. We are cautious near term, but the weight of evidence suggests good things yet to come in 2021.
|Schenk Wealth Management Equity Allocation|
In the Markets
We remain a bit concerned that our Buying Power Indicator, which measures strength in money flowing into stocks, continues to suggest that institutional money is not joining the party yet. Because of this, we continue to keep our stops tight on most positions. Long-term however, the bulk of the evidence remains bullish and we are in a bull market.
Right now the market is very choppy and it’s more challenging to make gains. One day you think it’s rotation into travel stocks, then it changes and something else moves. Back and forth. This is simply how the market works when there is imbalance between supply or demand; you get randomness and no synchrony. This too shall end.
Choppy trends are part of markets – always have been and always will be. Fixed income isn’t all that different. Big money (institutions) do not seem to have any conviction at the moment.
The Bad (short term)
Buying Power Indictor
Money Flow Analysis, as measured by our Buying Power Indicator, is the most important first step in analyzing any security because it will give a leading tell whether the average stock is under accumulation (demand) or distribution (supply). Most of this year, that appears to be leaning toward distribution. This action leads to market corrections. However, corrections can be through time or through price. For now, this one just seems to be taking time.
The Good (bigger picture)
Leading economic indicators still suggest an economic boom in 2021. Massive stimulus at roughly 50% of entire US GDP over the last 6 months supports that and is confirmed by economic surprises on the upside domestically and globally.
Still we know the economy is not necessarily the market. Right now investors have given up on Growth & Tech – but some key names are showing strength after quietly basing for months and others have now just begun to build bases.
At the same time a record-high number of companies (60) have issued positive earnings guidance for Q1 2021 to date. The number of companies issuing positive earnings guidance is well above the five-year average of 35.
SWM Primary Trend Indicator (PTI)
Our PTI captures the health of market trends using participation and trend data for the major market indices. This model can keep us on the right side of the market and set our allocation bias. We want to add exposure and take bullish signals in bull markets. Conversely, we want to shun risk, raise cash and ignore bullish signals when market health is weak and downtrends threaten.
The PTI is designed to absorb corrections within a bull market or counter-trend bounces within a bear market. There will still be drawdowns, corrections and dips during bull markets. These are considered opportunities to look for bullish setups, such as bullish continuation patterns and consolidations. No model is perfect but combined with our Buying Power Indicator, this should keep us on the right side of the market. For now, it’s short term caution with longer term (6-9 months) positive view.
Short term component of our PTI – Trend Thrust Model
This table measures shorter term shifts in supply and demand in the S&P500. Despite the significant rotation and weak Buying Power, this has yet to give a caution signal.
Those obsessed with watching the “S&P” or the “Dow” will not notice the market has been correcting big time, but it’s been one of rotation. Investors have been moving out of growth stocks and buying value stocks that would benefit from the re-opening and improving economy.
Longer term, the PTI appears to be shaping up for the “grind” we saw last November and into January. And, I like that because each new pullback will be a chance to refine our portfolios and add to positions.
The factors that really drive stock market cycles, outlined weekly in The Raps Sheet, remain positive.
Given the historic liquidity being injected into the system and high US consumer savings rates, the move in markets could get stronger than people think.
Jerome Powell, head of the Federal Reserve, reiterated again this past week“…we would like to smooth out the wild swings of past economic cycles by fine-tuning the monetary policy.” This is very bullish.
Long-term, the secular bull market remains intact, I suspect it will continue to surprise many as to how far it goes.
The world will be a very different place in 2030 and it’s important that we understand that today, and position accordingly.
For now, allocate defensively by reducing equity exposure, buy into great companies with great chart setups, keep stops tight, repeat. When the market tells us it’s done digesting, we’ll see the next leg in the cycle. Whether that starts at these levels, or from a lower level, I still expect it to be higher this year.
We remain completely open to any eventuality that the markets bring and will work endlessly to make sure your portfolios benefit from change, rather than fall victim to it.
Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.
Have a great weekend and if you have any questions about this update, or anything else please do not hesitate to reach out.
Peter Schenk, CMT, CIM | Portfolio Manager