Would we use growth or value here? We would use IWM. We would not use fxb, but it does suggest our idea for a speculative trade in EWU is at least supported by the currency.
This week looks like a “drift up” week without much zap to it. PGJ is our favorite of the higher risk Chinese ETFs, with short-term support around 57 to 55 and intermediate-term support around 50 to 46.
The stimulus deal is not enough to overcome this setup in the minds of investors. This lessens the chance for a rally through Thursday, but we remain hopeful and think that will be more of a drift than a power move.
The central idea is that hot stocks rally into Christmas, and possibly into yearend, as funds buy them to show on yearend statements. Stocks within 10% of their highs work well. ETFs that are momentum based should work. 2020 Tax Loss Bounce List.
Our favorite subgroup in Financials, broker/dealers, is showing strong relative strength and we would still be overweight there and in credit card stocks moving into 2021.
We believe that the majority of small cap outperformance for the market occurs in periods when the economy is coming out of recessions and the market broadens out. The yield curve will continue to slowly steepen, which should help the banks (and our analysis of XLF consistently shows the banks will need the help).
With the advance to 367.68, SPY has penetrated the bottom end of our forecasted range (which was 367 to 372). A test of 155 for TLT is possible, as the daily stochastic has given a sell indication once again. Our biggest concern with UUP is that it is making new lows in December and could be setting up for a buy at the end of the month after tax selling.
The technical picture remains positive overall, albeit overbought enough on some longer-term indicators. Sentiment is a concern also, as the Put/Call ratio has fallen into bearish territory similar to that before the election. I know I sound like a broken record, but advisors MUST have a larger than normal position in small cap at this time. Japan could be poised for a run in 2021 and perhaps beyond as long as the 20,000 area on the Nikkei 225 holds.
Note that the daily stochastics of SPX are overbought, and that condition should lead to corrective behavior in the next two weeks. We have seen that the market is broadening out, as small cap has started to outperform, and the “rotation trade”, as it is called, has been news for the past two weeks.
We have seen improvement in Value but not enough to be sure this is a major switch. About the best you can say for XLF is that the model has stabilized in a negative pattern – it might improve later, but right now the model suggests this advance is in danger of being completely retraced.
If the market is to advance it should start to do so on Wednesday, and failure to hold yesterday’s low would likely suggest a short-term sell off. We still maintain our targets of 367 to 372 on SPY.
In many respects this was the weakest rally since the beginning of 2020 but that may change today. Pfizer (PFE) is out with great vaccine news and the Russell 2000 is higher by 7%.
Other themes we have been looking at are XLI and XLB starting to outperform Tech, and a weaker XLF, which is where we think most of the risk for next year is. We note that the dollar is starting the rally we have forecasted and could hit the top end of the range at around 26 to 27 on UUP.
We have been looking at a down beginning to the week, and an up finish. If we are correct, then we should see the market stabilize and begin an advance Wednesday after what is going to be an ugly start. Support levels on SPY (SPDR® S&P 500 Trust), where ideally we would buy, are as follows: 336, then 330 but we doubt 330 could hit before the election. UUP above 25.15 would imply a trading bottom is in.
Last week we mentioned that daily stochastics are recycling, and this process is continuing and should end this week. These may be down enough to see some advance at the end of the week. On last Thursday’s call, we indicated that we believed that the Treasury Department is silently rooting for the yield curve to, shall we say, become less flat. Our reason for this is our big concern for next year is the banks.
While many market pundits are looking at the Head and Shoulders breakout areas as support that cannot be broken, we actually think some weakness as the stochastics come down is possible. Everyone is looking at 342 on SPY, 280 or so on QQQ, and 73 on IJR as “must hold” supports, but we can see some probing lower as part of this consolidation.
This week looks like the market should advance, but we realize the chance of surprise is alive and well. One thing most people have overlooked is that there is relatively strong performance out of XLI and XLB over the last few weeks.
