It's officially "stonk season" in the markets. The IPO market continues to baffle, and SPACs continue to pop-up like weeds in your front yard.

Plus if you’ve seen GameStop (GME), AMC Entertainment (AMC), and Blackberry (BB) lately, you know the Robinhooders are at it again.

These speculative gambles are ridiculously frothy right now as hedge funds and institutions continue to try and cover their shorts. The moves these stocks are making are more detached from reality than the guy in a buffalo headdress at the Capitol 3 weeks ago.

Complacency is the most significant near-term risk to stocks by far, and I have been warning about this for weeks. It also reminds me of the Q4 2018 pullback (read my story here).

It’s also earnings season (for those who care, like analysts), and it’s time for some big swings and volatility.

Well, not entirely. Monday (Jan. 25) saw a sudden mid-day plummet and subsequent recovery, and Tuesday (Jan. 26) traded slightly down. Wednesday (Jan. 27) looks set to open lower - we will see how that ends up.

Earnings have so far impressed, though, and there were some big moves from individual stocks.

General Electric (GE) popped over 9% thanks to a healthy outlook for 2021 and better than expected industrial free cash flow.

Johnson & Johnson (JNJ) also saw a nice 3% gain after beating earnings. Investors are also eagerly anticipating results from its vaccine’s trial. Johnson & Johnson’s vaccine is one dose and does not require any crazy storage protocols like Pfizer (PFE) and Moderna’s (MRNA). Strong results and FDA approval could genuinely change the tide of the pandemic and vaccine rollout.

Earnings from Microsoft (MSFT) and Advanced Micro Devices (AMD) also came in after the closing bell and impressed as well. Microsoft posted record quarterly sales, and AMD exceeded $3 billion in revenue.

Does this mean we're all clear now and can party like it's 1999?

Not exactly. Plus, if you're a stock nerd like I am, you don't want to party like it's 1999. Because that means 2000 will come—the end of one of the biggest parties, investors have ever seen. I'm talking about the dot-com bust.

Fair warning: the S&P 500 is still at or near its most-expensive level in recent history on most measures, and the Russell 2000 has never traded this high above its 200-day moving average.

The more GameStop pops, the more of a circus I think this market is. GameStop a $15+ billion company? Really? A correction at some point in the short-term would not be shocking in the least.

John Studzinski, vice chairman of Pimco, believes that market valuations are sound and reflect expectations of this eventual reopening and economic recovery by the second half of the year.

I agree on some level about the second half of the year. Outside of complacency, though, I have other short-term concerns.

For one, trillions in imminent stimulus could be useful for stocks but bring back inflation by mid-year. The worst part about it? The Fed will likely let it run hot. With debt rising and consumer spending expected to increase as vaccines are rolled out to the masses, the Fed is undoubtedly more likely to let inflation rise than letting interest rates rise.

All of this tells me that the market remains a pay-per-view fight between good news and bad news.

We may trade sideways this quarter- that would not shock me in the least. But I think we are long overdue for a correction since we haven't seen one since last March.

Corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

A correction could also be an excellent buying opportunity for what should be a great second half of the year.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is possible. I don't think that a decline above ~20%, leading to a bear market will happen.

In a report released last Tuesday (Jan. 19), Goldman Sachs shared the same sentiments.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth. Hopefully, you find my insights enlightening, and I welcome your thoughts and questions.

We have a critical week ahead with the Fed set to have its first monetary policy meeting of 2021 and more earnings announcements. I wish you the best of luck. We'll check back in with you at the end of the week.

Small-caps are Too Hot to Handle

Figure 1- iShares Russell 2000 ETF (IWM)

As tracked by the iShares Russell 2000 ETF (IWM), small-cap stocks underperformed the larger indices on Tuesday (January 26). The RSI is no longer technically overbought, but I still think that the Russell has overheated in the short-term. Stocks don’t just go up in a straight line without experiencing a sharp pullback. That’s just the nature of the beast.

Barron’s also claims that the Russell 2000/S&P 500 ratio has entered a powerful 15-year resistance area.

Nobody knows what will happen during this critical week of earnings, but I called a decline after the IWM began the week over a 70 RSI. Indeed the IWM is having a down week to this point, but it’s not sharply down enough for me to switch my call. Not even close.

I love small-cap stocks in the long-term, especially as the world reopens. Small-caps are also the most likely to benefit from Biden’s aggressive stimulus plan.

But the index has overheated. Period.

Before January 4, the RSI for the IWM Russell 2000 ETF was at a scorching hot 74.54. I called a sell-off happening in the short-term due to this RSI, and it happened.

After the RSI hit another overbought level of approximately 77 two Wednesdays ago (January 13), the IWM declined by another 1.5%. I said that Russell stocks would imminently cool down because the RSI was too hot, and precisely that’s what happened.

Consider this too. In its entire history as an index, the Russell has never traded this high above its 200-day moving average.

Small-caps may have priced in vaccine-related gains by now, and some stimulus optimism may have been priced in too.

I hope small-caps decline before jumping back in for long-term buying opportunities. I love where these stocks could end up by the end of the year.

SELL and take profits if you can- but do not fully exit positions. If there is a deeper pullback, this is a STRONG BUY for the long-term recovery.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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In a surprise twist, the Nasdaq surged by a healthy 4.2%, managing to close the week at an all-time high. What’s happening to tech stocks?

Surging, gaining...come again?

Wasn't tech supposed to wither away and die thanks to be big bad Democrat boogeymen? Wasn’t the radical Biden tax agenda and regulatory framework supposed to send your favorite tech stocks plummeting? Wasn’t Biden’s tax plan supposed to take an estimated 5-10% off the earnings per share?

For now, it seems like the market is putting more of its hopes into Biden's $1.9 trillion stimulus plan and ignoring his tax and regulation plans. As Treasury Secretary and former Fed Chair Janet Yellen claimed, Biden's primary focus is aiding American families (i.e., stimulus, low-interest rates) and, for now, not raising taxes.

But nothing is for sure with this stimulus. Republicans will resist it, and some moderate Democrats may do so as well. With Vice President Kamala Harris as the only tiebreaker for a Democrat majority in the Senate, Biden needs all the support he can get to pass this aggressive stimulus.

I maintain my view that the market is too complacent, and that we are about to enter a correction at some point in the short-term. It still reminds me of the Q4 2018 pullback (read my story here).

For one, valuations are absurd. Tech IPOs are a circus, the S&P 500 is at or near its most-expensive level in recent history on most measures, and the Russell 2000 has never traded this high above its 200-day moving average.

While stimulus could be useful for stocks in the short-term, it could almost certainly mean the return of inflation too by mid-year. The worst part about it? The Fed will likely let it run hot. With debt rising and consumer spending expected to increase as vaccines are rolled out to the masses, the Fed is undoubtedly more likely to let inflation rise than letting interest rates rise.

Others, however, believe that the market reflects optimism that the global economy will recover with the eventual lifting of COVID-related restrictions and more widely-available vaccines. John Studzinski, vice chairman of Pimco, believes that market valuations are strong and reflect expectations of this eventual reopening and economic recovery by the second half of the year.

All of this simply tells me that the market remains a pay-per-view fight between good news and bad news.

We may trade sideways this quarter- that would not shock me in the least. But I think we are long overdue for a correction since we haven’t seen one since last March.

Corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

A correction could also be an excellent buying opportunity for what should be a great second half of the year.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is possible. I don't think that a decline above ~20%, leading to a bear market will happen.

In a report released last Tuesday (Jan. 19), Goldman Sachs shared the same sentiments.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth. Hopefully, you find my insights enlightening, and I welcome your thoughts and questions.

We have a critical week ahead with the Fed set to have its first monetary policy meeting of the year and big earnings announcements on the horizon. Best of luck, have an excellent trading week, and have fun! We'll check back in with you all mid-week.

Are We in a Tech Bubble or Not?

Figure 1- Nasdaq Composite Index $COMP

Some of the hottest performing tech stocks announce earnings this week such as Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Tesla (TSLA) (yes I consider Tesla more of a tech stock than a car stock), and more.

Pay very close attention.

Although I am bullish on specific tech sectors such as cloud computing, e-commerce, and fintech for 2021, I’m concerned about the mania consuming tech stocks.

Tech valuations, and especially the tech IPO market, terrify me. It reminds me a lot of the dot-com bubble 20-years ago. Remember, the dot-com bubble was a major crash in the Nasdaq after excessive speculation and IPOs sent any internet-related stock soaring. Between 1995-2000 the Nasdaq surged 400%. By October 2002, the Nasdaq declined by a whopping 78%.

I have no other words to describe it besides the Nasdaq right now as a circus. Will the bubble pop now? That remains to be seen. But the similarities between now and 2000 are striking.

I am sticking with the theme of using the RSI to judge how to call the Nasdaq. An overbought RSI does not automatically mean a trend reversal, but with the Nasdaq, this appears to have been a consistent pattern over the last few weeks.

The Nasdaq pulled back on December 9 after exceeding an RSI of 70 and briefly pulled back again after passing 70 again around Christmas time. We also exceeded a 70 RSI just before the new year, and what happened on the first trading day of 2021? A decline of 1.47%.

The last time I changed my Nasdaq call from a HOLD to a SELL on January 11 after the RSI exceeded 70, the Nasdaq declined again by 1.45%.

The Nasdaq has an RSI of around 72 again, and I’m switching the call back to SELL. The Nasdaq is trading in a precise pattern and I am basing my calls on that pattern.

I still love tech and am bullish for 2021. But I need to see the Nasdaq have a legitimate cooldown period and move closer to its 50-day moving average before considering it a BUY.

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is a good option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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There’s not a rigid definition of what an emerging market is. For example, China is still the leading country in many emerging market ETFs and funds. But is it fair to consider China an emerging market any longer? It has nearly 1.4 billion people and was the only major economy globally to see GDP growth in 2020.

That’s like calling Giannis Antetokounmpo an up and coming superstar despite winning the last two NBA MVP awards.

But even if I did see China as an emerging market, it wouldn’t be my top choice for 2021.

If you’ve been reading my newsletters, you know that I love emerging market exposure this year. The dollar is weakening and should continue to weaken with trillions more in stimulus and rising commodity prices.

Meanwhile, emerging markets are perfectly positioned to exploit this and grow as a result.

You also know that I’ve been talking about specific emerging markets like Taiwan, Thailand, and Russia.

But in this special emerging markets newsletter, I will aim to further talk about what to look for when investing in a country, what other emerging markets to consider, and why I think they are set to outperform the US markets this year, after many years of underperformance.

Why emerging markets?

For several reasons!

For one, did you know these facts about emerging markets? They have:

-85% of the world population

-77% of the land mass

-63% of global commodities

-59% of global GDP (using PPP)

-12.5% of world’s market cap

Consider this for long-term investing too. Advanced economies are aging rapidly while emerging economies have youthful demographics.

That’s why PWC believes that emerging markets (E7) could grow around twice as fast as advanced economies (G7) on average.

For emerging markets, this could be very advantageous in the coming decades.

With American debt building up at an alarming rate, and the U.S. Dollar set for broader declines, this trend could begin sooner than we realize.

U.S. investors also usually have >5% exposure to emerging markets, making this an even more untapped opportunity.

Aren’t emerging markets risky?

Of course, you have to consider political risk, credit risk, and economic risk for emerging markets.

But did you see the U.S. Capitol two weeks ago? Have you noticed how its currency has performed since March?

Figure 1- U.S. Dollar $USD

Have you also seen the Fed’s balance sheet? Have you seen the S&P’s valuation and the tech IPO market?

I would even argue that emerging markets could hedge against America’s political, economic, and currency risks right now. The pandemic only exacerbated this.

Furthermore, if you look at the returns of the emerging markets I will discuss today: Taiwan (EWT), Russia (ERUS), Thailand (THD), Vietnam (VNM), South Korea (EWY), Indonesia (EIDO), Chile (ECH), and Peru (EPU), you will see that all have outperformed the S&P 500 (SPY) since September.

Figure 2-SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Sep. 1, 2020-Present

Taiwan iShares ETF (EWT)

Figure 3-iShares MSCI Taiwan ETF (EWT)

The Taiwan iShares ETF (EWT) has overheated more than the other emerging market ETFs based on its RSI that I will discuss. But if you’ve been reading my newsletters, you know I love Taiwan.

Taiwan has also arguably been the best call I’ve made since starting these newsletters.

I have been consistently calling Taiwan a better buy than China, despite China’s undeniable upside. Taiwan has the same sort of regional upside, without the same kind of geopolitical risks.

Consider this too. Despite China’s robust economic response to COVID-19, retail sales still fell 3.9% over the full year, marking the first contraction since 1968. Lockdowns have also returned to China with a vengeance thanks to a new wave in COVID-19 infections.

Ever since I called the EWT a buy on December 3rd, it has gained nearly 16% and outperformed the MSCI China ETF (MCHI) by approximately 3%.

It has also outperformed the SPY S&P 500 ETF by nearly 11%.

Taiwan also is unique for a developing country because of its stable fundamentals. It has low inflation, low unemployment, consistent trade surpluses, and high foreign reserves.

It also has a diverse and modern hi-tech economy, especially in the semiconductor industry. With a diverse set of trade partners, Taiwan could only be scratching the surface of its potential.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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This market continues trudging forward and weighing good news with bad. After stocks closed last week with their first weekly declines in nearly a month, stocks staged a mild recovery on Tuesday (Jan. 19th) led by tech, big banks, and small-caps.

Today's gains were primarily thanks to renewed stimulus hopes, faster vaccine distributions, and strong bank earnings. However, this is far from an “all clear.”

It still reminds me of the Q4 2018 pullback (read my story here). I remain steadfast that there is way too much complacency in today’s market- despite long-term tailwinds. In the short-term, we are truly walking on ice.

For one, valuations are absurd. Tech IPOs seem more like Barnum and Bailey than a capital market, the S&P 500 is trading near its highest forward P/E ratio since 2000, and the Russell 2000 has never traded this high above its 200-day moving average.

Signs are starting to point towards the return of inflation by mid-year as well. Despite declining Tuesday (Jan. 19), the 10-year yield remains around its highest level since March. Economist Mohammed El-Erian believes that “if we were to see another 20 basis point move in yields, that would be bad news.”

Edward Jones also claims that the 10-year breakeven rate, a market-based measure of inflation expectations, is at its highest level since 2018 thanks to rising commodity prices, a weaker dollar, and broad stimulus policy.

There are also some signs that the market is already pricing in Joe Biden's $1.9 trillion stimulus package.

On the one hand, according to Jim Cramer, “when an event occurs and the market gets exactly what it wants, but nothing more, it’s treated as a reason to sell, not to buy.” What happened in the market last week reflects this.

On the other hand, some of the economic benefits may not have been priced in yet. For example, JP Morgan believes that this stimulus plan could cut unemployment to less than 5% by year’s end.

But remember- the stock market is not the economy.

I remain firm that a correction between now and the end of Q1 2020 could happen thanks to this neverending pay-per-view bout between good news and bad news.

We may trade sideways this quarter- that would not shock me in the least. But I think we are long overdue for a correction since we haven’t seen one since last March.

Corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

A correction could also be an excellent buying opportunity for what should be a great second half of the year.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is possible. I don't think that a decline above ~20%, leading to a bear market will happen.

In a report released Tuesday (Jan. 19), Goldman Sachs shared the same sentiments.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth. Hopefully, you find my insights enlightening, and I welcome your thoughts and questions.

Have a great shortened trading week! Best of luck.

The Nasdaq’s RSI Indicates Hold- Deeper Pullback Coming?

Figure 1- Nasdaq Composite Index $COMP

If utility stocks are Subarus, tech stocks are Ferraris.

These stocks get the most glory, show the most growth potential, and are innovators and disruptors.

Pay close attention, especially to cloud computing, e-commerce, and fintech in 2021.

I am sticking with the theme of using the RSI to judge how to call the Nasdaq. An overbought RSI does not automatically mean a trend reversal, but with the Nasdaq, I always keep a close eye on this.

Over the last several weeks, the Nasdaq’s RSI has indicated a consistent pattern.

The Nasdaq pulled back on December 9 after exceeding an RSI of 70 and briefly pulled back again after passing 70 again four weeks ago. We also exceeded a 70 RSI just before the new year, and what happened on the first trading day of 2021? A decline of 1.47%.

The last time I changed my Nasdaq call from a HOLD to a SELL on January 11 after the RSI exceeded 70, the Nasdaq declined again by 1.45%.

Despite ticking back up on Tuesday (Jan. 19), the Nasdaq is still no longer technically overbought. But the tech IPO market screams dot-com bubble to me.

Last week, Lender Affirm nearly doubled in its public debut, while Poshmark surged by over 130% during its world premiere.

I have no other words to describe it besides a circus.

I still love tech and am generally bullish for 2021. But I need to see the Nasdaq have a legitimate cooldown period and move closer to its 50-day moving average before considering it a BUY.

I also have some worries about how full Democrat control could affect tech stocks thanks to higher taxes and stricter regulations. A Blue Wave is better for small-caps than tech.

For now, because the RSI is still a HOLD, I’m keeping my HOLD call.

If the RSI ticks back up above 70, I’m switching back to SELL. The Nasdaq is trading in a precise pattern.

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is a good option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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We’ve reached a very critical juncture in the markets. Last week, I mentioned how this reminded me of the Q4 2018 pullback (read my story here), and still maintain that there is way too much complacency in this market. Stock markets are risky for a reason, something many Robinhood traders are sure to find out this year.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra-high net worth. Hopefully, you’ll find the below enlightening from my perspective, and I welcome your thoughts and questions.

Stocks closed the week with their first weekly declines in nearly a month.

The pullbacks weren't anything astronomical, but it could potentially be the start of the Q1 declines that I have been predicting.

For one, valuations are insane, and the tech IPO market is looking like clown school. The S&P 500 is trading near its highest forward P/E ratio since 2000, while the Russell 2000 has never traded this high above its 200-day moving average.

Signs are starting to point towards the return of inflation by mid-year as well. As the 10-year yield ticked up to its highest level since March, economist Mohammed El-Erian said “if we were to see another 20 basis point move in yields, that would be bad news.”

Expectations haven’t been this high for inflation in years either. According to Edward Jones, the 10-year breakeven rate hit its highest level since 2018 last week due to rising commodity prices, a weaker dollar, and broad stimulus policy. The 10-year breakeven rate is a market-based measure of inflation expectations.

What’s also concerning is that investors didn’t seem to bat an eye at Joe Biden’s $1.9 trillion stimulus package!

What does this tell me?

That maybe this was anticipated and priced in already. According to Jim Cramer on his Mad Money show on CNBC, “When an event occurs and the market gets exactly what it wants, but nothing more, it’s treated as a reason to sell, not to buy.”

Although this week's decline was moderate, I still feel that a correction between now and the end of Q1 2020 is likely amidst a tug of war between good news and bad news.

Generally, corrections are healthy for markets and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). The last time we saw one was in March 2020, so we could be well overdue.

Corrections are healthy market behavior and could be an excellent buying opportunity for what should be a great second half of the year.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is possible. I don't think that a decline above ~20%, leading to a bear market will happen.

I hope everyone has a great day. Best of luck, and happy trading!

Time to Wager - Is the Dow Over/Under 31,000 Before the End of January?

Figure 1- Dow Jones Industrial Average $INDU

Is it possible to choose "push" on this gamble?

I have too many short-term questions and concerns about the Dow Jones to unequivocally say it's overheated like the Russell or tech IPOs, or if it's at the right buying level.

Although the Dow's RSI is comparable to the Nasdaq's on the surface, it has also not exceeded overbought levels as much.

I do like the Dow's decline this week. But I'd like to see a more profound dip before buying back in.

If someone wanted to make an over/under bet with me on the Dow's 31,000 level by the end of January, the truth is I'd probably choose "push." You'd have better luck betting on the AFC Championship game this year (but only if Mahomes plays).

I don't like how COVID-19 is trending (who does?), I am disappointed in the vaccine roll-out (although it's improving), and I am concerned about short-term economic and political headwinds. But I think it's more likely than not that the Dow hovers around 31,000 by month's end rather than make any significant move upwards or downwards. It is very hard right now to make a conviction call on this index.

If and when there is a drop in the index, it probably won't be anything like we saw back in March 2020.

While a 35,000 call to close out 2021 is a bit aggressive, the second half of 2021 could show robust gains for the index once vaccines are available to the general public.

With so much uncertainty, the call on the Dow stays a HOLD. I am closely monitoring the RSI if it exceeds 70.

For an ETF that looks to directly correlate with the Dow's performance, the SPDR Dow Jones ETF (DIA) is a strong option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

• Read more