This market reminds me of the days leading up to Christmas Eve 2018. For those who don’t remember, it was a pretty dark day for those trading in financial markets.

I was in the office, alone, and felt particularly responsible for my clients that day. You see, since October of that year, markets had been in a tailspin lower.

“Fundamentals look good, add some exposure to equities here” I found myself saying, more than once. And just when I thought I would get a break, have a half day in the markets, and take a couple days off - boom. Markets fell 2 to 3 percent on the day.

I still remember the feeling, it was like a gut punch. We were unprepared and had added more equity exposure for most of our clients in the prior few weeks. My boss was furious, as I was responsible for allocating hundreds of millions of dollars and we were having our worst quarter ever. I vowed to never be caught unprepared and foolhardy about markets ever again after that quarter.

It was a great lesson, and one that allowed me to flourish in 2020. While I did not foresee a global pandemic, back in January of 2020, things were looking eerily similar to 2018. Markets were frothy, and it appeared that no downside was possible. And I cut exposure for my family assets significantly.

That allowed me to avoid the worst of the pullback, and in March, with an eye on the long run, I took my family assets and picked up several companies at mouth watering valuations, some we hadn’t seen in years.

So far, so good. My old boss would have been pleased - not that it matters…

And now? Well. We’re falling into the same song and dance lately, aren’t we. I have some tips below for those interested, and if you want to know how my personal portfolios have performed, slip into my DMs.

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.

Although stocks closed mildly lower on Thursday (Jan. 14), stocks have overall had a strong start to 2021.

Be that as it may, I am still concerned about overheated valuations for stocks and the return of inflation. The S&P 500 is trading at its highest forward P/E ratio since 2000, and the 10-year treasury is at its highest level since March. The Russell 2000 is also up over 37% from its 200-day moving average for the first time in its history.

Overvalued stocks combined with inflation returning by mid-year is quite concerning for me. I feel that a correction between now and the end of Q1 2020 is likely.

I like how economist Mohammed El-Erian described the market as a “rational bubble.” But he did caution against four major risks that could cause a downturn.

The first two risks, and the least likely are the Fed pulling back on monetary stimulus and the potential for corporate bankruptcies. As Fed Chair Jay Powell said himself Thursday though, (Jan. 14) “be careful not to exit too early,”

The last two risks could be riskier.

The first is “some sort of market accident” akin to the dot-com bubble popping in 1999. THIS is what concerns me most right now. The IPO market is simply absurd right now. The DoorDash (DASH) and AirBnB (ABNB) IPOs were ridiculous, and other IPOs are looking more and more like a circus. Lender Affirm went public on Wednesday (Jan. 13) and nearly doubled. Shares of Poshmark also surged more than 130% in its debut Thursday (Jan. 14).

The other risk is the bond market and its effect on inflation. According to El-Erian, “If we were to see another 20 basis point move in yields, that would be bad news.”

Despite my concerns, it is clear to me that investors are loving the potential for a $1.9 trillion stimulus package under President-elect Biden.

Although a short-term tug of war between good news and bad news could continue, it seems to me that investors (for now) would just prefer to ride this out for what could be a strong second half of the year. According to CNBC’s Jim Cramer, there appears to be a lack of “people willing to sell”.

Be that as it may, jobless claims surged to their highest levels since August, and the pandemic is still out of control. According to Goldman Sachs’ Chief Economist Jan Hatzius, U.S. stocks and bond markets could possibly “take more of a breather” in the near term.

Generally, corrections are healthy, good 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). Because we haven’t seen a correction since March 2020, we could be well overdue.

This is healthy market behavior and could be a very good buying opportunity for what should be a great second half of the year.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

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 very possible. I don’t think that a correction above ~20% leading to a bear market will happen.

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

S&P 500’s Valuation is its Highest in Years

Figure 1- S&P 500 Large Cap Index $SPX

Conventional wisdom would tell you that the S&P had overheated and valuations are crazy. The index’s forward P/E ratio is the highest it’s been in two decades.

But did you just see JP Morgan’s (JPM) earnings report?

Wow.

The big bank crushed both top and bottom line estimates, and saw a net income growth of 42% from a year ago.

But look deeper into the earnings call, and there are some things to worry about. JP Morgan reported a net benefit of $1.89 billion in credit reserves and is maintaining a reserve topping $30 billion.

Why is this worrying? According to CEO Jamie Dimon, this is because of “significant near term uncertainty” due to the pandemic.

Dimon further added that despite vaccine and stimulus-related optimism, JP Morgan is holding onto these reserves in order to “withstand an economic environment far worse than the current base forecast by most economists.”

That’s a bit troubling.

The S&P 500 has been trading in a streaky matter as of late and reflects the broader tug-of-war between good news and bad. The index seemingly goes on multiple day winning streaks and losing streaks on a weekly basis. After seeing its worst sell-off since October last Monday (Jan. 4), for example, it went on a four-day win streak and broke past 3800.

We are now back below 3800. Although I always cheer stocks going up and hitting records, I want buying opportunities. I would like to see a drop to around 3600 or below before making a BUY call for the long-term.

For now, my near-term outlook is murky. A short-term correction could inevitably occur by the end of Q1 2021, but for now, I am calling the S&P a HOLD. I would like to see a sharp correction before initiating S&P exposure at a discount. There is clear upside for the second half of 2021, but I would just prefer to maximize the upside from a lower level.

For an ETF that attempts to directly correlate with the performance of the S&P, the SPDR S&P ETF (SPY) 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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Have you ever had a stock that's so far in the green that you’d never sell it? Rolling with “House Money?”

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.

We are now firmly in the second week of 2021. After markets declined to start the week, we saw a muted recovery on Tuesday (Jan. 12).

With Democrats gaining full control of both the legislative and executive branches of the government, the prospect of further stimulus has sent stocks soaring to their highest valuations in years. However, the short-term tug of war between good news and bad news will continue.

I am especially concerned about overstretched valuations for stocks combined with the return of inflation.

The S&P 500 is trading at its highest forward P/E ratio since 2000, and the 10-year treasury is at its highest level since March. Overvalued stocks combined with inflation returning by mid-year is quite concerning for me. I feel that a correction between now and the end of Q1 2020 is likely.

According to Goldman Sachs’ Chief Economist Jan Hatzius, U.S. stocks and bond markets could possibly “take more of a breather” in the near term. National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback by the end of this month.

Generally, corrections are healthy, good 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). Because we haven’t seen a correction since March 2020, we could be well overdue.

This is healthy market behavior and could be a very good buying opportunity for what should be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once the growing pains of rolling out vaccines stabilize.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

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 very possible. I don’t think that a correction above ~20% leading to a bear market will happen.

House money is fun to play with, but trust me - you won’t feel as well if you let it ride through a full correction without taking profits.

Best of luck, and happy trading!

The Nasdaq’s RSI is Back Below 70...Where Does it Go from Here?

Figure 1- Nasdaq Composite Index $COMP

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

I initially changed my short-term call on the Nasdaq from a SELL to a HOLD on January 5. I liked the Nasdaq’s declines to start 2021, especially after overheating. The RSI was no longer overbought as well.

After changing the call back to a SELL on January 11th, the Nasdaq declined 1.45%.

Over the last several weeks, this has been a consistent pattern for the Nasdaq. The Nasdaq pulled back on December 9th after it exceeded an RSI of 70, and briefly pulled back again after passing 70 again three weeks ago. We exceeded a 70 RSI again before the new year, and what happened on the first trading day of 2021? A decline of 1.47%.

Tech can rally at any time and witness a plunge at any time. Truly, this sector could move sideways before seeing a correction sooner rather than later.

Although there are also tailwinds for tech, they are specific to subsectors. Do what you can to find tech sub-sectors that are innovating, disrupting, and changing our world.

I am especially bullish on cloud computing, e-commerce, and fintech.

The Nasdaq is no longer overbought, and its RSI is now hovering around 64. I like this level more as a HOLD, but I still feel that it has overheated in the short-term.

I am generally optimistic and bullish for 2021, but I would like a pullback closer to the 50-day moving average before considering buying back in.

I also have some concerns with the Democrats winning Senate control, and its potential consequences for tech. It may not happen in 2021, but a Democrat-controlled Congress could raise taxes and further regulate high growth companies.

Additionally, love him or hate him, the censorship of President Trump across social media platforms raises questions about what constitutes free speech, and if Big Tech has too much power.

Because the RSI is back in HOLD territory, I’m switching my call again from SELL back to HOLD.

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

Do not let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself, especially in markets. I have many concerns about tech valuations and their astoundingly inflated levels. The recent IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this.

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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Welcome to a Stock Trading Alerts special edition focusing on tech. We will do a brief run-through of what happened in 2020, followed by the emerging tech trends that we can expect, and profit on, in 2021.

Tech’s impact on our world was arguably the main economic story of 2020. Nobody truly knew what to expect after the pandemic reached U.S. shores in February because nobody has previously experienced a worldwide pandemic of this nature. A novel disease has never before shut down economies or turned our lives upside down.

As we got used to this “new normal” though, it was obvious that tech would be the biggest beneficiary. It kept our world running, our businesses working, and students learning. With “stay-at-home” as the new norm, the Nasdaq hit record highs and saw its best year since 2009. Between January 2, 2020, and December 31, 2020, the Invesco QQQ ETF which tracks the Nasdaq, gained 46.20%.

The QQQ also gained nearly 85% between the bottom of March 23, 2020, and December 31, 2020.

In its 2021 kickoff, the Nasdaq continued surging, having already gained 2.4% in the first week of the new year.

There are some concerns though about overstretched valuations. Three of the 10 biggest IPOs for U.S. tech companies took place in 2020, including the largest ever, with cloud-based data-warehousing company Snowflake (SNOW). Although old-school investors such as Warren Buffet, are finally seeing the benefits of tech stocks, if you look at the Nasdaq chart below, it screams “bubble”.

Notice the Nasdaq’s RSI. While an overbought RSI does not automatically mean a trend reversal, with the Nasdaq, it tends to reverse in the short run anytime it exceeds a level of 70.

There are also concerns for tech with Democrats winning Senate control. While a tax hike may not happen in 2021, a Democrat-controlled Congress wants to raise taxes on high growth companies. Further regulation for big tech companies could be imminent as well. Additionally, love him or hate him, the censorship of President Trump across social media platforms raises questions about what constitutes free speech and what is stepping over the line for censorship. Expect social media stocks to be hit hard in the near-term due to this controversy.

There are also tailwinds for tech, and they are specific to sub-sectors.

Because technology has been evolving at such a rapid pace, it is important to understand what the top trends were for 2020, and how these trends could have more room to run in 2021.

According to ETF.com, the Top 5 performing tech ETFs in 2020 were the following:

1. ARK Next Generation Internet ETF (ARKW)
2. O'Shares Global Internet Giants ETF (OGIG)
3. ARK Fintech Innovation ETF (ARKF)
4. WisdomTree Cloud Computing Fund (WCLD)
5. SPDR S&P Internet ETF (XWEB)

Since March 23, the returns on these five ETFs compared to the QQQ are staggering:

In the paid subscription component of this newsletter, we will examine the ARKW ETF in more detail, what tech sub-sectors it focuses on, and which of these sub-sectors could become big in 2021. We will also discuss what trends to watch out for in those sectors.

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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The indices hit record highs yet again to close off the first week of 2021 and weighed unrest, poor jobs data, and further prospects of economic stimulus.

News Recap

• Both the Dow and S&P 500 closed the week off with four-day win streaks. The Dow climbed 56.84 points, or 0.2%, at 31,097.97. The S&P 500 rose 0.6% to 3,824.68, and the Nasdaq popped 1% to 13,201.98. The small-cap Russell 2000 declined 0.25%.
• The Dow and S&P 500 each gained more than 1% on the week, while the Nasdaq gained 2.4%, and the Russell 2000 surged by nearly 6%. These gains to start the year came despite the unprecedented unrest and invasion of the Capitol by Trump supporters on Wednesday (Jan. 6).
• Despite Democrats winning full control of the Senate, the Dow briefly declined 200 points midday after moderate Democrat Senator Joe Manchin from West Virginia told The Washington Post that he would “absolutely not” support a round of $2,000 stimulus checks. Manchin mildly walked back those comments later in the day and said he was “undecided,” and not outright opposed to it.
• The U.S. economy lost 140,000 jobs in December, according to the Labor Department. This is significantly worse than the estimated gain of 50,000 according to economists polled by Dow Jones.
• The 10-year yield rose to its highest level since March 20, and broke above 1.1%.
• Coca-Cola (KO) rose 2.2% to lead the Dow higher. The consumer discretionary and real estate sectors each rose more than 1%, lifting the S&P 500. The Nasdaq got a boost from Tesla, which popped 7.8%.

The first week of 2021 largely continued where 2020 left off- with turmoil, tension, and a barrage of news. Another 2020 pattern continued to kick off the new year- a resilient market.

A week that started off with a sharp sell-off concluded with sharp weekly gains, all-time highs, and a four-day winning streak for the Dow and S&P 500. This is despite the first assault on the U.S. Capitol since 1814, despite COVID-19 cases continuing to wreak havoc, and despite a disastrous jobs report.

How could this be?

The results of the Georgia election can first and foremost be credited for the market surge.

Although tech initially plummeted due to fears of higher taxes and stricter regulations, with full Democrat control of the Presidency, Senate, and House, there is finally clarity and expectations of further spending and government stimulus.

Although President-elect Joe Biden had promised to pass a measure for bigger stimulus checks if Democrats secured control of the Senate, comments from West Virginia Senator Joe Manchin, a moderate Democrat, spooked investors for a time on Friday (Jan. 8). Although Manchin briefly walked these comments back, according to Bill Miller, founder of Miller Value Partners, “Nothing is going to get passed if they can’t get the moderates in the Democratic Party, or the Republican Party for that matter, to go along with (further stimulus).”

President-elect Biden said Friday (Jan. 8) that a new aid package would be “in the trillions of dollars.” This comes after Goldman Sachs stated that it expects another big stimulus package of around $600 billion. Value stocks and small-cap stocks have surged as a result of these prospects.

Despite the prospect of further stimulus that could heat up the economy, the short-term tug of war between good news and bad news will continue. Many of these moves upwards or downwards are based on emotion and sentiment, and there could be some serious volatility in the near-term. Although markets have kicked off the new year with excitement from the “Blue Wave”, consider this.

Stocks have overstretched valuations, the Capitol was invaded, the pandemic is out of control, and the vaccine roll-outs have been clunky at best.

Even though the markets saw a nice weekly gain to kick off 2021 and the 10-year treasury is at its highest level in months, a correction between now and the end of Q1 2020 is likely.

National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback as early as this month.

Generally, corrections are healthy, good 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). I believe we are long overdue for one. We haven’t seen a correction since March 2020. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once the growing pains of rolling out vaccines stabilize. The pandemic is awful and the numbers are horrifying. But despite this, and despite the horrendous jobs report, there is one report released this past week that could be a step in the right direction - the ISM manufacturing data.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

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 very possible. I don’t think that a correction above ~20% leading to a bear market will happen.

Can Small-caps Own 2021?

Figure 1- iShares Russell 2000 ETF (IWM)

Small-caps were the comeback kids this week. Although I believed that the Russell 2000’s record-setting run since the start of November was coming to an end, the iShares Russell 2000 ETF (IWM) had itself quite a week and rallied 7.35% since January 4th. Small-cap stocks were the most excited from the Democrat sweep in Georgia due to hopes of further economic stimulus on the horizon.

I love small-cap stocks in the long-term, especially as the world reopens. A Democrat-dominated Congress could help these stocks too, but in the short-term, the index, by any measurement, has simply overheated. Before January 4th, the RSI for the IWM Russell 2000 ETF was at an astronomical 74.54. I called a pullback happening in the short-term due to this RSI, and it happened. Well now the RSI is back above 74 again, and I believe that a more significant correction in the near-term could be imminent.

Stocks simply just don’t always go up in a straight line, and that’s what the Russell 2000 has essentially been between November and December. It’s looked eerily similar this week.

What this also comes down to, is that small-caps are more sensitive to the news - good or bad. I think that vaccine gains have possibly been baked in by now. There could be another near-term pop due to further stimulus hopes, but it’s likely that small-caps in the near-term could trade sideways before an eventual larger pullback.

I hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

SELL and take this week’s profits if you can - but do not fully exit positions.

If there is a 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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Stocks gained for the third consecutive day on Thursday (Jan. 7) and hit record highs despite the unprecedented unrest in the U.S. Capitol in Washington.

News Recap

• The major indices hit a trifecta of record highs and historic milestones. The Dow Jones closed above 31,000 points for the first time and gained 211.73 points, or 0.7%, to 31,041.13. The S&P 500 also gained 1.5% to close above 3800 for the first time, and the Nasdaq climbed nearly 2.6% to close above 13,000 for the first time. The Russell 2000 also gained 1.89%.
• After Congress officially confirmed the election of Joe Biden as president, investors largely looked past the unrest in Washington and the unprecedented assault on the Capitol building by a mob of angry Trump supporters on Wednesday (Jan. 6). This was the first time since 1814 that the Capitol building was physically breached by hostile actors.
• Investors were likely relieved that President Trump finally “conceded” (in his own way) through a statement that “there will be an orderly transition on January 20th.”
• The Democrat sweep in the Georgia Senate elections continued to be cheered by investors. While there were some initial concerns that the markets could react negatively, the likelihood of further stimulus with a Democrat President, Senate, and House, outweighed any concerns. Stocks hit especially hardest during the pandemic could benefit the most from this.
• Jobless claims continue to stay somewhat level and beat expectations. Initial jobless claims came in at 787,000 for the week ending Dec. 31 and beat the estimated 815,000.
• Microsoft (MSFT) and Alphabet (GOOGL) both gained more than 2%, while Apple (AAPL) rose 3.4%.
• Walgreens Boots Alliance (WBA) led the Dow and rose 5.2% thanks to stronger-than-expected quarterly earnings. JPMorgan Chase (JPM) also advanced 3.3% after Bank of America upgraded it to buy from neutral.
• Tech and consumer discretionary were the best performing sectors on the S&P 500 and rose 2.7% and 1.8%, respectively.

It’s been two days after the U.S. Capitol was ransacked by an angry mob - and guess what? The markets keep going up! How can the markets keep going up when the centerpiece and symbol of American democracy was ransacked and breached by hostile actors for the first time since 1814?

It’s pretty simple when you look at the bigger picture. Despite the horror, disgust, and embarrassing display, at the end of the day it has no bearing on the economy. Although Wednesday's events were a black eye for American democracy, they have nothing to do with stocks and the economy.

CNBC personality Jim Cramer had very comprehensive and to the point statements on the matter Thursday (Jan. 7).

“We see the chaos in Washington, but many believe the storming of the Capitol will be the highwater mark of discord. The election is finally over, the results are certified, the challenges are finished. There’s a possibility of unity after years of polarization,” he said. “The stock market’s not a referendum on the state of the nation”

With encouraging ISM manufacturing data from earlier in the week, better than expected jobless claims, and political clarity, it makes some sense why the indices continue to hit all-time highs.

According to JJ Kinahan, chief market strategist at TD Ameritrade, Georgia’s election results give investors “more clarity” by “solidifying Democrat control in Washington and increasing expectations of more stimulus to come...With the political tensions easing, more stimulus expected to help boost the economy, and coronavirus vaccines helping bring a measure of calm to investors and traders, it seems that the market can now focus on earnings season.”

Goldman Sachs also expects another big stimulus package of around $600 billion. While this could be bad for the national debt and have long-term consequences, in the short-term, it could send the economy heating. Small-cap stocks surged as a result.

I still believe that there will be a short-term tug of war between good news and bad news. Many of these moves upwards or downwards are based on emotion and sentiment, and I believe there could be some serious volatility in the near-term. Although markets for now may be overly euphoric from the “Blue Wave”, consider this. Although it has no direct bearing on the economy, the Capitol was still invaded. January 7th was also the deadliest day of the pandemic yet in America, with over 4,000 deaths (Jan. 7).

There was no pullback to end 2020 as I anticipated, but I still believe that markets have overheated in the short-term. I believe that between now and the end of Q1 2020 a correction could happen.

Carl Icahn seemingly agrees with me, and said to CNBC on Monday (Jan. 4), “in my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually they hit a wall and go into a major painful correction.”

National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback as early as this month.

I do believe though that corrections are healthy and could be a good thing. Corrections are more commonplace than people realize and is normal market behavior. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are long overdue for one since there has not been one since the lows of March 2020. A correction could be a very good buying opportunity for what I believe will be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains out of the U.K. and South Africa are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5), and the better-than-expected jobless claims (Jan. 7) are positive steps in the right direction.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey that polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

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 very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

The premium analysis this morning will showcase a “Drivers and Divers” section that will break down some sectors that are in and out of favor. As a token of my appreciation for your patronage, I decided to give you a free sample of a “driver” and “diver” sector. Please do me a favor and let me know what you think of this segment! I’m always happy to hear from you.

Driving

Materials (XLB)

Figure 1 - Materials Select Sector SPDR Fund (XLB)

The ONLY reason that I can’t say to buy materials via the XLB ETF, is that the RSI is severely overbought as the ETF continues to hit record highs. But I truly believe that materials could be one of the biggest winners in 2021 thanks to several macro-level tailwinds.

Materials companies could be some of the biggest beneficiaries of vaccines getting us back to normal. With this new stimulus package and a weakened U.S. dollar, materials could also surge. Historically, dovish economic policies and a weak U.S. dollar have benefitted materials.

Because materials largely benefit from a weak dollar, emerging markets and materials are also historically correlated. As I am very bullish on emerging markets for 2021, I believe that materials could follow suit.

On one hand, I believe that this sector could pull back further in the early parts of 2021 along with the broader market. On the other hand, with Democrats in full control of both the executive and legislative branches of the government, more stimulus and an even weaker dollar could be on the horizon.

I previously said that I do not foresee a consistent rally happening until the end of Q1 2020. But I could be changing my mind soon. There are simply too many things that could send materials to the stratosphere in the coming year. But I would still like to get the XLB ETF at a cheaper price for more upside. To tell you the truth, I may switch my call the second I see the RSI drop to a more manageable level. I love this sector.

For the time being, this is a short-term HOLD but a BUY on a pullback.

Diving

Communication Services (XLC)

Figure 2 - Communication Services Select Sector SPDR Fund (XLC)

The XLC Communication Services ETF has had a strong week, but guess what? So has everyone else! Communications stocks simply do not excite me in 2021 and have not excited me in past years. Even when markets outperform, communications stocks tend to underperform.

While traditionally this is a good sector to find value in, right now I just don’t see it. The ETF is trading near its 52-week high, but I see downside risk without the same type of upside potential as other sectors such as small-caps and materials.

The ETF’s volume is already low and has been unstable too. This screams volatility to me.

I just can’t see how you would benefit from buying into this sector. It is hard to foresee how this sector will truly benefit from a Democrat controlled government, vaccines, and 2021 reopening relative to other sectors. Therefore, I give it a SELL call.

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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