Last week went a lot better than the week before. Especially if you’re a Nasdaq bull and bought the dip (like I recommended Feb 24).

The real story, though? We’ve still got the Dow, S&P, and Russell firmly at record highs.

This week should be full of excitement for the indexes. Will we see more record highs? Will the Nasdaq catch up and recover? How will the newly signed $1.9 trillion “America Rescue Plan” impact the market? Will inflation fears and accelerating bond yields spook investors again?

As you can see, there are clearly questions right now for stocks- despite the wheels in motion for pent-up consumer spending and a strong stock rally. Plus, we’ll start having many retail investors with an extra $1,400 to spend looking to have a little fun.

Inflation fears and surging bond yields are still a concern and have caused significant volatility for growth stocks. But let’s have a little perspective here. Bond yields are still at a historically low level, and the Fed Funds Rate remains 0%. Plus, jobless claims beat estimates again and came in at 712,000. This is nearly the lowest they’ve been in a whole year. Last week’s inflation data also came in more tamer than expected.

So what should you pay attention to this week?

More inflation data, jobless claims, and consumer sentiment will be released throughout the week, for one.

But pay incredibly close attention to the Fed. Bonds still remain the market’s biggest wild card. With the Fed meeting Tuesday and Wednesday, bond yields could take their cue from what they say. No action is expected to be taken, and the Fed is expected to indicate more substantial growth. Fed officials are also not expected to alter their interest rate outlook and may stick to the plan of keeping rates this low through 2023.

If this goes as expected, bond yields could potentially pop again, reinvigorating the rotation into value and cyclical plays and out of tech and growth plays.

Time will tell what happens.

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 to help people who needed help instead of the ultra-high net worth.

With that said, to sum it up:

There is optimism but signs of concern. The market has to figure itself out. A further downturn is possible, but I don’t think that a decline above ~20%, leading to a bear market, will happen any time soon.

Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.

Russell 2000- Lessons Learned

Figure 1- iShares Russell 2000 ETF (IWM)

So remember when I said not to time the market?

I might have broken my own rule for that with the Russell 2000. I’ve wanted to buy the Russell 2000 badly forever but never thought it dipped hard enough (whenever it did). I was waiting for it to at least approach a correction.

What made me hesitant about buying the Russell 2000, as tracked by iShares Russell 2000 ETF (IWM), was its rally since November and year-to-date. Even with its slow down before last week, it was still way up and outperforming.

But now? Look at these gains.

Since the market’s close on October 30, the IWM has gained about 53.06% and more than doubled ETFs’ returns tracking the more major indices.

Not to mention, year-to-date, it’s already up almost 21% and back at an all-time high.

With that $1.9 trillion stimulus package set to greatly benefit small businesses, the Russell 2000 could pop even more.

Unfortunately, I’m keeping this a HOLD. But I am monitoring the Russell 2000 closely.

I’ve learned this index doesn’t behave quite like the Nasdaq when it comes to the RSI. Aggressive stimulus, friendly policies, and a reopening world bode well for small-caps in 2021. I think this is something you have to consider for the Russell 2000 and maybe overpay for. The next time the index dips, I am going to be a little more aggressive.

The Streaky S&P Has Been in a Good Mood

Figure 2- S&P 500 Large Cap Index $SPX

The S&P 500 is a complex index to call. It’s incredibly streaky and is between a rock and a hard place right now.

Before March 5’s significant upwards reversal, the large-cap benchmark declined for 3 days in a row and 5 of 6 sessions.

Before last Tuesday’s (Mar. 9) pop, it had also declined in 4 of 5 sessions.

Now? We’re at a record high, close to 4000, and on a 5-day winning streak.

See where I’m going with this? To me, this is not behaving like a buyable index. I feel like it’s best to be patient and monitor what happens.

Consider this too. We do not see a whole lot of breadth and depth with the index’s gains.

What do I mean by that? Simply put, not all of the S&P’s sectors are performing so great. In the S&P, compare energy vs. tech month-to-date, for example. The XLK ETF, which tracks S&P tech stocks, is down about 2.6%, while the XLE ETF, which tracks S&P energy stocks, is up almost 8.5%.

Unless I see some sort of buy or sell signal for the S&P 500, I think we’ll keep playing this streaky sideways game.

HOLD for now, but be prepared to either BUY or SELL depending on its moves. For an ETF that attempts to directly correlate with the performance of the S&P 500, the S&P 500 SPDR ETF (SPY) is a great option.

Nasdaq- Proudly Bought the Dip. Now Will Sit.

Figure 3- Nasdaq Composite Index $COMP

I’m pretty proud that I bought the Nasdaq’s dip when it hit correction territory two weeks ago. Last week’s gains are precisely why.

I’m not saying that we’re out of the woods with tech. But what I am saying is not trying to time the market, not getting scared, and having some perspective is vital. Take Ark Funds guru Cathie Wood, for example.

Many old school investors scoffed at Cathie’s comments last Monday (Mar. 8) after she practically doubled down on her bullishness for her funds and the market as a whole. After crushing 2020, her Ark Innovation Fund (ARKK) tanked over 30%. Many called her the face of a bubble. Many laughed at her. Tuesday, March 9, ARKK saw its best day in history.

In the last 5 sessions, ARKK is also up a staggering 14.89%.

The Nasdaq is back in positive territory for the year. Still, unfortunately, I no longer think we’re at a BUY level. Prepare for some more potential volatility this week with the Fed meeting and bond yields expected to weigh on tech stocks.

Monitor the RSI and the 13000 support-level too. If we see a significant drop again this week, it could be a strong buy signal. If I see some of these signs, I’m going to stick with the theme of buying the dip and “selectively buying” sub-sectors such as cloud computing, e-commerce, and fintech.

I think you should now HOLD and let the RSI guide your Nasdaq decisions. See what happens over subsequent sessions, research emerging tech sectors and high-quality companies, and buy that next big dip.

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

Beware of Inflation

So is inflation really coming back, or is all this fear overblown?

Pay very close attention to the Fed’s meetings this week. Consider what institutions and analysts are saying from both sides of the fence too.

On the one hand, BoA, in a March 10 note, described inflation as “well-contained.” The bank also said that inflation fears would subside by the end of the year and expects CPI inflation to be well shy of the Fed’s 2% target and hit 1.7% by the year’s end.

On the other hand- have you filled gas lately?

January Consumer Price Index data also found that the cost of food eaten at home rose 3.7% from a year ago. This is over double the 1.4% year-over-year increase in all goods included in the CPI.

The Economic Research Service for the U.S. Department of Agriculture also believes that the food cost from grocery stores will rise 1 to 2% this year.

Plus, Moody’s Analytics chief economist Mark Zandi feels that investors have not fully grasped that inflation is “dead ahead” and are grossly underestimating its seriousness and effect on every sector in the market.

I have been calling out Jay Powell for weeks on this. I feel he is cavalier in his inflation thoughts, and I did not buy what he was selling a few weeks ago. Good for him that inflation hasn’t hit his magic 2% target yet. But he essentially admitted on March 4 what the worst kept secret in the book was- that we could see “temporary inflation.”

“Temporary inflation”? We weren’t born yesterday. Inflation isn’t “temporary” unless you drastically hike rates. Once that happens, then all bets are off for stocks.

How long will the Fed do this song and dance? Who knows. They said they’d keep rates at 0% through 2023, but if inflation gets really bad, there’s no way this can be sustainable.

Pent-up consumer demand is great. Retail sales crushing expectations reflect this. However, bond yields rising as fast as they have coupled with $1.9 trillion heating up the economy and an aggressive (reckless?) Fed showing no signs of hiking interest rates is as strong a sign of inflation as you can get.

Five-year inflation expectations have also more than doubled from last year’s low and are now at around their highest levels since 2013.

“The rich world has come to take low inflation for granted. Perhaps it shouldn’t.” -The Economist.

As hedges against inflation, consider BUYING the SPDR TIPS ETF (SPIP), the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and the iShares Cohen & Steers REIT ETF (ICF).

Mid-Term/Long-Term

Add Emerging Market Exposure- Period

Figure 4- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Sep. 1, 2020-Present

Since September, the SPDR S&P 500 ETF (SPY) has gained around 12.68%.

But if you compare that yield to that of my top emerging market picks for 2021, it has underperformed.

Consider this too.

With inflation on the horizon, a surge in commodity prices combined with shifting demographics could send other emerging markets upwards long-term. Plus, with birth rates plummeting during the pandemic in developed markets, it could mean long-term upside for emerging markets.

PWC echoes this sentiment and believes that emerging markets (E7) could grow around twice as fast as advanced economies (G7) on average in the coming decades.

For 2021, the following are my BUYs for emerging markets and why:

iShares MSCI Taiwan ETF (EWT)- Developing country, with stable fundamentals, diverse and modern hi-tech economy, regional upside without China’s same geopolitical risks.

iShares MSCI Thailand ETF (THD)- Bloomberg’s top emerging market pick for 2021 thanks to abundant reserves and a high potential for portfolio inflows. Undervalued compared to other ETFs.

iShares MSCI Russia Capped ETF (ERUS)- Bloomberg’s second choice for the top emerging market in 2021 thanks to robust external accounts, a robust fiscal profile, and an undervalued currency. Red-hot commodity market, growing hi-tech and software market, increasing personal incomes. Russian equities may also have potential upside north of 35%.

Figure 5- Equities: Long-Term Return Expectations Developed Markets/Emerging Markets

VanEck Vectors Vietnam ETF Vietnam (VNM)-Turned itself into an economy with a stable credit rating, strong exports, and modest public debt relative to growth rates. PWC believes Vietnam could also be the fastest-growing economy globally. It could be a Top 20 economy by 2050.

iShares MSCI South Korea ETF (EWY)- South Korea has a booming economy, robust exports, and stable yet high growth potential. The ETF has been the top-performing emerging market ETF since March 23.

iShares MSCI Indonesia ETF (EIDO)- Largest economy in Southeast Asia with young demographics. The fourth most populous country in the world. It could be less risky than other emerging markets while simultaneously growing fast. It could also be a Top 5 economy by 2050.

iShares MSCI Chile ETF (ECH)- One of South America’s largest and most prosperous economies. An abundance of natural resources and minerals. World’s largest exporter of copper. Could boom thanks to electric vehicles and batteries because of lithium demand. It is the world’s largest lithium exporter and could have 25% of the world’s reserves.

iShares MSCI Peru ETF (EPU)- A smaller developing economy but has robust gold and copper reserves and rich mineral resources.

Let’s take a look at how these emerging markets performed this past week.

Figure 6- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- March 8-12

Commodities are once again the big story. In the last 7 sessions, copper has rallied about 4%. Lithium, a crucial battery metal, as tracked by the LIT ETF, has also gained over 6.25%. Oil has been surging as well.

That’s why Chile and Russia led the way last week with gains of 6.21% and 5.66%, respectively.

Remember. Chile is one of Latin America’s most robust economies and the world’s largest copper and lithium exporter. It could, in fact, have 25% of the world’s lithium reserves.

Regarding Russia, Boris Schlossberg, managing director at BK Asset Management, told CNBC’s “Trading Nation” that the rise in oil is very beneficial for Russia’s growth.

“It’s pretty clear that oil has really found a very, very strong consolidation of the $60 level ... if you’re a big believer that oil stays, these levels go higher. It’s very positive for Russia, very positive for the Russian economy.”

Schlossberg also looked at Goldman’s call for commodities to return 15.5% over the year as strong for Russia.

“Goldman’s thesis that commodities are entering into a very strong bull market because of infrastructure needs all across the world only helps Russia.”

Outside of the aforementioned country-specific ETFs, you can also BUY the iShares MSCI Emerging Index Fund (EEM) for broad exposure to Emerging Markets.

Long-Term

I remain convinced that the economic recovery is going better than expected as the progress in administering the vaccines improves. But it’s a blessing and a curse if it goes “too well.”

Continue to pay attention to complacency, overvaluation, bond yields, and especially inflation.

Time will tell what happens with the market. There could be more short-term swings. But the economic climate is reopening, and things look a bit sunnier than they did at this time a year ago.

I think we could see some more swings as the market figures out bond yields and inflation. We may be at the beginning of the end of the pandemic, and despite some choppy waters, 2021 should be a big year for stocks.

Summary

I cannot stress this enough. Play volatility to your advantage, and do not try to time the market. There are some concerns, but the overall backdrop right now is favorable for stocks.

Do not get caught up in fear and most of all:

NEVER TRADE WITH EMOTIONS.

Consider this too. You can sit out and be scared and wait for the perfect buying opportunity all you want. But we are almost a year out from March 23rd, 2020- the day that the market finally bottomed. If you bought ANY of these index-tracking ETFs on March 23rd when it looked like the world was ending, here is how you would have fared: Russell 2000 (IWM) up 137.16%. Nasdaq (QQQ) up 85.99%. S&P 500 (SPY) up 79%. Dow Jones (DIA) up 79.11%.

Nobody knows “where” the actual bottom is for stocks. However, in the long-term, markets always move higher and focus on the future rather than the present.

For now, even though bond yields and inflation appear to have stabilized, I’m still a bit concerned. This $1.9 trillion rescue deal may be a short-term catalyst for stocks. But it’s only prolonging the inevitable. Inflation will eventually return with a vengeance. Bond yields will ultimately rise even more as the GDP heats up, and debt will continue to grow.

But for now? Enjoy the ride. Just maybe avoid filling gas. It’s getting ugly out there.

To sum up my calls:

I have HOLD calls for:

• The Invesco QQQ ETF (QQQ),
• the iShares Russell 2000 ETF (IWM),
• the SPDR S&P ETF (SPY), and
• the SPDR Dow Jones ETF (DIA)

I also recommend selling or hedging the US Dollar and gaining exposure into emerging markets for the mid-term and long-term.

I have BUY calls on:

• The iShares MSCI Emerging Index Fund (EEM),
• the iShares MSCI Taiwan ETF (EWT),
• the iShares MSCI Thailand ETF (THD),
• the iShares MSCI Russia ETF (ERUS),
• the VanEck Vectors Vietnam ETF (VNM),
• the iShares MSCI South Korea ETF (EWY),
• the iShares MSCI Indonesia ETF (EIDO),
• the iShares MSCI Chile ETF (ECH),
• and the iShares MSCI Peru ETF (EPU)

Additionally, because inflation has already crept back; and I foresee it getting worse as early as mid to late 2021…

I have BUY calls on:

• The SPDR TIPS ETF (SPIP),
• the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and
• the iShares Cohen & Steers REIT ETF (ICF)

Thank you.

Matthew Levy, CFA
Stock Trading Strategist