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.

Are We in a Tech Bubble or What?

Figure 1- Nasdaq Composite Index $COMP

Earnings season is off to a scorching hot start with Microsoft (MSFT) and Advanced Micro Devices (AMD) crushing it.

Apple (AAPL), Facebook (FB), and Tesla (TSLA) (yes I consider Tesla more of a tech stock than a car stock), are also set to report Wednesday (January 27),

Pay very close attention.

Although I am bullish on earnings and 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. The SPACs don’t help either.

All of this reminds me 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%.

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 over 73 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.

The Dow is Moving Sideways as We Approach February

Figure 2- Dow Jones Industrial Average $INDU

The Dow has been the least impressive index over the last two weeks. While the Nasdaq and the S&P continued reaching highs, the Dow has been sideways. That’s not necessarily a bad thing, in any case. The Dow has been the only index that hasn’t traded like a maniac, nor has it overheated.

However, I have many short-term questions and concerns about the Dow Jones to make a conviction call. If there’s an index that reflects the tug-of-war between good news and bad news, it’s the Dow.

The Dow has traded flat for the last two weeks, and it could remain flat again this week. Of course, a lot of that depends on earnings and if the vaccine rollout improves.

One catalyst that could potentially send the Dow higher this week is Johnson & Johnson’s (JNJ) COVID-vaccine’s clinical results. Because JNJ’s vaccine candidate is one dose rather than two and doesn’t need to freeze in an igloo like Pfizer’s, it could be potentially game-changing in eradicating the pandemic.

But is the Dow at a BUY level? Not just yet.

I don’t like how COVID-19 is trending (who does?), and while I am encouraged by potential improvements in the vaccine rollout, I am still concerned about short-term economic and political headwinds.

It’s challenging to make a conviction call on this index, and if/when there is a drop in the index, it probably won’t be anything like what we saw back in March 2020.

More likely than not, the Dow trades sideways for the rest of the month and hovers around 31,000. New president, new agenda, and lots of data for investors to weigh.

A 35,000 call to close out 2021 may be a bit aggressive, but the second half of 2021 could show robust gains once vaccines become available to the general public.

With so much uncertainty, the call on the Dow stays a HOLD.

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

The S&P 500 Remains Overvalued and Streaky

Figure 3- S&P 500 Large Cap Index $SPX

The S&P has gained just over 2% in 2021.

However, it’s down nearly 0.80% in the last five days. What intrigues me about this index is that it seems to go on multiple day win streaks and lose streaks. After seeing its worst sell-off since October three Mondays ago (Jan. 4), for example, it went on a four-day win streak and broke past 3800.

The S&P is still firmly above that 3800-level. Despite what could be a solid earnings week, I remain concerned about the S&P’s valuations. Although its RSI is not overbought, it is approaching that level. I’m mostly concerned about the S&P’s overinflated forward P/E ratio, which is the highest it’s been since the dot-com bust.

The trailing price/earnings ratio of the median U.S. stock, as tracked by Ned Davis Research, has also never been higher in history.

Based on 2021 forecasts, fewer than ⅓ of S&P 500 stocks are also trading under a 15 P/E- the rough long-term average trailing multiple.

I would like to see a more profound drop to around 3600 or below before making a BUY call for the long-term. There is an upside for the second half of 2021, but I would prefer to maximize it from a lower level. Discount shopping can be fun in the long-term.

A short-term correction could inevitably occur by the end of Q1 2021, but for now, I am sticking with the S&P as a HOLD.

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.

Mid-Term/Long-Term

Taiwan, South Korea, and More for Best Emerging Market Exposure

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

China is technically an emerging market, and its upside is undeniable. The MCHI ETF, which tracks Chinese equities, has outperformed thus far in 2021, and performed better than my expectations. Before this year, I felt that China’s economic recovery from its initial COVID contraction was priced in. Maybe I was wrong.

I still maintain that this is not the best bet for international exposure in 2021, and have no clue how China is even considered an emerging market anymore.

There are so many more exciting emerging opportunities for 2021.

For one, the dollar is declining and should continue to do so. Emerging market stocks and currencies will surely take advantage of this.

Consider the demographics too. Developed markets are aging, while emerging markets are younger. Many predicted a COVID baby boom to happen, but we might be in a baby bust. Initial stats show significant drops in December 2020 births, compared to a year earlier.

Considering all of this, PWC 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 (a big deal for a declining dollar), growing hi-tech and software market, increasing personal incomes.

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)- Booming economy, robust exports, stable yet high growth potential. ETF has been the top performing emerging market ETF and surged by 143.77% since the market bottomed on March 23rd.

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.

Out of all these calls, Taiwan and South Korea have performed the best thus far in 2021, with gains of 7.16% and 6.74, respectively.

Peru and Indonesia have been the laggards to this point and have fallen 0.74% and 0.59%, respectively. They are the only emerging market ETFs that I have called BUYs to be in the red year-to-date.

Indonesia has especially had a rough last five trading days and has declined nearly 5.4%. But I’m still bullish on the country for the long-term and think this could be a strong entry point.

For broad exposure to Emerging Markets, you can also BUY the iShares MSCI Emerging Index Fund (EEM).

Prepare for More Greenback Pain to Come

Figure 5- U.S. Dollar $USD

The U.S. Dollar is actually up 0.34% thus far in 2021. In the last five days though, it’s declined by about the same amount. This decline could accelerate again if more stimulus passes sooner rather than later. With Democrats in full control of the government, Biden’s $1.9 trillion stimulus plan will further devalue the dollar.

Incoming Treasury Secretary Janet Yellen’s testimony last week only strengthens my bearish outlook.The Fed can’t expect to keep printing money and magically hope the U.S. Dollar appreciates.

I’m still calling out the dollar’s weakness after several weeks and expect the decline to pick up steam again thanks to a dovish Fed and multiple headwinds.

I do not see the benefit in running to the greenback as a safe asset at this time. If you want safety, run to gold. Gold has been a safe store of value for thousands of years, and has more potential upside in 2021 with trillions of stimulus expected to come.

Any time the U.S. Dollar has rallied, I’ve called it “fools gold.” So long as policies stay the same, rallies will still be “fools good.”

With inflation likely coming back sooner than we realize, it could double the headwinds the dollar could face.

I also have too many doubts on the effect of interest rates this low for this long, the strengthening of emerging markets, commodity prices, and yes, even cryptocurrencies, to be remotely bullish on the dollar’s prospects over the next 1-3 years.

Meanwhile, the US has nearly $28 trillion of debt, and it’s not going down anytime soon. Some forecasts show that the debt could balloon by over $8 trillion in 2021 too.

According to The Sevens Report, if the dollar falls below 89.13, this could raise the prospect of a further 10.5% decline to the next support level of 79.78 reached in April 2014. We are closer to this point than most realize.

When COVID-19 fears outweigh any other positive sentiments, dollar exposure might be useful since it is a safe harbor. But you can do a whole lot better than the U.S. dollar for safety. Since hitting a nearly 3-year high on March 20th, the dollar has plunged almost 12.68%

Where possible, HEDGE OR SELL USD exposure.

Pay Very Close Attention to Inflation

Pay very close attention to the possible return of inflation within the next 6-12 months. The Fed has said it will allow the GDP to heat up, and it may overshoot in the medium-term as a result. GDP growth may stutter in Q1 2021 but pay close attention to what happens in Q2 and Q3 once vaccines begin to be rolled out on a massive scale. It is only inevitable that inflation will return with the Fed’s policy and projected economic recovery by mid-2021.

The 10-year yield’s recent rally, as well as the 10-year breakeven rate, reflects this as well.

If you are looking to the future to hedge against inflation, look into TIPS, commodities, gold, and potentially some REITs.

In the mid-term, I have BUY calls on the SPDR TIPS ETF (SPIP), the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), the SPDR Gold Shares ETF (GLD), and the iShares Cohen & Steers REIT ETF (ICF).

Long-Term

There is so much to worry about in the short-term. But I’m convinced that economic stimulus and the progress made with administering the vaccines bodes well for stocks in the second half of 2021. We may be at the beginning of the end of the pandemic-but over the next 1-3 months, this could be a very bumpy ride back.

There does seem to be one consensus though: 2021 could be a big year for stocks.

Small-caps, value stocks, and cyclicals, could especially surge. I just have a much better feeling for them in the second half of the year. I almost hope we see a correction within the first 3 months of 2021. This could be a very strong buying opportunity.

Summary

The current headwinds are very concerning. But I remain optimistic for the second half of 2021 despite the bumpy road there. Until COVID-19 is eradicated, a battle between optimism and pessimism is inevitable.

Despite the strong earnings we are seeing so far, a short-term correction is likely. But do not let this scare you.

Corrections are NORMAL. What happened last March is ABNORMAL.

The crash and subsequent record-setting recovery we saw in 2020 is a generational occurrence. I can’t see it happening again in 2021. If there is a short-term downturn, take a breath, stay cool, and use it as a time to find buying opportunities. Do not get caught up in fear and most of all:

NEVER TRADE WITH EMOTIONS.

Consider this. Since markets bottomed on March 23rd, ETFs tracking the indices have seen returns like this: Russell 2000 (IWM) up 116.56%. Nasdaq (QQQ) up 93.73%. S&P 500 (SPY) up 74.33%. Dow Jones (DIA) up 68.48%.

In the long-term, markets always end up moving higher and are focused on the future rather than the present.

To sum up all our calls, in the short-term I have a SELL call for:

• The iShares Russell 2000 ETF (IWM) (but do not fully exit positions- trim profits), and
• the Invesco QQQ ETF (QQQ) (but do not fully exit positions- trim profits),

I have a HOLD call for:

• the SPDR S&P ETF (SPY), and
• the SPDR Dow Jones ETF (DIA)

I also have a long-term STRONG BUY call for:

• the iShares Russell 2000 ETF (IWM) BUT IF AND WHEN IT PULLS BACK

For all these ETFs, I am more bullish in the long-term for the second half of 2021.

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

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 Vietnam (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 I foresee inflation returning as early as mid to late 2021…

I also have BUY calls on:

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

Thank you.

Matthew Levy, CFA
Stock Trading Strategist