Welcome to January...which is “trivia month.” That’s right, after the first day of trading...the third day of trading...the first week of trading...and the first month of trading...of every new year, we hear all sorts of trivia about what the action over those-time frames means for the rest of the year. (“If the broad market rises over the first X days of the year, then for the rest of the year, the market usually does Y.”) Sometimes we wonder why anybody who is employed in a market-related job bothers going to work after January! Based on all of the trivia that is provided during this month, everybody should know everything they need to know about the rest of the year after January each year!
Don’t get us wrong, some of the data is interesting, but when was the last time you has somebody turn to you in July and say, “I don’t care about the earnings for the rest of the year because the market rallied in January and that’s all I need to know.”???......Of course, we sometimes also go out with things like the “Tom Brady” indicator...but at least we know that it’s just fun stuff...and thus we know it’s worthless when trying to determine what is going to go on in the markets between now and the end of the year.
Anyway, the overseas markets and the domestic futures are all pointing to a good start for the stock market this year...and even though that will tell us nothing about what will happen between now and December 31st...it does still tell us that liquidity remains quite plentiful. We have been saying for a while now that the level of liquidity should reman high as we move into the early part of the new year, but our big concern is that as the newest wave of the pandemic subsides, so will the liquidity (much like it did over the summer...which led to the September correction). Therefore, investors CAN continue to “ride the wave” of liquidity...BUT since we’re getting closer to the crest of that wave, investors will also have to be much more careful in the weeks ahead.
The end of 2020 has not led to an end of the wild swings we saw last year in most markets...as a couple of markets are already seeing wild swings on the first day of trading in 2021. Bitcoin fell almost 20% at one point in overnight trading...but it has bounced 10% since its overnight lows, so it now stands “only” 11% below its intraday highs from yesterday. In other words, after trading very near 35,000 yesterday, it rolled over and fell all the way down to a level below 30,000. In fact, it got as low as 28,000 at 5:00am this morning! (Over the weekend, we said that Bitcoin would fall at least 30% at some in the first half of 2021, but we didn’t think it would get 2/3 of the way there on the first few days!)
We’ve also seen strong rallies in both silver and gold...with gold breaking above the first resistance level we highlighted late last week and over the weekend of $1,900. This is quite bullish for the yellow metal, but we still have to see a break above the November highs of $1,950 to confirm that the multi-month down-trend that started in early August has reversed itself. However, there is no question that today’s action so far is quite bullish for gold (and silver).
We did not talk about the Russell 2000 index in our weekend piece this weekend...mostly because we wanted to have something to highlight this morning!.......There has been a lot made of the fact that it had reached a record premium to its 200 DMA recently. This is absolutely correct...and it is a concern. However, we have always thought that it is more important to watch an index (or stock) compared to its 200 week MA...because it tells us about longer-term extremes.
At last week’s highs, the Russell had reached a premium of 31% to its 200 week MA. That is the same premium it saw just before it rolled-over in a significant way in 2018, 2015, 2011, and 2007. However, it’s not as extreme as it was in 2014, 2000 and 1998. Therefore, it could certainly move to a higher extreme before it tops out. This is especially true given how much liquidity there is in the system.
In other words, even though we painted a relatively grim picture for the intermediate-term potential for the stock market over the weekend (when we said it could/should fall 15%-20% at some point beginning in the first half), we have maintained our short-term positive stance due our thinking that the global central banks will keep the pedal to the metal until the newest wave of the pandemic subsides. Therefore, we want to reiterate that our concerns will be much more elevated as we move into February than they are right now. (Russell chart below.)
Of course, something else could cause the decline to begin sooner than we’re thinking right now. If the vaccines do not work against the new strains of the coronavirus, the global economy will shut down again...and all the liquidity in the world won’t keep the stock market from falling.........The other one is the Georgia Senate election. We’re not saying that a Democratic sweep of those two seats will knock the market down 15% or more, but it is DEFINITELY an issue where complacency is at an all time high! Therefore, that outcome could/should throw at least some sort of wrench in the works of the market sooner than we’ve been thinking.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.