Phases & Cycles Market Outlook – June 23, 2021
The markets have been in an overbought position since the end of April. To measure this, we look at two Indicators: percentage of stocks above their 30-week Moving Averages (30wMA), which is an objective indicator, and at the percentage of Bulls among the American Association of Individual Investors (AAII), which is a subjective and therefore a contrary indicator. While the Standard & Poor 500 Index (SPX) rose from 3351 at the end of September, 2020 to 4200 on April 29th, 2021, the percentage of stocks above their 30-week Moving Averages also rose from 50.2% to 81.3%. At the same time, the members of the AAII increased their bullish opinion from 24.9% to 56.9%. Common reaction to the formers on Wall Street is that "an overbought market could stay overbought for a long time" and the reaction to the latter is that such high numbers (given that is a contrary indicator), suggest that the market was extended and about to collapse immediately and it is time to “cry wolf”! Of course, none of this happened as the SPX merrily continued to achieve an alltime high of 4257 on June 15th, an extra 1.4% growth since the end of April. Since during this time, both the 30wMA and the AAII statistics lowered their bullishness, as the recent readings declined from 81.3% to 75.8% and from 56.9% to 40.2% respectively. Suddenly no one was crying wolf! More about this later.
Our last Market Comment pointed out Toronto’s (TSX) outperformance vs. the Dow Industrials (DJI), the S&P 500 (SPX) and the NASDAQ (NASD). In the intervening 14 days, the TSX closed even, the DJI lost 4.5%, including a 533 point loss last Friday, the SPX declined by 1.6%, but the NASD gained 1.8%. Last Friday the Advancing vs. Declining stocks showed a negative balance (986 vs. 3,167) and the Volume statistics approached “selling climax” level as the Declining Volume outnumbered the Advancing ones by a six-to-one plurality. One would have expected the newspapers to be full of “wolf”. But no!
Just as well, since on Monday the market reversed. The DJI rose 587, more than its Friday’s loss, the Volume statistics showed a nine-to-one ratio of Advancing vs. Declining Issues, and by Tuesday the NASD reached an all-time high at 14,270.
OUTLOOK
“Nobody is crying wolf” is a double edged sword. It may mean that everybody has now accepted that overbought conditions are normal and they will never end or it is a sign to be alert and accept that now is the time to “cry wolf”. We don’t believe either.
NASD’s all-time high on Tuesday vs. the Toronto’s above mentioned outperformance of all other Indicators suggest that the market is correcting in a rotational fashion. Reliable sources suggest that institutional fund managers have over $3 trillion in cash, which fuels the rotational correction vs. a downside correction. This doesn’t completely eliminate a potential small correction of maybe 5-6%, but it confirms our long time conviction that we are, and will stay for a considerably time, in the bull market that started in 2009 (and included and will include numerous small corrective periods) and will last for yet a number of years.
PAC-20-198; MKT-501; June 23, 2021
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC, H3Z 1J9
Tel.: (514) 393-3653. E-mail: RonMeisels@phases-cycles.com
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