Phases & Cycles Market Outlook – July 23, 2021
Our most recent Market Comment concluded with: “Enjoy the summer, but use it to reassess portfolios for a possible minor corrective move at the end of the third quarter”. The correction came sooner than expected. Last Friday, the markets began a two day corrective period, the Dow Industrials (DOW) declined 1348 points or 3.8%, the S&P 500 (SPX) lost 3.4%, the NASDAQ (NASD) gave up 1.4%, the Russell 2000 (RUT) declined 4.7% and Toronto’s S&P/TSX index (TSX) fell 3.0% (the percentage decline for the RUT shows a much larger decline (10.3% if calculated from its recent high). The 1,348 point decline by the DJI was blamed by the press on the “Delta variant”, creating fears of renewed shutdowns. However, the decline was short lived: by Wednesday’s close the indices (with the exception of the RUT) fully closed the gap that was created on the previous two days (as “The McClellan Report” suggested, “associating the market selloff with Covid is a case of lazy newsroom association”).
The decline heavily swayed the technical indicators. The “stocks above their 10-week Moving Average” index, which was at an “over-bought” level of 79.5%, declined to 38.3% on Monday, approaching the “under-sold” level. Similarly, the “stocks above their 40-week Moving Averages” (a much slower moving index) declined from 82.7% to 67.3%. The “AAII bears” (American Association of Individual Investors – a contrary indicator) increased from 19.8% to 26.8%. The VIX, the well-known “fear Index” jumped from Friday’s 16.03 to Monday’s 25.09, but by Wednesday it also changed direction and closed at 17.9. The 25.09 reading suggested the end of a corrective move, but was nowhere close to the March, 2020 reading of 85.5, suggesting that further corrective actions may occur.
OUTLOOK
The Friday-to-Wednesday action was not an “across the board” decline. The Material and Energy groups bore the most damage. As our June 23rd Market Comment outlook suggested “the market will probably correct 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 considerable time, in the bull market that started in 2009 and will last for yet a number of years”.
PAC-20-198; MKT-501; July 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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