Three Red Flags Money Managers Are Watching For In 2021
Investors and traders responded to the inauguration of President Biden and the peaceful transition of power by boosting the stock market. The S&P 500 was up 1.4%, as some of the high-tech giants broke out of their trading ranges. According to Bloomberg, it was the “best first-day reaction to a presidential inauguration since at least 1937.”
The daily chart of Alphabet (GOOGL) shows the sharp rally on Wednesday, and those prices held through Friday, closing up 9.6% for the week. Netflix, Inc. gained 17% on Wednesday, as it beat projections on earnings and revenue, while adding 8.51 million subscribers.
So far the earnings reports are fulfilling the expectations of traders and investors. The calendar is heavy this week, as Apple, Tesla, Honeywell, Microsoft, and General Electric are just a few of the companies reporting.
It was not surprising that the Nasdaq 100 Index ($NDX) led the market higher, gaining 4.4%. The S&P 500 ($SPX) was up 1.9%, and the iShares Russell 2000 (IWM) was not far behind, with both making new all-time highs last week. The Dow Jones Transportation Average and Dow Jones Utility Average were both lower for the week. The $NDX, $SPX and IWM all closed less than 5% below their weekly starc+ bands, consistent with a high risk market.
The latest Bank of America global fund managers survey reveals that fund managers are taking more risk now than any time in the past 20 years (see chart from Reuters). In addition, their cash levels are at 3.9%, the lowest cash level since March 2013.
The fund managers’ outlook on both global equity markets and emerging markets is bullish, with allocation to emerging markets climbing seven percentage points last month alone. The iShares MSCI Emerging Markets (EEM) has traded above its weekly starc+ band for the past two weeks, which makes it a high-risk buy at current levels.
The rising 20-week exponential moving average (EMA) is at $48.78, which is over 10% below the current prices. The major breakout level (line a) is at $46.35. The on balance volume (OBV) made a new high a week ago, but turned lower last week. It is well above its weighted moving average (WMA) and support (line b). Volume has not been impressive on the upside breakout. The bullish sentiment was also quite high in early 2018, and the MSCI emerging markets declined 19.7% from January to August 2018.
From the survey, the outlook for profits is the most positive since 2002, which was in the middle of a bear market. However, these managers highlighted three major risks that could derail the market’s enthusiasm: 1) a disappointing rollout of the COVID-19 vaccine, 2) a cutback in the Fed’s bond buying, and 3) a bursting of the Wall Street bubble.
Speaking of bubbles, the fund managers rated bitcoin as the most overcrowded trade. A similar recent money manager survey by Deutsche Bank revealed that 90% of respondents thought “many price bubbles were now being blown” and half of those surveyed ranked bit coin as a top candidate for a market bubble.
The NYSE Composite was up 0.40% last week, as it failed to overcome the prior week’s high at 15,129. It closed 4.2% below the weekly starc+ band at 15,575. There is a band of support on the weekly chart from 13,365 to 14,183. The NYSE All Advance/Decline line was in a positive trend before the election, and has been making new highs since November 13. It is well above its WMA, which is positive, but it is overextended.
The Invesco QQQ Trust (QQQ) made a new high Thursday at $327.13 (line a), which was above the prior day’s daily starc+ band. It formed a doji on Friday, with first support at $319.39 and the uptrend (line c) at $313. The breakout level (line b) is at $302.98.
The Nasdaq 100 A/D line has formed a negative or bearish divergence, as it made lower highs, (line d). A drop below its WMA and the recent low will signal that a correction is underway. There is first good support from December’s trading, with more important support going back to September (line e).
Even though there are no definitive signals that the overall stock market is going to correct now, the evidence is building. The overall market risk seems quite high. Being fully invested, especially if you have nice open profits on established positions, is probably not the best strategy, as I expect to see a 5-10% correction sometime in the first half of 2021.
A couple of days of heavy selling, like what we saw in early October 2018, could be enough. The technical indicators do suggest that the big tech breakouts last week may not be sustainable.
The prevailing belief of many investors and traders that stocks can only go higher when the Federal Reserve keeps rates low may be tested in the weeks ahead. The Federal Open Market Committee meets next week and there is a full economic calendar, with the Consumer Confidence Index, consumer sentiment, and the Leading Economic Indicators, as well as many more, all coming out.
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Dow Jones – Three Red Flags Money Managers Are Watching For In 2021