Time to Rebalance?

If you read my previous article, “Is the Stock Market Flashing a Top Signal?” back on November 13, 2020, I identified a level of resistance of 3645.99 in the S&P 500. Shortly after that article posted, the market did break through that level and thus it has now become a level of support.

I also described in that article how tech leads the market. Last year was a boom year for tech. There’s no doubt about it. The FAANG stocks averaged a 57.6% gain. For comparison, the S&P 500 posted a gain of 16.3% and the DOW lagged but still recorded a gain of 7.2%.

Since my November 13, 2020, article, the FAANG stocks have averaged 2.6% gain; the S&P 500 is up 3.2%, and the DOW is up 3.8%. Is this possibly a swing towards security? Or is this just a blip on the radar since tech absolutely crushed it last year? The year’s first trading day was a bit sour with all the major averages posting losses over 1%. Earnings, the true measure of the health of companies and the broader market, really won’t ramp up until January 19th, so, until we see the actual numbers coming in, the market could get a little volatile from here through the end of the month. It will most likely be a news-driven market on a daily basis until we see what the earnings have to say.

What about COVID since my last writing? Back on November 13, 2020, the date of my last article, there were 181,593 new cases in the U.S. and yesterday, January 3, 2021, there were 201,980. If you recall, the COVID case counts really made a parabolic move up in October and the daily new case counts have continued to drift slightly upward since November. The good news is that the vaccine is starting to be administered, but this new strain is definitely a bit worrisome. My niece is a respiratory therapist and has been caring for COVID patients since the beginning. I want to take a second to give a shout out to her for her courage, caring heart, and dedication to her profession.

Another piece of data that I talked about in my previous article was holiday sales. The final numbers aren’t in, but preliminary data according to a survey from the National Retail Federation showed that purchases from Thanksgiving to Cyber Monday were down 14% from 2019. We must consider, though, that major retailers started their Black Friday sales in early November, so, until we have the complete seasonal numbers, this may be an apples to oranges comparison. However, this is a little frightening because the drop is much larger than even the pessimists had predicted. If those numbers are accurate, this may signal a swing downward in consumer sentiment and spending to end the year. Time will tell.

I love technical analysis and charting. If you look at the chart of the S&P 500 below, you can see some of the indicators that I like to add to the chart. The middle line in the channel is the 110 day EMA and the top and bottom lines of the channel represent the levels that are 6% above or below that trend line. You’ll notice that the market has been riding above the top line of the channel for about a month and a half. Even today, the tail of the candle dipped below that line, but the close held above it. This is actually a healthy sign for the market. However, my algorithm flashed a TOP signal today due to the bearish engulfing candle. Yes, I did rebalance my investments due to this signal and I am proceeding with caution like I did back on November 13, 2020. If the market were to drop below the 3645.99 level of support (bold black line), I believe it could drop to the 3637 level that I identified in a separate post where I showed a neat mathematical trick for estimating the fair market value from the PE ratio and the trailing 12 month EPS. The next level of support after that would be the 110 day EMA, which is currently around the 3480 level. If you believe in the reversion to the mean concept, my 110 day EMA level is what I use for estimation purposes. Again, earnings will begin to tell the story later this month.

 One of my biggest concerns is the huge, weekly, initial unemployment claims that continue to be recorded. In the graph below you can see that back during the Great Recession a total of 29,834,000 initial claims were recorded in 2009. Prior to that, in 1982, during another recession, initial claims totaled 30,477,000. But for 2020, those numbers were blown out of the water with 75,408,000 initial unemployment claims filed in the U.S. You might think that these two rounds of stimulus checks might help, but think again. If a household received the full $1,200 for a couple, that still might not cover a single month’s rent with the national average coming in at $1,468 in 2020. The average mortgage payment, for comparison purposes, is a little over $1,500.

So, is it time to rebalance and scoop some cream off the top of a great year? Well, that’s for you to decide. I’m being a little cautious again until I see those new earnings numbers come out, the final holiday sales data, consumer sentiment and consumer spending data, how fast the vaccine rolls out, and if this new strain causes a drastic spike and more shutdowns. Of course, on the flip side, we can’t forget TINA because as they've said before….There Is No Alternative to stocks in the current market.