This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.
Otherwise, enjoy the column!
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Stocks – AMZN, F, BABA
Macro – SPY, VIX,
- RTM: Financial Conditions Appear To Be Tightening And That’s Bad For Stocks
- RTM: Rates May Now Rise Faster, Sooner
- Tactical Update: It Is Now A Matter Of When The Market Corrects, Not If The Market Correct
- RTM- Risk-Off On OPEX
- RTM Exclusive: Its To Time Buckle-Up
- RTM Exclusive: PayPal May Rebound Sharply Short-Term
- RTM- The Dollar Is Rip
- RTM Exclusive: Disney May Be Poised For A Big Rebound
- RTM- The Dollar Continues To Soar As Rates Move High
The day after Thanksgiving tends to be a great day for stocks, and this time of the year is usually a great time to be fully invested. After all, stocks are cheap, trading at 21 times its NTM earnings estimates, the highest levels since the late 1990s. They are even more reasonable when considering its PEG ratio is around 1 when considering that long-term forecast growth rate for earnings.
Never mind that the 5-year long-term growth rate for the S&P 500 is at its highest rate since 1985. Never mind that only 368 or the 505 companies in the S&P 500 contribute to that long-term growth, its lowest amount ever, which probably means that the long-term growth rate is entirely and utterly inaccurate. So now that we have established that valuations in the market are not insanely higher but based on incomplete data, but of course, when valuation makes zero sense, we can rest easy knowing that we have seasonality and passive flows to keep the bull market soaring.
Don’t worry about the Fed that is tapering and may taper even faster, or a market that is tightening financial conditions as a result, or slowing global growth or even overly inflation GDP growth forecast; none of that matters. We have seasonality. (Read more in my Shopify store- get for free with discount code “correction” – Tighter Financial Conditions May Sink Stocks Further – 11.27.21)
Until we don’t have seasonality, and it turns against you, then we can say it’s a holiday trading session. There is a lack of liquidity, and that the shortened trading session is to blame for the 2.2% decline in the S&P 500 on Friday, November 26.
Sadly, Friday had anything but a liquidity problem; volume for the half-day trading session was off the charts. Nearly 2 million S&P 500 e-minis traded on Friday, that a lot for a market that closed at 1 PM. The S&P 500 cash fell to support at 4590 and held that region to finish the day.
Meanwhile, the momentum indicators turned bearish on Friday, with the MACD, advance/decline line, and RSI breaking lower. The index finished close enough to the lower Bollinger band to suggest the index isn’t even oversold yet.
It looks the 2b top was also confirmed by the S&P 500 on Friday, and with an unfilled gap at around $435 on the SPY and the cash SPX, that is probably where this market is heading. That is about 5% lower than where the index and ETF closed on Friday, and given that there was no material reason for the index to go up in October, to begin with, there need be no material reason for the index to fall back to 4350 either.
I have told everyone for weeks that the recent rally was on the back of multiple expansion, which was coming very late in the cycle, and that never tends to end well. The NASDAQ composite has been seeing its earnings estimates decline over this entire time. So the drop in the market back to where the rally started seems like just a starting point.
The declines should expand well beyond those early October lows, and I won’t be surprised if they did before year-end. As I have tried to warn repeatedly, financial conditions have been tightening, and that is because the market is preparing for a Fed that is becoming less dovish. The covid variant news over on Friday was sort of just an accelerant. The covid news may not last long and even lead to a snapback rally and refill of the gap at 4700. I would prefer for that gap to get filled as quickly as possible.
The other thing the market has got going for a potential snapback rally to 4,700 is the VIX. The VIX is currently trading at 28.6, implying the S&P 500 will move around 1.8% every day for the next thirty. So at this point, unless we open down by 1.8% or more on Monday, the VIX should start to drop, which will help cushion any declines and potentially assist in aiding a rally.
Again, any rally in the S&P 500 isn’t likely to last because conditions for the equity market are becoming more and more unfavorable whether the covid knows last or not.
Many people just don’t like my message, and I don’t care. I do what I have to do for myself, my family, clients, and subscribers. If you want to live on the edge, be my guest. My only takeaway is that most people investing today have no idea how QE works, know what happens in a downgrade cycle, and don’t know what happens when they buy on margin when the market drops. I love to read comments as well; even if the market drops as it did in 2018, it snapped right back. Yeah, it did, but I remember in 2018 repeatedly writing about how the sell-off was unjust and overdone and how it was ridiculed at the time for being a permabull. I also remember people writing to me because they had bought stuff on margin and blew themselves up and then asking what they should do. So it’s easy to look at a chart and say things can come back. They absolutely can come back, just don’t tell that to the person who bought Cisco or Intel in March 2000, Citigroup or Bank of America in 2007, or Exxon or Chevron in September 2018. Not everything comes back.
Anyway, on to dead money, aka Amazon. It looks likes a successful retest of the broken uptrend, and well, we are getting closer to being able to call a double top in the stock. Officially for this to be a double top, the stock needs to sink below 3,200, given the stocks valuation and HORRIBLE quarter and guidance that shouldn’t be too hard. I would think the 3,200 serves as short-term support, but ultimately that should break.
The gap in Alibaba from 2017 is now nearly filled; maybe that’s where the CCP wants to get long.
Ford has a huge gap to fill, around $15. I know Ford will be making EVs, which means it is worth more than it was before it was making EVs. How I don’t know, but I’m sure there is some story floating around out there that is half as good as the seasonality story, or it is a “disruptor” or the next “Tesla killer,” which is most certainly not.
Ok, that’s enough for this weekend. See you on Monday.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.