by Lance Roberts, Clarity Financial
Review
Since I did NOT produce a newsletter last weekend due to the holiday’s, this will start with a review of the broad market.
Following the election, the market has surged around the theme of “Trumponomics” as a “New Hope” as tax cuts and infrastructure spending (read massive deficit increase) will fuel earnings growth for companies, stronger economic growth, and higher asset prices. It is a tall order given the already lengthy economic recovery at hand, but like I said, it is “hope” fueling the markets currently.
“First, the market has moved from extremely oversold conditions to extremely overbought in a very short period. This is the first time, within the last three years, the markets have pushed a 3-standard deviation move from the 50-day moving average. Such a move is not sustainable and a correction to resolve this extreme deviation will occur before a further advance can be mounted. Currently, a pullback to the 50-day moving average, if not the 200-dma, would be most likely.”
“Secondly, as discussed above, the advance to ‘all-time highs’ has been narrowly defined to only a few sectors. As shown the number of stocks participating, while improved from the pre-election lows, remains relatively weak and does not suggest a healthy advance.”
The problem with the breadth of the advance is significant. As shown in the sector rotation chart, the current rally has been extremely bifurcated. Such extreme deviations in performance tend not to last long and tend to have rather nasty reversions.
As my friend David Larew (@thinktankcharts) pointed out on Thursday, breath has triggered a short-term sell signal suggesting a pullback to support.
Combine the current backdrop with a sharply higher dollar and interest rates and you have all the makings for a decent correction. This, of course, aligns with my prediction from two weeks ago when I stated:
“However, expect a decline during the first couple of weeks of December as mutual funds and hedge funds deal with distributions and redemptions. That draw down, as seen in early last December, ran right into the Fed rate hike that set up the sharp January decline.”
