2020 will go down as one of the most volatile trading years in recent history, if not ever. Traders and investors were subjected to a sickening meltdown of financial assets in the early part of the year. The financial world appeared to have had become totally unglued. The breadth of the selling panic in February/March was broad and inclusive, as all asset classes broke hard to the downside.
Nine months later, with the stock markets making new highs with almost clock-like regularity, to speak of the February/March period as a crash, is almost quaint.
The charts below best illustrate the range that the stock markets traced out up until our present point in late December. It’s fair to say that few could have seen the meteoric rise in stock prices given the circumstances that gave rise to the selloff in the first place. As of today, the planet is still imprisoned by a paranoid mentality imposed by most caretakers in public office and it was this unknown that first caused the markets to collapse.
The left side of the chart shows the devastating selloff which occurred in the early part of the year, now appearing to be only a minor blip by the subsequent up move by all of the major market indices. From the depths of a minus 20% return to an over 55% return in the high flying Nasdaq is spectacular by any historical precedent. The chart below is even more eyepopping if we show the dominant movers of the year which includes ZM, AMZN, SHOP, NFLX and TSLA.
There may be those who can easily explain the market’s activity ex postfacto but as we know, the real challenge is to make sense of events in the middle of the chaos and to systematically chart a path forward. Market participants and technicians in particular, will one day look back at the events of 2020 as textbook examples of using logical and classic charting techniques to makes sense of a chaotic environment.
In review of our comments in real time during this tumultuous year, we are quite pleased with the results of our objective analysis, especially during the most violent periods in March and April when the very ground beneath us was in doubt. This has less to do with our brilliance and much more to do with the application of classic technical charting techniques pioneered and employed by professional technicians over thousands upon thousands of charts for almost 100 years.
We’ve demonstrated the perspective of using top down analysis, which is to look at the state of the markets in general using widely available tools that are available to anyone. We were also able to drill down into specific groups, industries and stocks using relative strength analysis to determine the best performers. We were able to discuss price targets and therefore entry and exit points for aggressive traders. All these were performed using the most basic technical tools available to everyone. We were not using all kinds of elaborate proprietary trading algorithms as many claim to employ these days. Instead, we simply used tools that anyone can access to get a logical, unbiased view of market activity.
So much for then; what about now? There’s no debate that markets are all in the strong uptrends that we’ve been discussing for the past half year. This has been supported by the strong breadth measures even as skepticism abounded because of unsettling news. We’ve made clear that once a strong trend is established, it will take some very powerful forces to turn that trend around.
However, during all trends, there will be ebbs and flows and there are a number of methods we can use to determine where inflection points can be projected to be. In some respects, the state of the markets now are the inverse of the panic levels seen earlier this year. At the moment, many strong issues are trading substantially above their short and longer term moving averages, which is of course bullish. Statistically, when prices are many standard deviations above moving averages, we look for divergences in momentum to determine whether velocity has peaked and a pullback may be expected. To be clear, this is not a bearish signal, it only tells you that peak velocity has ended. We know from experience that when no one is bearish, you need to be careful just as when everyone is afraid, you have to look for bullish signals. Investing is not just about riding a trend; another important ingredient is assessing risk/reward by employing proper money management. Entries and exits matter.
As we’ve also discussed, the stock market has also been undergoing a degree of rotation as the economic cycle rolls forward. We had forecast the turning of the commodity stocks, in particular copper and many issues have doubled since then. We expect this trend to continue. Gold has been a laggard since the outperformance earlier this year, but it appears the technical signs are pointing upwards in that group. As the chart below illustrates, there is another industry group which has started to make itself widely noticed and that is digital or crypto currencies, with Bitcoin of course, the star of that group. The trading of Cryptos is not as easy as trading on listed exchanges, but some ETF’s can give an indication of money going into that space. We will explore this in subsequent commentaries.