Hi All,
FTSE, S&P, NASDAQ all coming off quite sharply over the last few days.
Stocks selling off heavily across the board.
Inflation indicators, and fears, seem to be on the rise.
Is this a short-term correction in a continuing bull market... or the start of a longer-term bear market?
Thoughts?
Far too early to say........a correction is long overdue, so for now it's no more than that I feel. If weekly SP falls and stays below 3800 then it will look a bit more shaky. I don't believe FTSE is as vulnerable since valuations were never so high. Nasdaq may be struggling more but mainly through rotation process out of tech.
"Is this a short-term correction in a continuing bull market... or the start of a longer-term bear market?"
If any one of us knew that for sure...
The oil pipeline hack in The US. The Iranian backed Palestinian summer time sport of lobbying rockets at Israeli citizens... so far the geo-political is just a side-show and light entertainment. It would be a major event that kicks off a bear market.
One US commentary I heard yesterday said that Biden's unemployment handouts are creating shortages in the workforce. $15 to sit at home watching Netflix is an easier gig than working. This is feeding inflation.
We shall see.
Without getting too political, on an objective level I do agree that Biden's unemployment benefits are not helpful for the US economy.
There is a 'sweet spot' to be found with welfare, where those that genuinely need it are supported, but without being at such a level that living off benefits becomes a viable lifestyle choice for those that are so inclined.... they seem to be in that territory at the moment, and that will fuel inflation if it isn't addressed.
My guess, regarding the NASDAQ, is a short term correction in a continuing bull market.
Reason: Index is still above the 30 and 40 week EMAs.
Plus the 30 and 40 week EMAs are still rising strongly.
The correction is long overdue as Neil D56 suggests. The weekly MACD indicates a continuing negative trend though, certainly for a few weeks. I think the NASDAQ will fall maybe down to 12500 before recovering as a lot of retail investors will be dumping their techno holdings (well, that's what I'm doing) and shifting the money into less volatile sectors. Like Neil D56, I'm pencilling in 3800 as a possible support for the S&P 500.
If either index goes below the 40 week EMA, that could trigger a big sell-off and a few months of US bear market.
Interesting, I'll keep an eye on those levels. I note that in both cases, they would represent a fall of approx. 10% from their respective highs.
I know Stan Weinstein paid great attention to the 30week SMA with his methodology. I note that the NASDAQ is on that level at the moment, after it previously acted as support in early march.
Think it's likely to be broken this time around, although we may get a short term bounce.
so far the geo-political is just a side-show and light entertainment. It would be a major event that kicks off a bear market.
Agree, so which events are priced in?
My attention is on developments in Taiwan, Hong-Kong and the South China sea.
Biden & Trump consistent in hostility to China and Xi Jinping becoming autocratic.
Semi-conductor stocks have come a long way since last March, some only since last October but I am reluctant to sell.
TSM (Taiwan semiconductor) building in Arizona. Looking to buy MU (Micron techno), muffin-top chart but PE of 8 with huge EPS growth. Market agrees with me today.
The trite answer is that everything is 'priced in' but with a probability that moves in a volatile manner :)
I heard a good Economist podcast yesterday on the race to chip domination - very big business with a new chip fab costing $20bn. The sector sounds extremely globally interconnected and subject to fabs and suppliers forming alliances etc https://www.economist.com/podc...
I was close to investing in TSMC a couple of months ago but the rising geo-political tensions put me off. Samsung might be a safer bet? Maybe AMD and Intel if they recover some of their mojo? Meanwhile I've had a dabble with ASML and KLA-Tencor as providing the 'pics and shovels' to the industry. I'll look at MU, thanks.
Unless of course that is the plan. Biden is effectively causing worker wages to rise as employers need to raise to compete with the 'stimulus' plan. Beats getting into a four-year mud-slinging fight with Republicans over minimum wage legislation, plus has the effect of causing inflation, which evaporates away gov't debt.
I spent a career as a GP then an occupational health consultant in and around a midlands industrial town. My experience led me to the realisation that there were at least as many people at work who probably ought not to have been as fit ones milking the system. The very small number of well but work-shy men (almost always men) were, in reality, such low quality individuals that you and I would not want them working for us, even as babysitters. What was always apparent was that the actual yield of benefits was so poor and such a hassle to get, only the most dedicated wastrel would bother and that having no job to call your own was a living hell for very many. I saw no evidence of any "sweet spot" in 40 years.
Maybe others have had different experiences. I just thought I'd share mine for what it's worth.
It seems logical that a more generous welfare system would cause the number of people willing to live off benefits to increase.
If companies do put their wages up to compensate, and to attract workers, then it is typically low qualified or young people who suffer. Increased wages create increasing demand, which means companies can be more selective in who they hire.
Its difficult to see a scenario in which increasing welfare payments can be anything but detrimental to the labour market.
"Its difficult to see a scenario in which increasing welfare payments can be anything but detrimental to the labour market."
Having lived in Europe for a few years I can anecdotally say that is certainly not the case.
Regarding the question:
Is this a short term correction or the start of a longer term bear market??
My personal opinion is that we are going through a short term correction and this will be the sixth correction since the start of the long bull market which commenced back in 2009. I believe the USA will experience more of a correction that the UK due to its toppy forward PE of around 35.
The reason for my opinion is that the global IMF has forecast that worldwide GDP will grow by 6% during 2021 and it will grow by 4.4% during 2022. If the worldwide GDP is forecast to grow then it means that companies will have to produce more, so EPS will rise and so a recession is not on the cards at the moment. Had the global IMF forecast a shrinking GDP for the world then my opinion would be that we could be looking at a shrinking stock market, aka a bear market.
Regards Sell in May, etc... My opinion is that it is better to keep an eye on one's stop losses, for those who use stop losses, and sell each individual stock as it falls below each stop loss. My opinion is that stop losses are for short term traders and those who are long term investors may probably be aware that the market and hence share prices bounce back and recover over time.
But as the old adage goes, I could be wrong!!
I lived in Europe (Italy) for a few years as well... I'm not sure how that relates to Biden's welfare policy though.
Obviously valuation in the USA far too high, UK less so.
Balanced against this is massive QE / money printing that is expanding the bubble.
My guess is that another high inflation number will bring inflation fears to the fore. Something that money printing can't solve, in fact is making worse. At this point the central banks have no answer; money printing bad but putting up interest rates also bad.
The only way to avoid a bear market would be if inflation is transitory, which i don't think it is.
Pretty nasty looking 'hanging man' candle print on the QQQ for May with continuing divergence between price & RSI on weekly TF suggests, imo, that a pull back over the next couple of months is likely. I am targeting the 21 period EMA on the monthly chart for support to get long again.
The best cue may come from govt bond yields. They moved aggressively higher at the start of the year, but have held steady over the last 2-3 months. If they break higher again, that may cause the equity markets to roll over as well. Stock-bond correlation at 20-year highs currently. That also means you lose the traditional diversification benefit.
Bitcoin appears to have formed a major head-and-shoulders top over recent months. It could be something of a warning signal. Bonds tend to lead stocks at major market turning points, and of course the bond market already peaked 6-7 months ago essentially.
Overall, very interesting times from a macro perspective. My favourite call is long oil and I'm getting back into gold again as well. But still a full allocation to stocks for the time being... until the music stops.
