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by Troy

More speculative signs

Speculative signs keep piling up. Contrarian investors and traders have focused on surging penny stocks and micro-cap stocks in recent days. The smallest of small cap stocks are now more than 40% above their 200 day moving average! The last time this happened was in February – March 2000, near the peak of the dot-com bubble.

*This is the Dow Jones Micro-Cap Index, which is the smallest 50% of the Wilshire 5000 index:

It’s important to note that this also happened during the first year of the 2003-2007 (September 2003) and 2009-2020 (September 2009) bull markets. In those 2 historical cases, the stock market rallied another 4-6 months before major corrections began. This is a bearish sign for spring & summer 2021.

Energy rebound

Energy stocks are rebounding. While nobody wanted to buy energy stocks a few months ago, 100% of energy stocks are now above their 200 day moving average:

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This is how multi-year energy sector rallies began in the past. When the % of stocks above their 200 dma cycled from 0% to 100%, most of the medium term gains were already over. However, the next few years were very rewarding for long term investors:

This is bullish for energy stocks, particularly as the global economy rebounds in 2021.

Commodities breakout

Commodities are on fire. The CRB Commodities Index broke out to its highest level in over 5 years.

When commodities’ momentum was this strong in the past, they typically rallied further over the next 3 months:

European sentiment

European investor sentiment is on the rebound after the worst collapse in over a decade. Eurozone Sentix crossed above zero for the first time since the pandemic began:

The 3 historical cases saw European stocks either rally further or swing sideways over the next year. As a sidenote, bond king Jeff Gundlach is more bullish on European & emerging market stocks than on U.S. stocks:

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My market outlook

Here’s my market outlook based on 3 different time frames:

  1. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
  2. Medium term traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
  3. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end. In a highly speculative environment like today, the most profitable traders are short term trend followers who trade markets with strong animal spirits. Short term trend followers must use stops.
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