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