Last week was a reality check for investors who have been getting used to stock markets shrugging off any and every headline.
On the heels of the Fed announcement on June 16, 2021, the initial response of equity was negative. In fact, the week ending June 18th was the worst performing weeks of 2021 for most of the indexes.
When considering risk-on and risk-off indexes (RO/RO), the sell off after the Fed meeting was the first since 2020 in which the RO/RO fell below its 50-day moving average. This can be interpreted in several ways, but essentially it shows how sensitive investors are, based on inflation sentiment, to potential changes in outlook. Here a chart showing the initial response and the resumption of the broad-based expansion after Chairman Powell seemed to walk-back the concerns of investors later the same week.
Investors can learn a few things from the reaction. First, be prepared for sudden bouts of volatility over the summer and early fall. Second, this is more of a confirmation of cyclical data which indicates that in the second year of a new bull market, equities tend to be susceptible to short term corrections and rotations in leadership. Earnings growth is expected to remain high through third quarter 2021, however at some point, earnings growth will moderate and margins will begin to flatten.
Based on the Ned Davis Top Watch Report, we are seeing 3 out of 9 indicators in market-topping-mode (with one signal due to expire after the day of this writing). This is below the threshold of 5 out of 9 indicators which would indicate a Top Watch. Therefore, considering this, it is likely we have not yet seen the top of this market.
Despite not being able to call the top at this point, we are more than 12 months into this uptrend. That puts markets in a position of being due for a single digit correction, but it is a guessing game when and if we will see anything meaningful on this.
As time goes on, potential pullbacks do become more likely. Unless data shows a breakdown in the trends, this should be interpreted as short-term corrections and not a change of momentum into a bear market. Additionally, this shows that data and evidence is more important than ever.
Your friends at Trek Financial sincerely hope that you and your family have a wonderful 4th of July weekend and enjoy your freedom and family!
Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Trek FG 21-66