Stocks went from de-risking to re-risking this week

Learnings and conclusions from this week’s charts: $.SPX(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2412(ESmain)$ $.IXIC(.IXIC)$ $NASDAQ 100(NDX)$ $Invesco QQQ(QQQ)$ $E-mini Nasdaq 100 - main 2412(NQmain)$ $.DJI(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$ $Cboe Volatility Index(VIX)$

• Stocks went from de-risking to re-risking this week.

• We’re now into a typically strong seasonal patch.

• Crypto/Tech/Transports show speculation revival.

• US large caps look tired, global/small/value look wired.

• Stocks tend to do well when it rains in New York.

Overall, the mood is well and truly risk-on. Part of this is a reversal or unwinding of the de-risking and caution in late-October, an element of “stealth corrections” resolving to the upside, optimism for a repeat of 2016-17 run in stocks, and a generalized continuation of the underlying market mood of bullish euphoria. But there are a few key conditions that are quite different now vs 2016, and we may need to rethink about how to navigate things in the coming years…

1. 6000: As flagged last week, the de-risking we saw at the end of October sure enough did set the scene for a bit of re-risking post-election with uncertainty resolved and hope for a repeat of the 2016-17 run in stocks boosting things.

2. Return in November:  Also front of mind is the prospect of the typical year-end rally, and of course we’re now into the Nov-April period, which has historically been the best performing part of the year in terms of probability of positive returns and magnitude of returns. It’s basically the other side of the “Sell-in-May” saying….. you’re supposed to come back in November.

3. Speculation Awakening:  While Bitcoin is likely getting a boost from a prospectively more crypto-friendly incoming administration, it does echo and add to the wider speculation revival. It also is in effect a dual-resolution in the chart below to the multi-month stagnation or stealth bear in bitcoin and tech stocks… in other words, sometimes you don’t need to have a correction in price, but a correction in time in order to set the scene for the next leg up.

4. Transported Higher:  Another key segment of the market; transports (a key sentiment/macro barometer in that these stocks are at the cross-currents of multiple macro and (geo)political trends) has made an initial breakout out of a huge triangle formation. The fact that this comes against the backdrop of an underlying overarching uptrend through the period in the chart below is quite bullish, and adds to the developing risk-on theme.

5. Mind the Hype:  However, as Kantro points out below, at least in the case of small caps relative performance, there have been many false starts and bouts of premature speculation. While price does tend to move faster than fundamentals, the point he makes with this chart is that you need real fundamental follow-through if things are going to sustainably turnaround for this specific case, but also for wider bullish follow-through (and on that note, check out the bonus chart section…!)

6. Mind the Surge:  Another aspect is that we are actually quite progressed in the current cyclical bull market, and in the middle of an extended surge in stocks —which may need to take a bit of a breather at some point.

7. Generational Opportunities:  This chart comes from a note by Dan Suzuki which highlights some of the best trades of the past 50 years, and how the latest one (US/tech stocks) is looking extended, and noting how these things don’t just go on forever; this too shall eventually pass. Meanwhile he, like me, sees better opportunities in the coming years for global/small/value, and inflation beneficiaries.

8. Global Small Value stocks:  Speaking of such, here’s the relative performance chart of Global ex-US Small Value stocks vs US Large Growth stocks. It has been pretty much a one-way street over the past 15-years; a massive relative bear market for Global/Small/Value. And one that has created major relative value gaps.

9. US Small Caps — Priced for Imperfection:  Closer to home, even just US small caps are looking good; trading at a 25% discount to large caps, and looking like they are nearing the low point in the long-term cycle of relative performance.

10. When it Rains:  This chart from the excellent Tom McClellan shows an apparent link between New York City rain fall and stockmarket returns, he quips: “Watching the rainfall data for New York City and its relationship to the stock market is one of the funnier relationships I have discovered in the few decades I have been doing this.  There is no reason I can think of for why such a relationship should exist, and yet there is a large amount of evidence showing that the two are related.”

The takeaway? Maybe be cautious on stocks if you expect a dry spell in NYC!