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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
December 6, 2021
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Stock Market Outlook: are stock valuations "crazier" now than the dot-com bubble?
Many stock market indicators turned more bearish last week on news about the Omicron COVID-19 variant and inflation. For the short term, the path of least resistance since the SPY peak at 473.54 on 11/22/2021 is clearly down.
After insisting for months that inflation would soon turn down, Federal Reserve Chair Jerome Powell finally gave up on describing inflation as "transitory". He said that the Fed should consider phasing out its asset-purchasing program a few months earlier than previously planned.
Monetary policy still will be easy in months ahead, but it will be less easy as the months roll by. Goldman Sachs' chief economist Jan Hatzius expects "the FOMC to double the pace of tapering [of the Fed's money printing] at the December meeting and then to deliver the first rate hike in June 2022." The Fed will meet on December 14 and 15 to plan monetary policy.
Some of the sentiment indicators suggest a quick shift from overbought Greed to oversold Fear for the short term. Previously, however, bullish sentiment was far above average for 19 months, in a persistent overbought position from April 2020 to November 2021. It could take much more time to work off those longer-term, persistent levels of overbought Greed.
Corporate insiders (officers, directors, and large shareholders) have been selling the stocks of their companies like never before. It is generally assumed that insiders know the most about their companies' earnings prospects and stock price valuations.
From a long-term perspective, stocks remain overbought and overvalued relative to traditional measures: sales, earnings, dividend yields, and book value. Stocks are priced for an extremely optimistic future, ignoring all potential bumps in the inherently unpredictable road ahead. Berkshire Hathaway's Charlie Munger thinks stock valuations are "crazier" now than they were in the dot-com bubble in years 1999-2000. History shows that overly high stock prices are followed by low returns, and overpaying for stocks is not profitable in the long run.
The SPDR S&P 500 ETF Trust (SPY) price broke down below the lows of the previous 7 weeks. Leading indicators, RSI, MACD and OBV (On-Balance Volume), peaked 4 weeks ago, diverged bearishly versus price, and remain bearish for the short term. Many other market indicators (shown below) still show negative divergences relative to the SPY. A few overpriced stocks account for most of the SPY's gains this year. The S&P 500 index is capitalization-weighted, and the largest and most popular stocks still have been dominating the stock market all year, while the typical stock has been relatively unwanted. It seems too soon to call a change in that well-established trend.
The broad-based, equally-weighted Value Line Geometric Index ($XVG) broke down below the lows of the previous 4 months and fell further below its own trailing 50-day and 200-day SMAs (simple moving averages). $XVG underperformed SPY again last week, continuing a relatively bearish trend that started on 3/18/2021.
The Cumulative Daily Advance-Decline Issues Line for the NYSE ($NYAD) broke down below the lows of the previous 10 weeks and dropped further below its 50-day SMA. Peaking on 11/8/2021, $NYAD signaled an early warning bearish divergence compared to the most recent new high for the SPY closing price 10 days later, on 11/18/2021.
Net New Highs on the NYSE ($NYHL, now at -180) again finished the week in a bearish position: below zero, below its 50-day SMA (simple moving average), below its 200-day SMA, and with the 50-day SMA below the 200-day SMA. Peaking last May, $NYHL signaled early warning bearish divergences compared to stock index prices for 6 months.
The QQQ Nasdaq 100 ETF (QQQ) price index, which is heavily weighted by technology stocks, broke down below the lows of the previous 5 weeks. Leading indicators, RSI, MACD and OBV (On-Balance Volume), peaked weeks ago and remain bearish for the short term. QQQ underperformed SPY again last week. During the worst of the COVID-19 pandemic, from March 2020 to January 2021, QQQ outperformed SPY, but QQQ underperformed SPY since January 2021.
The Russell 2000 ETF (IWM), which is composed of relatively small-capitalization stocks, broke down below the lows of the previous 15 weeks and fell further below its own trailing 50-day and 200-day SMAs (simple moving averages). Leading indicators of price, RSI, MACD, and OBV (On-Balance Volume), are bearish. IWM underperformed SPY again last week and has underperformed since 3/18/2021.
Our full report reviews indicators that we monitor every day and offers clear and unbiased guidance on the following each week:
Global stock markets
The Defensive stock sectors
The Health Care sector
The Cyclical sectors
The Technology sector
The Financials sector
U.S. bonds and notes
Commodities (Oil, Metals, Agriculture)
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