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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:
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The Cyclical sectors
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My ETF Rankings are not investment advice. Rather, they are an objective ongoing research study.

Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my
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According to CFTC Rule 4.41, hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States.

 
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"Robert Colby has evolved a system that, while hardly foolproof, is pretty clever," wrote Daniel Fisher, "Surfin' ETFs", Forbes, Investment Guide, Special Issue, June 4, 2007.
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INTERVIEW of Robert W. Colby in Technical Analysis of STOCKS & COMMODITIES magazine, December 2006 issue.
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"Gold's next move: History, logic, and intermarket relationships. See if testing gold's relationship to different markets over a 32-year period provides possible trade signals for the yellow metal."
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"Which gold indicators are best? Divining gold's next move."
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"Applying the Relative Strength strategy to ETFs."
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"PUTTING CANDLES TO THE TEST, How Profitable Are They Really?" by Robert W. Colby, CMT. Published in SFO, STOCKS, FUTURES AND OPTIONS MAGAZINE, Volume 5. No. 8. August 2006, pages 91-94. Please click here to buy this article. (Scroll to bottom of linked page.)
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Active Trader magazine September 2004 interviewed Robert W. Colby. 4 pages. "Robert W. Colby: Technical collector. A discussion with Robert W. Colby about technical trading and his revised Encyclopedia of Technical Market Indicators, Second Edition. By Active Trader Staff."
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MetaStock® PC Software for Technical Analysis
MetaStock® is a powerful technical analysis software program for your personal computer. It offers more than 200 built-in indicators and line studies to enable you to explore a wide variety of methods. And it empowers you to build, back test, and optimize custom trading systems to suit your own particular requirements.
Great new version just released November, 2019.

Click this link to save 7%-9% on MetaStock® software
.
Or, click the banner below for a one-month free trial.

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