Caution Needed in Stock Market

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When stock market was in free fall in March 2020, I wrote a post on Linkedin on March 21st. After launching this website, same post can be found here. I used all the available information at that time to screen for potential investments. Most of the stocks mentioned in the post have done very well. Three months later, I am compelled to write again about stock market based on certain patterns and data points as discussed below.

There are many sources to look at data but I will reference to OpenTable data. In march, it looked as follows:

NameMar-13Mar-14Mar-15Mar-16Mar-17Mar-18Mar-19Mar-20Mar-21Mar-22Mar-23Mar-24Mar-25Mar-26Mar-27Mar-28Mar-29Mar-30Mar-31
Global-36-40-47-56-83-89-96-98-99-99-100-100-100-100-100-100-100-100-100
Australia-8-11-12-30-43-50-53-52-54-66-100-100-100-100-100-100-100-100-100
Canada-40-41-47-60-94-97-99-100-100-100-100-100-100-100-100-100-100-100-100
Germany-28-38-46-63-90-95-98-99-100-100-100-100-100-100-100-100-100-100-100
Ireland-51-52-75-70-86-97-99-99-99-98-100-100-100-100-100-100-100-100-100
Mexico-16-21-35-48-62-73-78-85-91-95-95-96-97-97-97-97-99-98-99
United Kingdom-26-20-31-52-82-88-91-94-100-100-100-100-100-100-100-100-100-100-100
United States-36-42-48-56-84-91-98-99-100-100-100-100-100-100-100-100-100-100-100
Seated diner from online, phone, and walk-in reservations – OpenTable

Same data for June 2020 looks as follows:

NameJun-13Jun-14Jun-15Jun-16Jun-17Jun-18Jun-19Jun-20Jun-21Jun-22Jun-23Jun-24Jun-25Jun-26Jun-27
Global-67-79-70-68-67-66-62-60-45-67-67-65-63-59-58
Australia-20-17-25-16-15-9-6-8-3-16-18-6-1454
Canada-77-85-79-75-74-73-70-69-55-66-71-68-66-58-57
Germany-14-22-27-25-24-31-7-47-13-9-2-8-11
Ireland-98-100-100-99-100-98-99-99-100-100-99-100-100-100-100
Mexico-92-95-92-91-91-90-87-87-83-88-88-89-87-84-84
United Kingdom-98-99-99-99-99-99-99-98-99-99-99-99-99-99-98
United States-65-78-67-66-65-64-60-59-41-66-65-64-62-58-57
Seated diner from online, phone, and walk-in reservations – OpenTable

As you can see from both time series, some countries like Australia, Germany have improved materially but overall activity at Global level is still down materially. Some other sectors are also rebounding from depressed level but activity is still not back to full capacity. In fact, some countries are witnessing a second wave of COVID-19. Some countries like USA have never had it under control in first place itself. [For COVID-19 worldwide data, please look at Worldometer. For COVID-19 USA data, please look at this and this. John Hopkins data is also pretty good.]

Based on all this, you may be wondering why stock market is back to prior peak? This is purely a liquidity driven market with Fed backstopping. I wrote about it on May 13th, 2020. Clearly, there seems a disconnect between stock market and economic activity in near term. Based on this disconnect, I started looking at various indices and individual stock charts which make me cautious in near term. Based on how stock prices behave in coming days, it will dictate if we are headed higher or lower.

Some observations from stock charts:

SPY (S&P500 ETF) is forming and maintaining an “island top” so far. Island top is a price reversal signal till it gets negated. This is worth watching if it holds or not.

SPY – Island top

XLK (tech sector etf) is high 20% of SPY. Within XLK, top 10 components are Apple, Microsoft, Visa, Intel, MasterCard, Nvdia, Adobe, Paypal, Cisco, and Salesforce. These top 10 are 70% of weight in XLK so I believe it is worth watching these stocks especially Apple (21% of XLK) and Microsoft (21.8% of XLK) to see how market will behave in coming days. I can see potential for a “double top” in many of these etfs and may be a “false breakout“.

XLK – potential double top
IVE (SPX Value etf) – island top
IWN (Russell 2000 Value etf) – island top
QQQ – false breakout?
AAPL – false breakout?
MSFT – False breakout?
GLD – breaking out from channel consolidation

Based on all of above, I think it is worth to slowdown for retail bob at Robinhood as well as for professional investors till this market gives more clues. Since Fed is injecting a lot of liquidity, I am not sure for how long price distortion can persist – only time will tell. A breakout in Gold stands out.

I would love to hear your views. Please share them in the comments section.

Disclaimer:

These are personal views and don’t reflect views of my firm. Above scenarios are for illustrative purpose and may or may not hold true in coming days. Readers must consider all relevant risk factors including their own financial situation before making a trading decision.


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