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RoboStreet – May 20, 2021
More Market Consolidation Ahead
Some big moves in a few key asset classes have fueled volatility this past week, putting the bulls on the defensive for the time being. Crude oil, lumber, copper and most other commodities have run into selling pressure, while Bitcoin, Ethereum and other crypto currencies were liquidated to the tune of 30%-50%.
Selling of growth stocks that are dominated by the big cap tech sub-sector were also under pressure as fund flows into reflation stocks continued to take hold of investor attention. Selling of the SPY has been contained to 4% where the benchmark index found support at its 50-day moving average after testing it twice this past week.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
Fresh selling pressure has now emerged in the reflation stocks, where if the volume picks up to the downside, could trigger another wave of broader market selling that could see SPY break below its 50-day, resulting in a correction of 10% or more. The market is kind of at a technical inflection point where forward inflation data will likely be the key driver as to the near-term direction for stocks.
The $SPY broke through the key support level at $410 and retested 50-day moving average. VIX traded above the $20 level. The reflationary stocks sold off and the technology stocks were able to stage the rebound as the week progressed.
The QQQ trading below the 50-day moving average. The $DXY is reaching oversold levels and due for a rebound. The $TLT starting to recover. Short-term the $SPY key support level is at $403-410.
I would consider rebalancing the portfolio at this point to be more market neutral. I expect the second wave of the sell-off to continue this week or next. The second wave of the sell-off can start after a sharp rebound (the $SPY reaching $412-$418) and I would use any market strength to raise cash.
Based on our models, the $SPY can pull back 10-15% from the all-time highs in the next 2-6 weeks. If you are trading options consider selling premium with September and October expiration dates. Based on our models, the market (SPY) will trade in the range between $388 and $425 for the next 2 weeks.
It’s tempting to buy every dip, because that’s been a pattern that has worked for the past year, with each pullback being contained to roughly 5% with the exception of the two drawdowns in October and November that were more along with the 10% variety.
My AI models are what guide our investment decisions for our advisory service RoboInvestor. Our AI platform screens thousands of potential trades that can involve blue-chip stocks and ETFs that represent indexes, market sectors, interest rates, commodities, precious metals, currencies, and volatility. RoboInvestor is a service without restrictions as to where we can put capital in the more opportune trades.
It’s been a long time since the market-tested its 200-day moving average, and it would not be abnormal at all to see this rolling correction evolve in the next two to four weeks, led lower by the reflation stocks, of which several leading names are very extended and due for some retracement of their heady 2021 gains. A couple of catalysts that could trigger the second wave of selling would be a rally in the dollar that is very oversold at present. Looking at the Invesco DB U.S. Dollar Index Bullish Fund ETF (UUP), our proprietary AI-driven Seasonal Chart is flashing a “Higher” signal for the next 20 and 300-day periods.
The other downside catalyst would be a string of economic data that reveals further inflationary pressures at work, where bond yields move higher and stocks move lower in reaction. The chart of the 10-year Treasury Note argues well that the next move for its yield is higher – probably to the 1.80%-2.00% range over the intermediate term.
Lastly, the implosion of cryptocurrencies has shaken the confidence of millions of traders and investors that are too heavy into Bitcoin, Ethereum, and the more speculative digital coins. China has basically outlawed Bitcoin transactions as of this week, sending a shock wave through the sector. And this loss of confidence is spilling over into the high P/E stocks where there is abundant technical damage.
One timely trade we have at work in RoboInvestor is long the iPath S&P 500 Short Term Futures ETN (VXX) that is highly correlated to the VIX. Shares of VXX traded as high as $50 on May 12 and have pulled back to $41 over the past week as market volatility settled down. But if and when the next wave of selling materializes, VXX should challenge the recent high and maybe trade higher.
We’re very proud of how our AI system has performed for RoboInvestor members for the past three-plus years. Our Winning Trades Percentage is an eye-popping 91.19% that to my knowledge is the best win rate available to investors anywhere. As the investing landscape is about to get trickier with inflation data, Fed policy, interest rates, geopolitical issues, and rapid sector rotation, having the power of agnostic AI models that identify the highest quality trades is a solid investment proposition.
I put out two new trades every other week when we publish our newsletter over the weekend, so you have actionable trades when the market opens Monday morning. I like to maintain a portfolio of no more than 25 holdings and exit trades when our AI indicators signal us to do so. That’s what’s great about RoboInvestor. Our AI system not only tells us what and when to buy, but also when to sell.
Take advantage of our years of hard work, perfecting our AI platform, to deliver the kinds of returns that build real wealth year after year. Make RoboInvestor your best trade of the week and I’ll be the first to congratulate you on joining our community of successful investors through the power of AI.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
*Please note: RoboStreet is part of your free subscription service. It is not included in any paid Tradespoon subscription service. Vlad Karpel only trades his own personal money in paid subscription services. If you are a paid subscriber, please review your Premium Member Picks, ActiveTrader, MonthlyTrader, or RoboInvestor recommendations. If you are interested in receiving Vlad’s personal picks, please click here.
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