Last week’s drop in the indexes could mark the beginning of the correction.  Fortunately this correction may not last very long or be very deep.  The indexes have experienced excessive buy over the past few weeks.  Though last weeks decline with heavy volume helped bring some balance to the markets.  things are still somewhat out of kilter.  So expect more selling and or volatility over the next few weeks. 

Of course the big news of the week is the mega short squeeze of GameStop stock.  This is the first time retail investors have managed to orchestrate such an action at the expense of hedge funds many, of whom experienced billion dollar losses.  For better or worse, this is the new reality for the markets. We were already at the point were the actions of retail investors could influence the direction of the market, but now it is clear that coordinated action by retail investors can dictate a stock price.  This should be a lesson to us all that at the end of the day the price of the stock is set by the demand for the stock not a companies fundamentals.  

It looks like we are about to experience the first correction of 2021.  How long (a day… a week… a month) and how deep (2%, 5%, 10% drop) will it be?  Well that’s the $1M question.  The economic fundamentals have not changed since the beginning of the pandemic, and we have not started to see the full effects of the Fed’s monetary policy.  So this correction is likely due to good old fashioned profit taking.  

Remember, 2020 was a great year for the markets.  The NASDAQ was up over 43%.  Since the average annual return is roughly 9%, it would be reasonable to expect a correction soon.

I would expect the correction would happen over the next few weeks, and hopefully it won’t be too deep or last too long.  So review your positions and sell rules; you might have to sell something to preserve capital.  Also update your buy list.  There are going to be some bargains coming!  

Santa Claus didn’t giving us nice things this year due to coronavirus restrictions on gathering with family and friends, but what a rally! To think back in March many of us thought we were on a precipice of a global coronavirus induced market collapse.  Instead we’ve seen the NASDAQ rocket over 40% year to date (not counting from the low for the year) and the SP500 and DJI up over 14% and nearly 6% respectively.  This is the ultimate silver lining to what has been a bad year.  

My indicators suggest the up trend should continue for the next few weeks.  After New Years volume should tick up as people return from the holidays.  There are many factors that will affect market direction after New Years.  The new Biden administration ‘s policy will start to be announced.  Small business in America is in a state of crisis, as are renters and landlords.   In spite of this, the markets still retain their longterm  upwards bias.  So as of now I am betting 2021 will also be an up year.

Prior to the election my indicators suggested buyers were going away, thus causing markets to fall.  It’s important to note that selling did not pick-up, suggesting the people were hedging their bets till after the election.  Now that the election is over my indicators suggest buying and selling on the NASDAQ has returned to normal.  The other indexes may follow suit this week.  Barring news about Covid-19, I would expect the markets to continue their volatile rise upward.

Now that the election is over I’m surprised at the number of people who were surprised by how close it was.  Last year Moody’s Analytics  produced a report predicting a Trump victory if economic trends continued and there was low voter turnout.  If the economy declined and there was high voter turn out then, according to the report, Trump would lose.  From the report is was clear that the key battle ground states would be the rust belt states of Michigan, Wisconsin and Pennsylvania. This is exactly what we saw.  Further the IBD/TIPP poll, which accurately predicted the past 8 presidential elections, suggested the popular vote result would be 50% Biden and 46% Trump.  This too is almost exactly what happened; a close election, but it is not a “Blue Wave”.

Since we live in a political-economy it will be interesting to see what aspects of Trump-ism the Biden administration maintains and how the markets respond to Bidenomic.

The 2020 election was a referendum on Trump and not his policies.  Thus the defeat of Trump doesn’t mean an end to Trump-ism.  This is borne out by the gains the Republicans made in the House election and the likely continuance of their Senatorial majority. 

So what is Trump-ism?  There is no formal political ideology espoused by the soon to be former president, which makes Trump-ism inherently a populist movement.  So, what are the tenants of this movement?  Based on my observation over the last 4 years, Trump-ism could be described as America First.  In domestic policy this translates into fostering an American Identity over an intersectional view of identity.  One consequence of these policies would be an end to open immigration to America in favor of an immigration policy where only persons of means or special talent can immigrate to America.  In foreign policy this means the end of the Bretton Woods system in favor of a more economically isolationist and anti-interventionist policy. Without Bretton Woods America would adopt high tariffs on imports and no longer be a major importer of foreign manufactured goods. Another hallmark of this policy is continued energy independence through the use of fracking in spite of the environmental consequences of this technology. 

I would expect Americans to debate these issues over the next four years.  I also anticipate the Republican party to become more Trump-ist up to the mid-term election in 2022.  The question is: what aspects of Trump-ism will the majority of Americans accept and reject?

In spite of the increase in covid cases, lack of stimulus plan, and shaky economy, the markets shucked off its end of Q3 confusion and found a direction, upwards.  My indicators suggest the upward trend to continue for the near future.

As the election approaches, the anticipated Biden victory appears to have no impact on the market direction.  This may be because the covid response is the dominant issue for the market.  Likewise, a Trump victory should not upset the market either.  In fact it may go up even more.

So does that mean we can expect a Q4 Santa Claus rally?  Maybe… we’ll know in the next few weeks. 

This has been an amazing year for the markets.  In spite of the world economy slowed down with some sectors effectively halted as a result of the coronavirus the SP500 is up over 2%, and the NASDAQ is up 21% year to date!  On would expect both (like the DJI) to be down for the year under these conditions.  However, both are down from their highs for this year. 

 Q3 is nearly over and analysts are starting to look toward 2021.  It’s not looking good.  Government mandated lockdowns and social distancing could continue until there is an effective vaccine.  This will have a negative effect on the economy.  Even if there is a vaccine soon don’t expect a return to normalcy soon.  This means more of the same till at least 2022.  Without continued government support US consumers will be under threat of mass evictions and foreclosures.  Keep in mind that even with government mandated rent and mortgage forbearance missed payments still need to be repaid, and in some cases as a lump sum.   

This could be why my SP500 indicators are flashing warning signs and we have seen a down trend in the markets with increased volume since the beginning of September.  The NASDAQ is behaving normally, but the volume of selling is rising, which is also a cause for concern.

All in all we are in for a rocky start to Q4.

On 9/3/20, like a herd of elephants the big fund managers started moving money out of the markets, particularly tech stocks.  By 9/11/20 the NASDAQ and SP500 lost ~10% and ~7% respectively.  These indexes are now trading close to their 50 day moving averages.

So long as the 50 day line holds, the upward trend is still your friend, but with a brief pause.  My indicator suggest that this is likely the case. The NASDAQ is behaving normally, but the SP500 is showing an unusual decline in buying.  This isn’t a good sign.  My sell rules have were triggered so I have more cash on hand, an am cautiously looking for bargains. 

Half birthdays are important to kids under 8, but should also be important to adults over 44.  That is because at 59 ½ you can start withdrawing from your 401K and IRA accounts without penalty.  So 15 years after your 44 ½ birthday you should be able to retire. Happy Half-Birthday!  When you do retire you need to have the right mindset.

The first change of mind you need is to realize you no longer work for assets your assets work for you.  So your cash, stock, cars, home, and anything you own of value now need to work for you to make money.  They do this by growing in value or offsetting costs.  Stocks and homes are good assets because they tend to go up in value.  Cars and cash are bad assets because they tend to go down in value.  This doesn’t mean cars and cash are bad.  A car can be good to own if the total cost of owning a car is less than the total cost of using public transportation.  Cash is needed as a medium of exchange.  Yet, because of depreciation and inflation cars and cash respectively will be less valuable over time.  A retired person who lives solely off of selling assets in their IRA and other places needs to be aware of which assets go up in value and which go down. The amount your assets need to appreciate each year is dictated by how much you spend each year.  If you spend a little then your assets don’t need to work very hard.  If you spend a lot hopefully your assets are growing in value fast enough to cover your spending.  Debt should be avoided  because you need to pay it back by selling assets which could be used to generate money for you to live off. 

For the long run stocks demonstrated the ability to consistently increase in value.  That is why they are the best store of value and source of income for retired persons.  The SP500 returns 9.8% a year on average.  This year the SP500 is up over 8% so far!  So on average a $500K IRA could generate $49K of income per year. 

The economy, as predicted by many, is experiencing a V’ish shaped recovery, which was confirmed by recent employment data and earnings reports.  I would expect this to continue for the rest of the year. The tech heavy NASDAQ is on FIRE due to people leveraging technology to work remotely.  In spite of this the rate of increase in the NASDAQ shows signs of slowing as the index continues to new highs.  My indicators, however, show no signs of a major pullback soon. The SP500 is finally up for the year.

So what does the future hold?  US Presidential Election …. Cold War with China.  Regardless of who wins the US presidential election a US-China cold war is coming.  This isn’t necessarily a bad thing and unlike the US-Soviet Union Cold War, which ended with the collapse and end of the Soviet Union, a US-China cold war could end with the decoupling of the two economies, which could be beneficial for both.  A decoupled China could achieve economic prosperity from growth in the domestic economy and a decoupled US could achieve more economic growth from import substitution and money saved from policing the South China Sea.  So both sides win!  Though post election and pandemic “end”, be prepared for the return of trade related market volatility.  

The future president will set the tone for this war.  If there is a Trump win expect an iron fist holding a spiked club approach, and if there is a Biden win expect a velvet glove holding a baseball bat approach.  In spite of tough talk neither Trump nor Biden will be willing to use overt force since Americans are beginning to grow tired of wars and more importantly too many people in the US and China would lose too much money if there was an actual shooting war.  The US China cold war will be mainly economic and cyber, and both sides will eventually realize that they are better off without the other.

So who’s going to win in November?  Well that is another post.