I am not worried yet, just getting concerned. Chatter is starting to build on “high valuations”. Yes, they are. Bank of America (BoA) also reports that S&P 500 companies topping Wall Street’s earning estimates and/or providing upbeat guidance aren’t popping on the good news. BoA points out this hasn’t happened since the top of the 2000 tech bubble and notes the S&P 500 dropped 13% during the next three months the last time good earnings weren’t good news for prices. (1)
I remember those days quite vividly. Companies were destroying expectations but sliding afterwards. A lesson was learned as a result: Be aware when good news is bad news for stock prices and bad news is good news for stock prices. Many times, that self-taught rule marks pivot points.
We don’t have to think too far back to find an example of this adage. Can the news have been any worse in late March 2020. COVID was just getting started in full, the country was in lockdown, 15-days to flatten the curve, nobody knew what to expect and the news was overloaded with doomsday headlines (remember- 2.5 million people to die in the US within a year). Yet, stocks started to show signs of life.
In fact, this is what we wrote in this newsletter for the week of March 23, 2020, the day the NASDAQ bottomed.
“There was something different about Monday. Call it gut instinct or wishful thinking, but something was different in the way traders handled the market to start the week. When bad news isn’t that bad for stock prices, something is up.
We can see it now, heads cocked to the side, disbelieving eyes and a collective what the heck are you talking about, the market was down 582 points. Considering recent swings in the multi 1000s, six hundred points is small by comparison. That in the face of the Senate failing to pass a stimulus/aid package, twice. A week ago, that partisan mess might have resulted in losses well into the 1,000s.”
As stated at the top, it’s not time worry yet, just to be on alert. As long as the indexes stay in their upward channel, bulls are good to go. However, when/if the bottom guardrail is broken, expect “overvaluation” talk to accelerate and prices to drop. Keep that thought in the back of your mind.
Technology sectors dominated last week, which is to be expected when stocks climb higher. SPDR S&P Homebuilders ETF (XHB) and SPDR S&P Retail ETF (XRT) were the only, non-tech related exchange traded funds (ETFs) to make it into last week’s top 10 performers.
As much as we’d like to get on board with some of the hot tech ETFs, chart after chart shows so much more risk to the downside than upside potential. Bluntly, many are poised for some profit taking. It doesn’t mean they’ll drop right away. However, we’ve been well-served over the years sticking to our requirement that upside potential be greater than downside risk, and we aren’t there right now.
Maybe this one should go under sector watch, but we’ll put it here. The Biden administration came out swiftly in an aggressive tone against oil, issuing an executive order that halted the Keystone Pipeline and put a moratorium on new drilling leases on Federal Lands. (2)
The executive order should have minimal impact, for now, as Federal Lands only account for about 10% of oil production and the Trump administration issued enough permits to potentially last President Biden’s first term. However, the message is loud and clear, domestic oil could get the cold-shoulder from the new administration in their Green New Deal push.
As a result, oil production in the US could dip, lowering supply. If supply dips and the economy doesn’t contract, lower supply and constant demand could equal higher prices, especially at the pump. United States Gasoline Fund, LP (UGA) could be a way to offset spending more to fill your tank.
The investment objective of UGA is for the daily change to reflect the daily changes in the price of gasoline for delivery to the New York harbor.
If President Biden takes on “Big Oil” in an effort to transition away from fossil fuels to green energy, as he’s promised and many supporters demand, gas prices at the pump will likely head higher, perhaps much higher. If so, UGA’s price could find its way back to prices during Biden’s days as Vice President, which would be more than double where UGA is today.