Weekly Update

A Roaring Bull Market in the Riskiest of Asset Classes

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Published February 12, 2021

It is no secret that money is chasing stocks, creating what some are calling ‘bubbles’ of valuation here and there (if not in the market overall). We talked last week about how valuation doesn’t really matter, supply and demand does. Right now, investors see no reason to hold back on the demand piece. We find no better example of this behavior than the massive (and sharply quick) run-up in shares of the most risky of companies, broadly speaking. That would be the smallest companies in the market – the microcaps. These relatively tiny companies see demand for their stocks when risk-taking is high, as it obviously is now. The chart below shows us ten years of data. The first rally lasted three-and-a-half years, trough to peak, with a rise of +145%. A few months later, the group embarked on another run, this time lasting two-and-a-half years and almost +90%.

Both of those rallies pale in comparison to what is going on today. We are approaching a +200% leap in less than a year’s time. Making it more dramatic is the fact that the bulk of that jump has occurred in only the past FOUR MONTHS! Who knows how far this rally can run? It has certainly been one for the ages though.

Micro Cap rally

Where is some of this money possibly coming from?

Perhaps it is coming from the stocks that carried the market through last year’s most difficult months.

The three stocks below led the recovery from last April through August. Since then, however, they have largely moved sideways, leaving the momentum investors to try their luck elsewhere.

Amazon FB and Netflix moving sideways

The summary of it all is: as the vaccines have become available, investors have been willing to take on more and more risk, going full throttle once the election uncertainty passed. That risk-taking is showing up in different places every week – from Tesla to bitcoin to the short-squeeze mania stocks (GameStop, et al.) to this week’s darlings, the marijuana stocks. When does it calm down and what will make that happen? No one knows. But it is certainly out of the norm.

Which brings us to our TimingCube models. This market will most certainly give back some of the gains it has given. Markets do not move straight up like this without coming back down the other side of the “mountain”. We show the microcap chart again, this time noting that after reaching the peak microcaps gave back half or more of the rally.

IWC gives back after rally

No investor wants to see a huge chunk of their gains evaporate. Our models are focused on jumping OUT of the market when the rally ends, preserving our gains, and getting us ready to participate in the next wave upward. Our Turbo SELL signals can be read as a time to go to cash. More aggressive subscribers can use our SELL signals as a time to take a short position, seeking to profit from the market’s decline. Either way, we are built to hold on to the bulk of the market’s gains, a source of comfort when we see the market rocketing higher.

Market Update

Stocks kicked off the week with a +0.7% gain as investor optimism about a coming stimulus package combined with strongly rebounding corporate earnings to keep money flowing into stocks. Oil prices continued their move higher, reaching the $60 per barrel level that was in place before the pandemic hit. Flat trading Tuesday and Wednesday with the smallcap stocks giving back some of their recent gains. Fed Chairman Powell reiterated the group’s cautious stance toward interest rates, pledging to maintain their asset purchase program, noting the labor market and economy have yet to experience a full recovery. Solid earnings reports and a further embrace of cryptocurrencies by the nation’s banks and credit card companies offered support for stocks Thursday. Firms from online real estate company, Zillow (Z), to food maker Kraft Heinz (KHC) reported good results. Stocks ticked higher by +0.2%. Another +0.5% rise followed on Friday, leaving broad stock market indexes at record highs going into the three-day, President’s Day weekend.

Another weekly gain for stocks as the S&P 500 (SPY) rose +1.27%. The Nasdaq 100 (QQQ) added +1.54%. Smallcap stocks (IWM) lifted by +2.53%.

Warm wishes and until next week.