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Market Perspective: Recent Trends & Thoughts for the End of Year

Coming to you with some perspective on technicals, sentiment, and considerations for the rest of 2021.

I've done a few of these posts previously, you can find them here.

I don't do outright trading advice; this is intended to help form a picture, possibilities, ideas, to keep in mind when making trades.

I take a look at the overall market through some charts first, then use those to highlight some possible conclusions and considerations.

Let's dig in.

Charts

Sector Compare YTD
There's a lot going on here, but really we're just looking at the year-to-date % moves across our top indices and sector ETFs, to get an idea of what's been leading and what's been lagging.

SPY 1y

QQQ 1y

IWM 1y

So just looking at these:

  • After exploding higher from the mid-October lows, SPY has been flirting with the 470 (SPX 4700) level for almost two weeks.
  • Likewise, the QQQ was flirting with the 400 level (NDX 16400) for the same time period, but broke higher Thursday/Friday as bond yields fell. Generally when we've seen the Qs break above a level like this, we see more runway and more ATHs.
  • IWM (small caps) broke out of the range they've been in for the majority of the year, but have given up these gains and closed down inside that range on Friday. Right now this is looking like a failed breakout, and we'll have to see what the price action gives us next week.Perhaps this could have been opex-related (we'll discuss more below), and anecdotally small caps have outperformed more often than not in November / EOY, but the last two weeks have been worrying.

Let's take a look at some other charts to help build more context:

SPY vs S5fI
SF5I is an index that tracks/measure the percentage of S&P500 stocks above their 50-day moving average. This gives us some insight into breadth – the amount of stocks that are actually performing well within the index. The higher the better, as that's indicative of more stocks participating in the rally.

NDX vs NDFI
This is a likewise chart showing the Nasdaq 100 vs the Nasdaq 100 stocks above their 50-day moving average.

IWM vs R2FI
Likewise chart for the Russell.

RSP
This is the equal-weight S&P500 (SPY is cap-weighted), which gives us similar insight: if this is going down and SPY is going up, that's indicative of small breadth, just a few high-weighted stocks leading SPY higher instead of a broader-based rally.

US10Y
The 10y has been pretty volatile as of late, eliciting some nervousness as it swung up to 1.7 but then giving pretty much all of that back. I'm not worried about this until we see it break above that 1.70 – 1.75 zone, which I think would cause a sell off in growth stocks. Until then though, no reason to worry IMO.

DXY
A lot of people have been looking at the strength in the dollar (index). I want to take a moment to remind everyone that the DXY is a measure of the dollar vs a basket of 7 other currencies, but the largest one being the EUR. IMO the recent move higher in the DXY is not so much dollar strength relative to other currencies, but instead the EUR dropping hard, and we can see that in this chart: EUR/USD vs DXY – this entire move has been from the euro falling against the dollar, and that's really more about the state of Europe and European monetary policy than dollar strength.

Looking forward & Takeaways

Gamma Exposure, a measure of the total gamma exposure in the market, hit highs going into opex last week but we saw a majority of that roll off on Friday's expiration. High gamma usually portends price pinning and possibly volatile price action out of opex. It will be interesting to see next week if we get a volatile move higher or lower, as one of the other is likely coming out of a opex like this.

  • As just mentioned, gamma rolling off generally portends some volatility in one direction or another and thinking about seasonality here our assumption would be a move higher.
  • We need to watch small caps (IWM / Russell). Is this a failed breakout, or will we bounce back and push higher? I already have a position here and will cut losses if we continue to break down; alternatively I'll look to add if we start to see positive price action again.
  • Likewise, though I didn't include their charts, oil / energy and financials are in the same situation. This makes sense as they exploded higher will small caps from the end of last year into early this year, but they're now looking at a possible failed breakout like IWM / /RTY. All of these are sitting right at what could be a support level, so will be watching if these are able to bounce back and resume an uptrend – where I'll be a buyer – or if they'll confirm a breakdown.
  • I think you still have to have some long exposure to growth / tech. It's looking likely we continue higher here, and the narrative has been growth / tech as the market leaders doesn't look likely to change right now.
  • Seasonality is in play here, and barring any unknown unknowns, I think we are higher by EOY / January, and I'm likely to buy any weakness into the start of December. We should be constantly reviewing market conditions though, and re-adjusting our own positions to accommodate. Flows before pros, always.

I've constantly thought back to this note from earlier this summer:

When its advance is greater than 12.5% in the first six months of a year, the S&P 500 usually records a median return of 9.7%, which is nearly twice the median return of 5% for any given year, according to LPL Financial.

Bonus Chart

ADBE
I spotted this Friday and started a very small position into close. ADBE broke out above it's most recent high / resistance on no news (that I saw), high volume, and good technicals. Looking for this thing to run 700+ in the next few weeks, but I'm out quickly if we drop below that 680 line.

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