Five Charts to Start the Week
Some quick reminders before we get into it since there are more of you reading this now than there were last week. First, this is my diary on the market. It is in no way shape or form investment advice. These are the conversations that I am having with myself as I take in all that is happening in the market while trying to square it with the prevailing narratives and fundamentals. I do this to give some clarity to my thoughts. If you like what you are reading, please consider passing it along to others who might like it as well.
Next, if you have an opinion, I would love to hear it, especially if you disagree with something that I am thinking. I promise you that after starting in this business as a summer intern at the New York Stock Exchange when I was 16 years old, I have extremely thick skin.
Finally, nothing I write here should be considered investment advice. It is highly likely that I have a different timeframe and risk profile than you do.
As I sit here on Sunday morning, looking over the weekly charts, it is clear that risk was most certainly on last week. Granted, volumes thinned out as the week progressed. We were closed in the US on Thursday for the Thanksgiving holiday and the Friday was a half-day. As a side note, the Friday after Thanksgiving will always be a special day for me. My father used to always take me to work with him on that day. I would sit with him on the desk, watching the flashing screens and I would type in the symbols for the stocks that I knew. I had no idea what the numbers meant at the time but it was all fascinating to me regardless. When I was 12 years old, he took me to the trading floor of the New York Stock Exchange. The people running around, the paper on the floor, the volume of the yelling voices in the open outcry trading style that was in place at the time. I was hooked! I had to get a job there when I was older. My father introduced me to his friend who was a partner in one of the specialist firms on the floor who told me that I could start working as a summer intern when I was 16 years old. I never forgot the offer and when I turned 16, I told my father that he had to call his friend so that I could go to work that summer. His friend made good on the promise and I was off and running as intern. I worked every summer until I graduated college and then was offered a full-time position. On the trading floor, your word is your bond…thank you to Jim McMullen for keeping his!
Sorry, quick detour. Back to the charts and risk on. Here are the five charts that jump out at me as the new week begins and what I think their message is as we move into the final weeks of the year.
The iShares Russell Microcap Index Fund (IWC) broke to a new high last week, taking out the levels that were last seen in 2018. These are the smallest companies on the market. Inherent with being small is more risk. These are not Apple, Microsoft and Google. Anyone who has studied business strategy will know that they are not likely companies that would rank highly in Porter’s Five Forces Model. The fact that they are moving to new highs tells you what investors think about taking risk right now…they want it. They are betting that the prospects for a COVID vaccine will lead to a better economic environment that will benefit a larger number of companies aside from the giant brands that benefitted from the pandemic.
Along the same line of thought, the US Global Jets ETF (JETS) traded at its highest level since the pandemic lows. To me this is another bet on a return to something that more closely resembles “normal.” Delta in conjunction with Alitalia even announced the start of “quarantine-free” flights to Rome. When the news of a vaccine first broke a few weeks ago, I grabbed some JETS for myself. I have talked about how things are getting better and how this means it is possibly time to pay attention to the value names in the market. I think the airlines fit this bill.
About a year ago I wrote a blog post for Chaikin Analytics about the importance of semiconductors. These little chips are everywhere and touch our lives in ways that most people don’t even think about. I joke that we are probably not far from a time when our autonomous car receives a text message from our refrigerator, as we are less than a mile from a supermarket market, to let us know that we are low on milk. The car then places an order with the store and drives itself there where the milk is waiting for you curbside. Maybe farfetched but I don’t actually think so. Regardless, the amount of semiconductor content in the things that we use everyday is increasing. If semis are doing well, that’s generally a bullish sign, especially if they are outperforming, as they are now. This is also likely bullish for Technology stocks as a group which have been under some pressure since the beginning of September as prospects for a better economic environment have led people to the more cyclical (economically sensitive) areas of the market, such as the airlines mentioned above.
On a related note, in the technology theme, South Korea is trading at all-time highs. Why is this important? South Korea is the home to one of the most important technology companies in the world, Samsung. Many people think of TVs when they hear that name, but according to Wikipedia Samsung is a major manufacturer of electronic components such as lithium-ion batteries, semiconductors, image sensors, camera modules and displays for clients such as Apple, Sony, HTC and Nokia. Sammy, as it is affectionately known, makes up over 28% of the South Korean market.
So the most important part of the Technology sector (in my mind), semiconductors, are strong. At the same time, one of the most important countries in the Technology supply chain and the home to one of the most important companies in the group is also strong. I find it hard to make the case that the Technology sector is on the verge of collapse. Instead, what we have is the prospect for continued strength in this group at the same time as the prospects for a COVID vaccine, and with it better economic growth, are driving cyclical / value stocks higher as well. Markets are strongest when the strength is broad.
Finally, when I see long trends beginning to show signs of a reversal, I sit up and take notice. The cannabis stocks are in this group. The ETFMG Alternative Harvest ETF (MJ) tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational cannabis legalization initiatives. This theme was a big winner during the 2020 election and it will be interesting to see how it plays out in the coming year. I own some MJ and am looking at some of the individual stocks that are holdings in the fund.
Really, the biggest concern that I have in the near-term, is that none of this is non-consensus. Investors are bulled up. This doesn’t mean that it’s the wrong view, it simply means I am not alone in having it. The key will be for surprises between now and the end of the year to remain positive. The announcement of Janet Yellen for Treasury Secretary was a positive surprise last week. Perhaps we will have others? Maybe we get the long-discussed stimulus bill. Maybe the holiday shopping season is better than feared. Maybe the recent spike in COVID cases abates. Anything can happen, anything happens all the time. My mind is wide open as always.
I write about market breath every week for our clients to give them a sense of how these metrics are shifting in real time. You can learn more by going here: