The NASDAQ (mainly supported by the big tech) broke out on the first day of April and continued to rally quietly last week. The DOW and S&P 500 continued to make all time highs while the VIX dropped below the pre-pandemic level. From the stock market point of view, COVID-19 didn’t happen. Or it happened, but it was quickly erased from memory.
While the general market has been marching on quietly, the growth stocks have not returned to the previous speculative fever pitch. Tesla had very good delivery numbers for Q1, but the market reacted positively briefly and then it was sold off for the next few days. The divergence between the NASDAQ (big tech) and growth stocks is the main reason why the VIX is low. Money has been flowing steadily into the big names in every sector with the small cap, biotech and growth stocks lagging behind.
This is a very strange stock market. It is still very early in the economic expansion cycle because we have not even completely emerged from the pandemic, yet the stock market rich valuation appears to be the characteristic of a late cycle phenomenon.
In our alternative timing model, it shows that if the market can continue to make new highs beyond May 2021, then it can rally into 2023. From the 2023 high, it could be in a two-year bear market to make a low in 2025. From the March 2020 low to May 2021, it is only 14 months. Under normal circumstance, the bullish 4-year cycle started from March 2020 should rally minimum 31 months, which leads us to October 2022. We have studied 4-year cycle history since 1917, which is more than 100 years ago. The odds are in our favor to have a bullish market for at least 31 months from the start of the 4-year cycle.
But if the stock market stops making new highs after May 2021, we know that it is an abnormal market. The bull market is cutting short. We will face a bear market for two years, which will get us into 2023.
The future is never certain and we should have alternative plans. Let’s watch how the market survives May 2021.