Last week was a short trading week due to the 4th of July holiday. Even though the three indices closed at a fresh all time high weekly close, but the intra-week trading had a drama on Thursday, which some concluded as a technical correction as the 10-year treasury yield went dramatically lower against the expectations from the majority of the market participants.
Underneath the indices, we see:
1. The mega cap techs are breaking out after almost one-year sideways trading. These mega cap companies can grow no matter what, especially with the super low interest rates. It’s relatively less risky (profitable, strong balance sheet + continued growth) when compared to junior growth stocks and cyclical stocks.
2. The bank/energy stocks have peaked in May/June. Next week the banks will report earnings. If the bank stocks follow the cycle charts, the direction is going down after the earnings report. The re-open/higher interest rates benefits have been priced in fully.
3. The junior growth stocks such as PLTR/ARKK/TAN/TSLA have experienced more than 50% correction since the Jan/Feb top. They bottomed with the NASDAQ in early May. Since the early May bottom, ARKK retraced 62% of the down move, while the other growth stocks have only retraced 38%. The more than 50% correction from all time high caused the junior growth stocks to go into a bear market while the cyclical/value stocks were raging in the first half of 2021. The junior growth stocks had 26 weeks momentum spikes in the overall industry group, usually they have to correct for the better part of 24-36 months before a bottom is finally set in. The junior stocks encountered a selloff at the end of June, which is 7 weeks away from the junior stocks May bottom. This bounce from the early May bottom is still considered a bear market rally, and the end of June high could be the high for the weekly cycle. We don’t believe that it would take 24-36 months for the junior growth stocks to resume the previous rally though. Please the attached PLTR chart for more detail.
4. The general market may continue to hold up in July/August because the Q2 earnings report will good. The valuation is super rich with the S&P 500 forward earnings sitting at 22 times. The average S&P 500 earnings should be around 18.5 times.
The mega tech stocks breaking out while the 10-year treasury yield went lower is reflecting the anticipation of slower growth in the second half, that’s risk off in a one-two punch!
August-October is the traditional seasonal dark period. By the time in August, the most of the important earnings report will be done and the market will be subject to macro events. We don’t know what macro events could trigger the correction in the fall, but something will happen. The overvaluation has to be corrected before the next leg up.
We could see a 16% correction in the fall, but that will be a great buying opportunity. We have not had any sizable correction since the March 2020 bottom All we had were rolling corrections. First was the super expensive growth stocks such as TSLA/PLTR/ARKK, then the SPACs, then bitcoin. Now it’s the turn for the cyclical/value stocks. Because of the rolling corrections underneath the major indices, the general market was able to appear to be very calm, like a placid lake. Volatility will pick up in August.
PLTR is one of our major long term holdings. Below is the PLTR weekly chart for near term analysis.
