As we anticipated, good earnings did power the market out of indecision last week. The DOW and S&P 500 decisively closed above their perspective 50-day moving average. The NASDAQ decisively broke the down trend line with volume. All in all, the seasonal correction is OVER. If there aren’t any surprises (unknown events /shocks) down the road, the market should slowly grind higher into Q1 2022.
So far energy and financials are the best performing sectors in 2021. This is not a good news. Higher energy price is acting as a tax to the entire economy. The stock market can only stay up to the point where the economy can absorb the high enough oil price. After the high oil price exceeds the economic threshold of tolerance, the high enough oil price will eventually take down the economy and stock market. During the last big energy rally from 2002 to 2008, the stock market topped in October 2007, the oil price peaked in May 2008. From October 2007 to May 2008, the high oil price was acting like a huge tax on the entire economy that eventually took down the economy and stock market in a very big way. A higher oil price benefits the energy sector and that’s why the stock market will not crash as long as some sectors are rallying.
The current energy rally is NOT the same as the last rally from 2002-2008. The current high oil price is caused by the supply problems, rather than demand. The current energy demand hasn’t surpassed the demand peak in 2019. That is understandable because now we have more electric vehicles on the road, more online shopping and more work from home than in 2019.
Because this leg of rally is driven by energy and financials, the growth stocks are not responding to the rally. Because the seasonal correction was so mild in price and duration, we project that the mid 4-year cycle top has been extended to Q1 2022. In other words, the current leg is the last mile into the mid 4-year cycle top.
Below is the NASDAQ daily chart. You can see the clear breakout against the down trend line. The 14175 provided firm support during this correction.
It is 9 days into the new daily cycle. We expect the VIX to come down and the market to grind higher slowly.