• Kaiser L

Market Selloffs to continue?

The US stock market is starting in 2021 on the wrong footing already. Support levels are being undercut across the S&P 500 Index, Russell 2000 Index and Nasdaq Composite. The selling becomes apparent on Monday as seen in the increased selling volume across all the major indices. However, the selling has already started in individual stocks late December while the indices hold up. Firstly, the S&P 500 Index is barely holding up the rising channel, which has acted as the support since November. More notably, it is the first time it closes below the 20 Day Moving Average since November and is rejecting the $371 level intraday. Similarly, both the Russell 2000 has also closed below the 20 Day Moving average. More importantly, there are several notable down days with above-average volume since late December. The Nasdaq Composite has also broken down from its rising wedge pattern despite holding above the 20 Day Moving Average.

There may be several other reasons people may point to for this market pullback. Firstly, people are booking gains or losses for tax purposes. Secondly, there are political uncertainties brought about by the upcoming Georgia Senate election. The outcome will have massive ramifications on future policies. Thirdly, a new strain of COVID-19, which may come into the picture somehow. However, the most important reason is the market requires a breather after a massive rally in late 2020. Moreover, the % of stocks above the 50DMA has remained at extreme bullish levels for some time already. Hence, a market pullback wouldn't seem unreasonable to me after all.

My personal belief is that the market is at the beginning of a larger selloff. My view is that the S&P 500 Index, Russell 2000 and Nasdaq Composite could retest the 50 Day Moving Average in the coming days or weeks. However, if the market rebounds with CONVICTION, I would be more than happy to increase exposure to the market.

That being said, the market pullback will impact stocks that have rallied massively late 2020. Some of the names include Fubotv Inc, QuantumScape, Sumo Logic, Snowflake and C3.Ai, which have already given up most, if not all their recent gains in just a couple of days. It is important to note that most stocks typically go up in a staircase mode across several months and comes crashing down like a lift in just days. Basically, in markets like now, the hotter the stock and the higher it has rallied, the higher the probability it will pullback in a nasty way.

Hot sectors in late 2020 such as software applications, IPOs, SPACs, EV infrastructure are areas to avoid until the market gives the green light.

However, there is a silver lining in all the commotion. The market is rotating into laggard sectors such as commodities, financials, energy, and consumer cyclical. When I look at some of these commodity companies such as Lithium Americas Corp and Cleveland-Cliffs Inc, they are just starting to come out of MULTI-YEAR BASE CONSOLIDATION. There are also positive tailwinds from rebounding demand in China, rising commodity prices and bullish forward earnings estimates. Furthermore, many of these names are not priced at an insane premium yet. Even within the technology space, there are still pockets of strength among semiconductors. Semiconductors have already consolidated throughout December and look poised to continue its rally in 2021. Chinese stocks are also seeing relative strength despite recent pullbacks in other hot tech spaces. E.g. $FUTU, $NIO, $PDD, $JD. These are areas that I would look to increase exposure.

At present, my strategy is to raise cash across all accounts and minimizing new positions until I see a clear bottom in this market pullback/correction. Any relief rally in at the opening of the US market could be a spot for me to scale back exposure. I feel it is better to just sit on the sideline with cash until the market has given the green light to redeploy cash rather than risk catching falling knives. Buying at the right time is better than buying cheap if you want to survive the stock market longer.

Have fun and stay safe.