Markets Recover Some Losses, While Eyeing Georgia

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while 5% also said that the index could climb to 40,000.

Therefore, to sum it up: While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen. The premium analysis today will showcase a “Drivers and Divers” section that will break down some sectors that are in and out of favor.

Driving: Small-Caps (IWM)

Figure 1 - iShares Russell 2000 ETF (IWM)

After seeing a sharp pullback since Christmas week, the Russell 2000 briefly returned to its winning ways on Tuesday. The IWM Russell 2000 ETF, which tracks the small-cap index, witnessed a 1.55% gain - its best day in a while.

Although I genuinely love small-cap stocks in the long-term as the world will eventually reopen, I believe that in the short-term the index has overheated. Until the start of this week, the RSI for the IWM Russell 2000 ETF was at an astronomical 74.54. Although the RSI is at a more manageable 62.84, I still believe that the party of seeing vertical gains is over for now.

Small-caps in the short-term will be more sensitive to bad news, and right now there is a lot. Vaccine gains have possibly been baked in by now and stocks just don’t go up vertically the way that the Russell 2000 did between November and late December. It is very possible that small-caps in the near-term could trade sideways before an eventual larger pullback. I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

For now, my advice is to sell and take short-term profits if you can - but do not fully exit positions. If there is a pullback, this is a strong buy for the long-term recovery.

Diving: US Dollar ($USD)

Figure 2 - U.S. Dollar ($USD)

I have zero faith in the U.S. Dollar as a safe asset, even if we may see some short-term volatility and “risk-off” trades. I still am calling out the dollar’s weakness after several weeks despite its low levels. I expect the decline to continue as well thanks to a dovish Fed.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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