Market Continues Its Rally As Earnings Season Starts

Last week, we discussed that while the rally was strong with the breakout to new highs, it also sent our “money flow buy signal” back to levels normally associated with the end of “buying stampedes.” With “money flows” turning lower on Thursday and Friday, we will likely get a “sell signal” next week.

Specifically, I stated:

“The market is trading well into 3-standard deviations above the 50-dma, and is overbought by just about every measure. Such suggests a short-term “cooling-off” period is likely. With the weekly “buy signals” intact, the markets should hold above key support levels during the next consolidation phase.” 

It is worth noting that “key support” is the 50-dma which is currently almost 6% lower than Friday’s close. Again, with all indicators extremely extended, a correction of some sort is likely. 

Importantly, over the past couple of weeks, the “value” trade starting late last year, has rotated back to growth. As shown, while the Nasdaq has rallied sharply over the last month, Emerging Markets, Small Caps, and Russell 2000 lagged rather markedly.

While this may be a temporary rotation in the markets, it may also be a realization that interest rates and inflationary pressures may be more of a headwind than many realize. Such may also lower current optimistic economic and earnings growth expectations.

We continue to keep a close watch on both the dollar and interest rates, but also export and import prices which are rising sharply. Such will impact the economy and earnings in the future if they persist.

For now, the market trend remains bullish and doesn’t suggest that a decrease of risk exposures is required. However, the management of risk is always a prudent exercise as there are concerns that continue to persist.

China Is A Risk

China has been a leading driver of global economic growth for the last decade-plus. Fueling the growth are exports, massive infrastructure projects, urbanization, and extreme leverage.

U.S. economists pay close attention to their money supply or so-called “credit impulse” to gauge how much financial and economic leverage is being generated. As shown below, M1 has been growing at a relatively tepid rate despite the Pandemic.

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