I had the same question posed to me by several folks on Friday, so I thought I should address it. The question is where are we in the cycle? Well, I do not know.
I have said many times before that I will not know it is the top, until well after the fact. But at the same time, I have also noted many similarities to the chart of ARK Innovation Fund (ARKK) to the Invesco QQQ (QQQ) from the year 2000.
My sense on this year, 2021, is that we hit a speculative peak in January and February. There was so much speculation in the market, that it was unsustainable. I also think much of that speculation has been wrung out of the market. In that respect it is similar to the early part of 2000, because that too was a speculative frenzy.
What many fail to recall is that the markets, namely tech stocks, came down off that high and basically went into a trading range for six to seven months before it finally took a new leg down. At this point, we're only three months post the peak in the speculative stocks. And keep in mind it took a recession and 9/11 to really kill that market.
I think mostly this market is in that up/down phase, where we keep getting group rotation -- one reason we can't seem to get a proper whoosh. Just look at the QQQs an the Russell 2000 fund (IWM) together. In March, IWM managed to make a new high (blue arrow) and the QQQs could barely lift themselves off the math. Yet in April the QQQs made a new high (green arrow) and IWM couldn't get going.
That's why, even if the S&P keeps making new highs, we have a lot of rotation -- that either/or market -- going on under the hood.
Here's something else interesting. Upside volume for Nasdaq was 89% Friday, which is impressive. Yet, the last time it was similar was April 21. Go look at the two charts above (IWM and QQQ) and you can see we were within a week of a peak. Prior to that it was Sept. 28. We rallied for another week and then came right back down. And prior to that? The early June 2020 high. Clearly that much enthusiasm for stocks hasn't been bullish for longer than a short-term rally.
I think bearishness toward tech stocks got somewhat extreme last week or maybe I should say bearishness toward growth stocks. Take a look at the Russell 2000 Growth vs. Value chart. That's a round trip isn't it? And that leg down from mid-April through last week says we probably need another breather on that trade.
I think if we do pullback early this week we'll be right back to an oversold condition and likely too much bearishness by the end of the week.