In Part 1 of our forecast for 2021, we did not really focus on the markets, but more on where we might be in this grand secular bull market. We also shared some thoughts about sentiment and took a look back at some of things analysts like me used to focus on when making longer-term forecasts.
In Part 2, here, we will examine several key markets: the S&P 500, gold, oil, copper, bitcoin and the Russell 2000.
S&P 500
In this daily bar chart of the S&P 500 (below) we see a rally that is slowing. Prices have made higher highs into December but notice that the 12-day price momentum study has made a lower low from November into December. This is a bearish divergence as prices do one thing (go up) and the indicator does something else (go down). A bearish divergence is a heads up that something different is going on.
In the lower panel is the trend-following Moving Average Convergence Divergence (MACD) oscillator, which crossed to the downside earlier this month. The oscillator is in a "take profits sell mode" now.
In this weekly Japanese candlestick chart of the S&P 500, below, the MACD oscillator has begun to narrow. It narrowed in September and came close to a bearish crossover.
The oscillator has been narrowing again in December and could soon cross to the downside. Notice the previous downside crossovers and how the S&P 500 declined. I think a decline into the middle of February is coming. This will be a buying opportunity in my opinion.
I see this decline perhaps lasting into the second half of the first quarter followed by the resumption of the bull. Don't ask me how far down this decline could carry -- it tends to be folly, in my opinion. If you have a forecast (that is hopefully correct) that gives you the direction -- down -- and the timing -- the latter half of the first quarter -- why do you need a level?
Financial analysts would always ask what level at Smith Barney Harris Upham and at Morgan Stanley and even way back at MLPFS. My response was typically, "If I tell you to buy at 3000 on the S&P 500 and it stops short of that and turns up you are mad you did not get to buy and if it sinks below 2900, let's say, you are also mad that you could have bought it better."
A better approach, I think, is to have a shopping list of stocks you want to buy or buy more of and you buy them when they are getting extended (oversold).
Bottoms are much easier to spot than tops. If we get a nail-biting day (s) in late February or early March, that will be our signal to buy.
Gold
Is this the year gold really takes off?
In this daily bar chart of the continuous gold future (GOLD), below, we can see the corrective decline since August. We can see that prices tested the rising 200-day moving average line in late November-early December. This looks like the successful test back in March 2020.
I still have a book on my home office bookshelf titled Gold Bubble - Profiting from Gold's Impending Collapse. The book was published in 2012 and prices did decline for three years but did not collapse. This is not a dig at the author but something to think about.
There is a chapter titled "Sign of a Gold Bubble." These signs included parabolic price increases, massive publicity, overspeculation, extreme expectations. We ain't there yet on gold and by one measure (daily DSI sentiment is down to just 3 or 4% bulls, which is bullish) we are at a juncture to buy.
My recommendation is to buy the next dip in gold as the Dollar Index is due for a bounce. (Maybe bitcoin traders should keep the Sign of a Gold Bubble taped to their monitor. Just saying.)
Dollar
The U.S. Dollar Index has been in a downtrend since making a peak in March, as seen in the first chart below. Prices are pointed down.
The Point and Figure chart (the second chart below) suggests 80 is a potential price target. Long before we reach 80 we are likely to see a recovery rally.
In this daily bar chart of the DXY, below, we can see a bullish divergence from the 12-day price momentum study. Notice the higher lows from June to August to December. The pace of the decline has slowed. This bullish divergence can be foreshadowing a recovery rally.
Crude Oil
With crude oil, am reminded of Daniel Yergin's observation that power is shifting away from Russia and Saudi Arabia to China and maybe the U.S. Crude prices may get a boost from declining global production but I get the sense that prices are going to suffer in 2021 because demand could remain slack.
Look for a long-term rally but short-term correction as the dollar rebounds.
Copper
Is it strong demand from an economic recovery or is it the lack of growth in supply that has been pushing up copper prices? Copper prices have climbed steadily the past year and have broken out from a large double-bottom pattern.
The price target from this bottom is the $4.50 area. Despite this longer-term upside price target in the short run look for a modest pullback as the dollar bounces.
Russell 2000
In this long-term weekly close-only Point and Figure chart, below, of the Rydex Russell 2000 fund ( RYRHX) it is showing a potential $107 target. This might be the area to concentrate purchases in for the next cyclic bull market.
Bitcoin
I have begun writing about bitcoin because I believe history will eventually decide in hindsight that it will stand next to other financial manias. The famous Dutch tulip mania in the 17th century, John Law's Mississippi scheme, the 1920s stock market, the housing bubble of 2006. No two are alike but they do share some common themes. Martin Pring does an excellent job in his 1993 book Investment Psychology Explained to outline the 12 steps of how a mania or bubble inflates. Think of bitcoin as you read this:
1. A believable concept offers a revolutionary and unlimited path to growth and riches.
2. A surplus of funds exists alongside a shortage of opportunities. This channels the attention of a sufficient number of people with money to trigger the immediate and attention-getting rise in price.
3. The idea cannot be irrefutably disproved by the facts but is sufficiently complex that it is necessary for the average person to ask the opinions of others to justify its validity.
4. Once the mania gets underway, the idea has sufficient power and compelling belief to spread from a minority to the majority as the crowd seeks to imitate its leaders.
5. The price fluctuates from traditional levels of overvaluation to entirely new ground.
6. The new price levels are sanctioned by individuals considered by society to be leaders or experts, thereby, giving the bubble an official imprimatur.
Email me at Real Money if you want to know the next six steps in the bubble.
Another Piece of Advice for 2021
Consider a simple technical checklist before you pull the trigger.
-- What is the direction of the overall or broad market?
-- What is the direction of the 11 sectors?
-- What are the weekly and maybe the monthly charts showing?
-- What are the minor, intermediate and major trends showing -- up, down or sideways?
-- What is volume doing? Does it confirm the price action?
