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Let's Talk Turkey

Now let us talk turkey. The origin of the phrase came from colonial times, specifically from the day-to-day bargaining of price over wild turkeys between the colonists and Indians. Today, the phrase typically refers to speaking frankly. However, at this time of the year, many would interpret the “talk turkey” phrase as a discussion on cooking the bird.

Anyway, here is a frank discussion on stocks as we head into the Thanksgiving holiday. There have been a lot of rotations within the financial markets and in major markets and sectors. It is a sign that investors and traders are unsure of the state of the economy. Who can blame them given the ongoing Covid-19 pandemic and the impact on global economic growth, the supply-side bottlenecks, questions surrounding inflation – is it transitory or sustainable, the debacle in the social spending and climate bill, employment, and unemployment, stagflation, trade conflicts with China, among others?

My head spins just thinking about all these issues. Nonetheless, the market has been unstoppable, so far this year. There have been several pullbacks this year. But each time there have been dips in the stock market, it brings in more buyers. We suspect the better-than-expected earnings are helping sustain the rallies. The relatively low global interest rates and the low capital costs are also fueling the stock rallies. There is still ample cash on the sidelines that may come into the market to ignite a year-end to an early-2022 stock market rally.

We are not at the early stages of the stock market bull rally that began in earnest in May 2013 as the SPX Index broke out above its prior all-time high at 1,576. However, we are also not at the late stage. In a nine-inning baseball game, this would equate to around the sixth inning with no extra innings.

The recent divergences between key market indexes have many of the bears again calling for a market top. For instance, the negative outside days on Monday, 11/22/21 in SPX, COMPQ, and NDX are in sharp contrast to INDU, NYA, SML, IWM, and others which did not record negative outside days on 11/22/21. Instead, these indexes set all-time highs earlier in the month (11/8/21). Another concern from the bears is that many of the Nasdaq Composite stocks have been putting in new 12-month lows while the Nasdaq indexes record new 12-month price highs. Despite the intermediate-to-long term price strengths in the two Nasdaq indexes, breadth readings have been mostly negatives over the last few days.

So, why the technical divergences and the increase in market volatility?

The recent near-term market divergences can be best explained by the sharp price movements in mega-cap technology names such as AAPL, MSFT, GOOGL, GOOG, FB, AMZN, TSLA, NFLX, etc.

The lack of market liquidity this week may be attributed to the shortened holiday week as traders profit-take on Monday, 11/22/21 ahead of the Thanksgiving holiday.

End-of-the-month window dressing may have forced professional money managers to rebalance their portfolios to favor some of the value sectors and stocks that have not appreciated as much.

Overbought conditions tend to lead to normal consolidations in extended markets, sectors, and stocks. It is technically healthy and constructive to witness overbought stocks back and fill. The consolidation process helps to alleviate overbought conditions, preventing speculative bubbles.

On a positive note, markets are entering into a favorable seasonality period. According to the Stock Trader’s Almanac, the following bullish developments merit attention.

Dow Jones Industrial before and after Thanksgiving tends to be positive. Since 1988, Wed-Friday of the Thanksgiving week is generally bullish with gains 18 of 31 times. The best trading strategy is to enter the week on the long side and exit into strength on Friday of the holiday week.

Since 1950, November is the best month of the year for SPX, the second-best month for INDU, and the second-best for Nasdaq since 1971. November is also the start of the best six months of the year for SPX and INDU. For Nasdaq, November begins the best eight months investment strategy of the year. The day before and after Thanksgiving accounts for only 16 losses in the past 67 years. The week before Thanksgiving, INDU is up 19 of the last 26 years.

A brief review of the quarterly market statistics hints that the next two quarters are favorable. From 1949-2019, INDU has averaged 3.8% during the fourth quarter and 2.3% during the first quarter. During the same period, SPX has produced a fourth-quarter average return of 3.9% and a 2.4% return in the first quarter. From 1971-2019, Nasdaq Composite has returned on average a fourth-quarter return of 4.0%, placing it just below its first-quarter average return of 4.5%.

In summary, the rally in stocks this year has been impressive. Yes, there will be further market volatility in the weeks and months ahead. However, consolidations are constructive and are part of the normal process to a healthy bull market run. Favorable seasonality factors, if repeated, suggest the current bull rally can sustain at least until the end of the first quarter of 2022. Next year will be another story. It will be more challenging as another mid-term election year cycle low is possible.

Have a wonderful Thanksgiving!

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