Yes & No – All-Time Highs Remain On Tap – Larger Decline Potentially Looms – Oil Peak

The markets are set to open in the direction as we saw last week with stock lower, oil sharply higher, gold and silver lower and interest rates higher. Let’s start with the two questions I received the most last week. The first was if I still thought the stock market was going to new highs in Q2. The answer remains a resounding, yes. At the most recent peak, internal market conditions were solid to strong which means that weakness should be bought and a run to new highs would be coming. FYI, the stock market was stronger at the recent peak than it was at the similar junctures before the tariff tantrum plunge as well as the COVID high.

The second most asked question was if this decline is the 10-15% correction I forecast would come in Q2/Q3. I don’t think so, but the decline isn’t over so I don’t have all of the data and evidence. In my forecast, I was looking for a strong January followed by a mid-quarter pullback and strength in March and Q2 leading to a more significant peak. Unless the stock market unravels and declines more than 10%, I still think that a larger decline potentially looms.

In short, I think the stock market’s volatility spike should peak this week with “a” low or “the” low. More on the volatility on Wednesday.

Turning to oil which spiked to $119 overnight, sentiment is obviously also spiking almost to levels we saw in silver in January, right before it peaked and plunged. The chart of silver is below. And no, before you think otherwise, this time is not different.

Bespoke research tweeted the following which I thought was interesting.

“Crude oil is 5 Standard deviations above its 50-DMA. Statistically speaking, that occurs once every 9,500 years, so the last time would have been about 6,000 years before Moses parted the Red Sea.” FYI, my chart below was from Friday. 

My friend, Tom McClellan of oscillator fame, posted one of my favorite charts when dealing with futures prices. Sorry to get wonky. It’s backwardation versus contango. Plainly put, when prices are much higher right now versus months and quarters down the road, prices are in backwardation. In other words, there is a supply squeeze. Sharp backwardation typically occurs around peaks and vice versa. Oil is in one of those manic periods where a peak is indicated sooner than later.

And those of you wondering about what the Fed will do, check out my favorite chart below which is the Federal Funds Rate versus the 2-Year yield. They are roughly the same which means that the market is at equilibrium. And that says that no Fed action is coming soon.

Finally, clients have started asking about ROTH conversions because the stock market is down. I absolutely love when my clients learn and start to steal my thunder. I will put clients’ financial and investing IQ against any on earth. I think it’s a little early for ROTH conversions with stock market indices mostly down 6%, but tax loss harvesting is becoming a strong consideration.

Thanks for the questions. Please keep them coming!

Portfolio moves continue as volatility creates opportunity. Adding to higher conviction names during pullbacks. Pruning some names that have either been to strong or where conviction has diminished.

On Friday we bought more CVNA, more NEM and more SLB. We sold some GWRE, some CF and some LULU.