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Growth v Value Breakdown, EM's Vulnerable, Keep SPY Stops Tight - Morning Market Squeeze

Key Tactical Takeaways:

> Although one day does not a breakdown make, the all-important growth vs. value ratio broke down into the next leg of growth underperformance on Thursday (see page 9). If there is follow-though weakness, the anticipated long-term rotation away from growth leadership will continue.


> IWM is showing overshoot conditions matched < a handful of times over the past 10 years. While vulnerable to mean reversion, the short-term trend will not turn lower until a close < ....


> We see ... as being especially vulnerable to meaningful mean reversion here.


> After our EA Risk Barometer's Level 1 Sell Signal last week, we are very cautious on S&P-correlated equities.


> We still see amazing opportunities across smaller stocks. However, we are positioning for trades based on very specific setups, and will be quick to replace any ideas that fail to react fast enough to these setups. Therefore, after failing to deliver on an anticipated bull setup, we're replacing HCCI with CECE at the open.

Some Quick Thoughts:

We've been doing this for a long time and can honestly say that equity investor euphoria is the most palpable it's been since 1999. While this is a dangerous source of fuel in the event the broader indices ever sell below supportive trigger points, we have yet to see such trigger points being breached. Much of the run-up in recent weeks has been on expectations that the incoming administration would push for massive new stimulus measures similar to those spelled out by the President-elect last evening. Now that the news has been delivered, however, investors just might start to realize that passing such a massive plan is going to take several months. In the face of growing stagflation concerns, what's the next catalyst to move the major indices materially higher from here without some form of digestion occurring first?

Given that our EA Risk Barometer issued a Level 1 Sell Signal near the height of last week's S&P surge, we are particularly cautious at this point. As you can see on page 8, a Level 1 Sell Signal by this Barometer has had a very good track record of predicting corrections of greater than 5.0%, with the only one failed signal (in early August 2019) during the window shown. The key to using this and any other indicator is to take such information and reassess your risk exposure to correlated assets, then wait for price to confirm any sell signal. At this time, the first of two such signals (i.e., a close below the short-term stop) won't occur until SPX settles below ..., with the final, more important sell trigger sitting at SPX 0...

Tactical traders often piece into positions, especially when they are bets against the prevailing trend. Given that we view the dollar as being in a position to remain ...over the near-term, we see ... as being especially vulnerable to meaningful mean reversion here.


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