While analysts are currently very optimistic about the market, the combined risk of high valuations and the need to rebalance portfolios in the short term may pose an unanticipated threat. This is particularly the case given the current high degree of speculation and leverage in the market. It is fascinating how quickly people forget the painful beating of taking on excess risk and revert to the same thesis of why "this time is different." For example, I recently posted on "X," which showed a visual of the 2021 market surge versus 2023-2024. While this time is may be different, don't be surprised if it ends the same.

One of the near-term risks to more bullish investors is the combination of high stock valuations and the necessity of portfolio rebalancing, which could impact market stability. Using 2023 data, it is estimated that mutual funds in the United States held approximately $19.6 trillion in assets, while exchange-traded funds (ETFs) managed about $8.1 trillion, suggesting a substantial number of portfolios containing combinations of stocks and bonds.

With the year-end approaching, portfolio managers need to rebalance their holdings due to tax considerations, distributions, and annual reporting. For example, as of this writing, the S&P 500 is currently up about 28% year-to-date, while investment-grade bonds (as measured by iShares US Aggregate Bond ETF (AGG), are up 3.2%. That differential in performance would cause a 60/40 stock/bond allocation to shift to a 65/35 allocation. To rebalance that portfolio back to 60/40, portfolio managers will need to reduce equity exposure by 5% and increase bond exposure by 5%.

Depending on the magnitude of the rebalancing process, it could exert downward pressure on risk assets, leading to a short-term market correction or consolidation.

The stock-to-bond ratio also demonstrates that risk.

Historically, the stock/bond ratio remained between roughly 1:1 to 2.5:1. Today, that ratio has skyrocketed since the flood of liquidity following the pandemic as money chased risk assets over safety. At a ratio of 6.5:1, we suspect that, at some point, a reversion will take place. In the short term, given the outsized performance of stocks versus bonds in 2024, there is likely an unappreciated risk that portfolio rebalancing by managers could add a layer of selling pressure over the next couple of weeks.

Current Valuations Add To The Risk Profile

The second short-term risk remains valuations headed into 2025. While valuations are a terrible "market-timing" tool, they strongly indicate investor optimism. With consumer confidence in higher stock prices over the next 12 months to the highest level on record, it is unsurprising that valuations are pushing higher.

High valuations occur when stock prices exceed their intrinsic worth. Investors expect substantially more substantial earnings growth over the next 12 months to justify paying higher stock prices.

As noted in this past weekend's #BullBearReport, earnings, according to S&P Global, are expected to grow by 19.87% in 2025 from $209.83 to $251.53 per share. This is well above the long-term earnings growth trend from 1900 to the present, and if estimates are accurate, earnings would rise above the peak-to-peak trend. The only time that happened previously was in 1998-1999.

Still, such exuberance is unsurprising during strongly trending bull markets, particularly when Wall Street needs to justify higher valuations. The problem is that such exuberant forecasts rarely come to fruition. For example, in March 2023, S&P Global predicted that 2024 earnings would grow by 13% for the year. In reality, earnings grew by just 9% despite the market rising nearly 28%. In other words, given that actual earnings fell well short of previous estimates, the 2024 market was driven largely by valuation expansion.

Current estimates for 2025 are well elevated above the running linear trend line from 2014, while actual earnings growth remains close to it. This suggests that we will likely see a decline in estimates for 2025 to roughly $225/share, equating to earnings growth of roughly 7%. Of course, the linear trend of earnings growth is a function of economic growth and an important consideration for investors betting on elevated returns in the New Year.

When sentiment and expectations exceed economic realities, such sets up the potential for a repricing of stocks. As such, stocks are priced higher relative to their earnings, indicating potential overvaluation. For instance, the S&P 500's P/E ratio has reached levels that some analysts consider concerning, reflecting investor optimism that may not align with underlying economic fundamentals.

Expect Increased Volatility

While the bullish bias remains heading into year-end, combining high valuations and the need for portfolio rebalancing could lead to increased volatility. As noted above, if there is a more widespread need for rebalancing, it could apply downward pressure on stock prices. Furthermore, as the European Central Bank previously warned, high equity valuations and concentrated investments in major U.S. technology stocks pose risks to financial stability.

Historical data indicates that markets with elevated valuations are more susceptible to downturns. For example, during the dot-com bubble, excessive valuations led to a significant market correction. Similarly, the 2008 financial crisis was preceded by high valuations in the housing and stock markets. That correction resulted in substantial market declines. However, the problem is that market "exuberance" can generally last longer than logic would predict. Such is why we watch the annual rate of change in earnings as an indicator of future market direction. The annual rate of change in the market is pushing into more "rarified air," only previously witnessed near more significant market peaks. If the annual rate of change in earnings begins to deteriorate, which we suspect it will in 2025, such would suggest a reversal in market growth rates.

Conclusion

As I consider the market in approaching our clients' investment strategies, portfolio rebalancing is a near-term risk. It will undoubtedly increase portfolio volatility soon, but it is not a longer-term risk to be concerned about. However, with stocks significantly outperforming bonds in 2024, the imbalance in portfolios like the traditional 60/40 stock-to-bond allocation necessitates adjustments. Rebalancing, which involves selling equities and reallocating to bonds, could create downward pressure on stocks.

Valuations present a more serious challenge, given the interdependence between earnings and economic growth. While they are not reliable market-timing tools, elevated valuations reflect heightened investor optimism and expectations of robust earnings growth. Current earnings projections for 2025 suggest a nearly 20% increase, well above historical growth trends. However, we saw similar exuberance in 2023. The result was earnings falling short of estimates but a significant increase in asset prices. While such detachments of the market from earnings are not uncommon, they tend not to be sustainable over longer periods. We suspect that the risk to stocks in 2025 will be a failure of earnings to meet optimistic expectations.

While market sentiment may sustain markets in the short term, it leaves investors vulnerable to unexpected, exogenous events. Those "events," when they occur, lead to sharp sentiment reversals. What would cause such a sentiment reversal? No one knows. That is why Wall Street's immediate response is to suggest that "no one could have seen that coming."

As such, investors must continue managing risk into 2025 and navigate the markets accordingly.

1. Tighten up stop-loss levels to current support levels for each position.
2. Hedge portfolios against major market declines.
3. Take profits in positions that have been big winners
4. Sell laggards and losers
5. Raise cash and rebalance portfolios to target weightings.

The trick to navigating markets in 2025 is not trying to “time” the market to sell precisely at the top. That is impossible. Successful long-term management is understanding when “enough is enough” and being willing to take profits and protect your gains. For many stocks currently, that is the situation we are in.

Manage risk accordingly. (Read our article on “What Is RIsk” for a complete list of rules)

Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today’s volatile markets.

The post Portfolio Rebalancing And Valuations. Two Risks We Are Watching. appeared first on RIA.

Material stocks have been one of the worst-performing sectors this year, lagging the S&P 500 by nearly 20%. Since the election, its relative performance versus the market has continued to worsen. Therefore, given the historical correlation between the economy and the materials sector, we must assess what the sector's underlying stocks are trying to tell us.

We think the message is twofold. The easy takeaway is that Donald Trump will invoke tariffs on goods imported from China and other countries. Many of these goods that are likely to be tariffed are produced and mined abroad by companies in the materials sector.

However, the problem with blaming Trump tariffs is that the materials sector was weak well before the election. The materials sector has a strong relationship with the economy, primarily due to construction. In past Commentary, we have noted that residential and multifamily new construction projects are ebbing. Furthermore, commercial building construction has been weak. Thus far, the economy has held up well despite the slowdown in the real estate sector. Might material stocks be an early warning that the economy is weaker than the current statistics portray? Or might the economy be less reliant on construction than it has been?

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the need for portfolio rebalancing as we head into year-end, which could lead to some short-term volatility in the markets. We expect any correction process to be relatively mild and present an opportunity for traders to add exposure heading into year-end. However, over the next two weeks, the ride could get a little bumpy, and the volatility index suggests the same.

As shown, traders have become extremely complacent in the market lately, with little concern about a correction. Historically, high "complacency" is often a good time to become more "risk-conscious" from a contrarian point of view. The MACD is oversold and close to triggering a short-term "buy" signal for volatility, likely translating into lower stock and risk asset prices. Furthermore, the relative strength index (RSI) is also oversold and turning higher, also warning of a potential rise in volatility.

While such a turn in volatility does not mean the market is about to crash, it suggests that investors may see weaker asset prices over the next two weeks. Stocks, bitcoin, and more speculative trading vehicles like zero-day stock options and leveraged ETFs would likely face the most pressure. As is always the case, taking profits, hedging risk, and raising cash levels can reduce any corrective action risk.

However, as noted, whatever corrective action is taken before Christmas should be used to prepare portfolios for a year-end rally as managers "window dress" for their annual reporting.

Trade accordingly.

Confidence In Stocks Soars

The Conference Board’s November Consumer Confidence Index survey shows that 56.4% of consumers expect stocks to be higher in the next 12 months, as shown below. Investors' optimism over future returns is not shocking because the stock market has logged two +20% annual performances in a row. However, it's noteworthy that optimism for 2025 returns is now higher than in 1999 and all prior periods going back at least 35 years.

Tesla Fuels Discretionary Stocks

The first SimpleVisor table below shows that discretionary stocks are very overbought, both absolute and relative to the market. The culprits are Tesla and Amazon. The second table highlights the top ten holdings of the discretionary ETF XLY. Those two stocks account for nearly 40% of the ETF.

One can interpret the data in many ways. Here is our take:

We believe Tesla is riding Trump's coattails. Given that Elon Musk is cozying up with the future president, investors must believe that the regulatory and political environment will be friendly to Tesla. Over the last month, Tesla's shares have been up 11%, while competitors Ford and GM are each down about 7%.

Amazon, the internet retailer, is also very overbought. However, as shown in the second graphic, other retailers like Nike, McDonalds, and Lowes are trading poorly. This is likely linked to prospects for growing digital holiday sales versus less foot traffic at traditional brick-and-mortar establishments. Furthermore, Trump's regulatory policies focus less on monopolistic enforcement than those of the Biden administration.

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Investing for the long term is a journey that requires careful planning, patience, and, most importantly, diversification. Building a diversified investment portfolio is essential for mitigating risk and ensuring steady growth over time. By spreading your investments across different asset classes, you can weather market fluctuations and achieve your financial goals more effectively. In this article, we’ll explore why diversification matters, outline key asset classes, and share strategies to balance your investments for long-term success.

The Importance of Diversification

Diversification is one of the golden rules of investing. It involves spreading your money across various asset classes, industries, or geographies to minimize risk. The idea is simple: if one investment performs poorly, others may perform well, balancing out your overall returns.

For instance, during an economic downturn, stocks might experience a decline, but bonds or real estate investments could remain stable or even grow. By diversifying, you reduce your reliance on any single asset’s performance, protecting your portfolio from significant losses.

Understanding Asset Classes

To create a truly diversified investment portfolio, you need to understand the different asset classes available. Here are the main ones to consider:

• Stocks: Stocks represent ownership in a company and offer high growth potential, but they can be volatile in the short term. They’re ideal for investors looking to grow their wealth over time.
• Bonds: Bonds are fixed-income investments that provide steady returns and are generally less risky than stocks. They are perfect for balancing a portfolio and reducing overall risk.
• Real Estate: Real estate investments, including property ownership or Real Estate Investment Trusts (REITs), can provide stable returns and act as a hedge against inflation.
• Cash and Cash Equivalents: These include savings accounts, money market funds, and certificates of deposit. While they have lower returns, they offer liquidity and safety.
• Alternative Investments: This category includes assets like commodities, private equity, or cryptocurrency. These can add diversity but often come with higher risks and require careful consideration.

Strategies for Balancing Your Portfolio

Creating and maintaining a diversified portfolio requires a strategic approach. Here are some tips to help you get started:

1. Set Clear Goals: Determine your financial objectives, risk tolerance, and investment horizon. Your goals will guide the allocation of your investments across asset classes.
2. Use Asset Allocation: Divide your portfolio based on your risk tolerance and time frame. For example, younger investors may allocate more to stocks for growth, while older investors may focus on bonds for stability.
3. Rebalance Regularly: Markets change, and so does your portfolio’s balance. Periodically review your investments to ensure your allocations align with your goals.
4. Diversify Within Asset Classes: Go beyond investing in one type of stock or bond. For example, include domestic and international stocks or government and corporate bonds.
5. Consider Professional Guidance: A financial advisor can help you build and manage a diversified investment portfolio tailored to your unique needs.

Why Diversification Matters for Long-Term Growth

A diversified portfolio is crucial for long-term investment strategies because it provides stability and growth. While no investment strategy can eliminate risk, diversification helps minimize its impact, allowing you to stay on track even during economic downturns. Over time, a well-balanced portfolio benefits from the growth potential of higher-risk assets while being cushioned by the stability of lower-risk investments.

Take Control of Your Financial Future

Building a diversified investment portfolio is a critical step toward achieving long-term financial success. By understanding the importance of diversification and employing effective strategies, you can create a balanced portfolio that works for your goals and risk tolerance.

If you’re ready to take control of your investments, contact RIA Advisors today. Our team specializes in creating personalized financial plans designed to preserve and grow your wealth while minimizing risk. Schedule a consultation to start your journey toward long-term growth and financial security.

The post How to Build a Diversified Investment Portfolio for Long-Term Growth appeared first on RIA.

Housing affordability helps explain why residential real estate transactions have reached a standstill. Over the last five years, housing prices have surged. Per the Case-Shiller 20 City Home Price Index, home prices from 20 of the largest cities have risen between 33% and 80%. Over the same five-year period, mortgage rates jumped from 3.68% to 6.81%. Wage growth has helped to offset the higher prices and mortgage rates. However, with the median wage growth of 26% over the last five years, it has been woefully lagging.

We share the graph below to help contextualize the housing affordability problem. It highlights how much mortgage payments have risen over the last five years compared to wages. Consider that in 2019, a monthly mortgage payment for a $100,000 house in Miami, Florida, was $460. Today, with home prices in Miami up 80% over the last five years and mortgage rates much higher, the monthly payment would be $1,173. The weakest housing market, San Francisco, has seen the average payment increase by 90%, dwarfing the 26% median wage growth. Based on housing affordability, or should we say “inaffordability”, it's hard to see how the number of residential real estate transactions increases without much lower mortgage rates and or home prices.

What To Watch Today

Earnings

Economy

Market Trading Update

As noted on Friday, the market historically trades a bit weaker over the next two weeks as mutual funds rebalance portfolios and make annual distributions. With the S&P 500 rather deviated from the 50-DMA, a short-term consolidation or correction to either the 20 or 50-DMA would be unsurprising, with a slight uptick in volatility. Investors are currently very complacent with taking on excess risk, which typically precedes short-term reversals. However, with the end of the year approaching, any corrective action should be used to add exposure to equity risk as investment managers compete for assets for year-end "window dressing."

Over the last few sessions, money flows have declined, typically preceding such corrective actions. I have mapped out an anticipated path for stocks over the next two weeks, representing the historical "average" performance for this time of year. Notably, that correction could be more profound, given that mutual funds may need to complete more extensive portfolio rebalancing. As such, manage risk accordingly.

Last week, we launched the "beta" version of the Risk/Range analysis that we include in the weekly newsletter. This chart uses DAILY data versus the WEEKLY data in the newsletter, accounting for the potential difference in readings. We are working on some visual tweaks and sorting. However, the key takeaway is that every sector and market, except for Energy, are on "bullish buy signals." More significant "bear markets" and "crashes" are extremely unlikely in such a case. However, if you monitor this report, the risk of corrections and bear markets increases when you see more sectors and markets becoming negative. This report will provide a leading indicator for reducing equity risk in portfolios.

The Week Ahead And Employment

The BLS employment report came in largely as expected. Last month's meager gain of 36k appears to have resulted from the two hurricanes and the Boeing strike. November jobs grew by 227k, slightly better than expectations of 200k. The unemployment rate ticked up from 4.1% to 4.2%. However, it is .2% below the Fed's year-end expectation.

CPI and PPI on Wednesday and Thursday will provide the Fed with the last bit of inflation data before deciding whether to cut rates on December 18th. CPI is expected to increase by .3% monthly and 2.7% yearly. Both figures are a .10% increase from last month.

The Fed enters its media blackout this week. Accordingly, we suspect that if they are leaning toward not cutting rates based on CPI, we should expect a Wall Street Journal article from Nick Timiraos to alert the markets. If you recall, that was how they prepped the markets when they increased expectations from 25 to 50bps when they first cut rates.

The Kalecki Profit Equation and The Coming Reversion

Importantly, as opposed to Yardeni’s more ebullient forecasts, as we addressed last week, history suggests that periods of high profitability are not indefinite. From a macroeconomic perspective, unsustainably high margins eventually face downward pressure from mean reversion. The Shiller P/E ratio, which adjusts earnings to a 10-year average, remains elevated, implying rich valuations without much margin of safety. In other words, any move toward fiscal restraint or consumer belt-tightening could usher in a profit decline.

As always, the future of corporate profits and market performance remains unpredictable, but understanding the forces at play provides an edge. Acknowledging the interdependency of government policy, household behavior, and corporate actions is crucial for investors. The coming years may test the resilience of today’s profit levels, and prudent investors should prepare for a range of outcomes.

READ MORE...

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Inside This Week's Bull Bear Report

• 2025 - Do Economic Indicators Support Bullish Outlooks
• How We Are Trading It
• Research Report -The Kalecki Profit Equation And The Coming Reversion
• Youtube - Before The Bell
• Market Statistics
• Stock Screens
• Portfolio Trades This Week

Everybody Is Very Bullish

Last week, we discussed how speculation and leverage have returned in earnest to the market as investors rush to take on increasing levels of risk. With markets rising steadily all year, it is unsurprising to witness investors lulled into an elevated sense of complacency. Stocks, bitcoin, leveraged investments, and meme stocks are all surging higher, which is certainly reminiscent of the "madness" we witnessed following the Covid lockdowns. I posted the following chart on "X" Friday morning for reference.

Of course, speculation and sentiment drive markets higher, and investors currently have little concern about a correction. Markets are overbought and detached from short-term moving averages. Furthermore, one of the near-term risks to more bullish investors is the combination of high stock valuations and the necessity of portfolio rebalancing, which could impact market stability. Using 2023 data, it is estimated that mutual funds in the United States hold approximately $19.6 trillion in assets, while exchange-traded funds (ETFs) manage about $8.1 trillion, suggesting a substantial number of portfolios containing combinations of stocks and bonds.

Portfolio Rebalancing Risk

With the year-end approaching, portfolio managers need to rebalance their holdings due to tax considerations, distributions, and annual reporting. For example, as of this writing, the S&P 500 is currently up about 28% year-to-date, while investment-grade bonds (as measured by iShares US Aggregate Bond ETF (AGG) are up 3.2%. That differential in performance would cause a 60/40 stock/bond allocation to shift to a 65/35 allocation. To rebalance that portfolio back to 60/40, portfolio managers must reduce equity exposure by 5% and increase bond exposure by 5%.

Depending on the magnitude of the rebalancing process, it could exert downward pressure on risk assets, leading to a short-term market correction or consolidation. Some of that rebalancing has already been in process, but we suspect there is more to go, particularly given the rather extreme reading of the stock-to-bond ratio.

Historically, the stock/bond ratio remained range bound between roughly 1:1 to 2.5:1. Today, that ratio has skyrocketed since the flood of liquidity following the pandemic as money chased risk assets over safety. At a ratio of 6.5:1, we suspect that, at some point, a reversion will take place. In the short term, given the outsized performance of stocks versus bonds in 2024, there is likely an unappreciated risk that portfolio rebalancing by managers could add a layer of selling pressure over the next couple of weeks.

However, repeating what we wrote last week, we expect any correction to be short-lived.

"If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly."

While there is no reason to be bearish, this does not mean you should abandon risk management. Such is particularly the case as we head into 2025, which could suggest a less optimistic outcome.

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2025 Earnings Forecasts Are Very Bullish

Last week, we discussed the surge in speculation and leverage in the market. As discussed in that article, even though valuations are elevated, such is because sentiment drives valuations in the short term. As we head into 2025, Wall Street is very optimistic about earnings growth, leading investors to pay up for higher valuations. Such is also the case with consumers whose confidence in higher stock prices over the next 12 months has surged to record levels.

According to S&P Global, earnings are expected to grow by 19.87% in 2025 from $209.83 to $251.53 per share. As discussed, such is well above the long-term earnings growth trend from 1900 to the present. Still, such exuberance is unsurprising during strongly trending bull markets in an attempt to justify higher valuations. The problem is that such exuberant forecasts rarely come to fruition. For example, in March 2023, S&P Global predicted that 2024 earnings would grow by 13% for the year. In reality, earnings grew by just 9% despite the market rising nearly 28%.

As shown, current estimates are well elevated above the running linear trend line from 2014, while actual earnings growth remains close to it. This suggests that we will likely see a decline in estimates for 2025 to roughly $225/share, equating to earnings growth of roughly 7%. Of course, the linear trend of earnings growth is a function of economic growth and an important consideration for investors betting on elevated returns in the New Year.

Earnings Can't Outgrow The Economy

Crucially, earnings cannot outgrow the economy over the long term as earnings are derived from economic activity. Given that GDP measures the total value of goods and services produced within a country, it is a reliable gauge of overall activity. A growing GDP indicates increased economic activity, typically driving higher corporate earnings due to increased consumer spending and business investment. Conversely, a contracting GDP suggests an economic slowdown, often dampening corporate profits.

The data supports this concept. Historically, GDP growth has closely correlated with corporate earnings growth. Data from the Federal Reserve shows that, since 1948, a 1% increase in real GDP growth has translated to roughly a 6% increase in S&P 500 earnings on average. This relationship underscores why GDP is a cornerstone for assessing earnings trends. We can also see this visually.

“Since 1947, earnings per share have grown at 7.7% annually, while the economy expanded by 6.40% annually. That close relationship in growth rates should be logical, particularly given the significant role that consumer spending has in the GDP equation.” - Market Forecasts Are Very Bullish

A better way to visualize this data is to look at the correlation between the annual change in earnings growth and inflation-adjusted GDP. There are periods when earnings deviate from underlying economic activity. However, those periods are due to pre- or post-recession earnings fluctuations. Currently, economic and earnings growth are very close to the long-term correlation.

However, as we discussed previously, there is also a high correlation between the market and the corporate profits to GDP ratio. As is the case currently, markets can detach from underlying economic realities due to momentum and psychology for brief periods. However, those deviations are unsustainable in the long term, and corporate profitability, as discussed, is derived from underlying economic activity.

I will write an article soon covering the importance of a handful of economic indicators on earnings. However, I want to discuss two today: the ISM Manufacturing Index and the Chicago Fed National Activity Index.

ISM Manufacturing Index

The ISM Manufacturing Index is a widely followed leading indicator of economic activity in the manufacturing sector. It surveys purchasing managers on critical metrics like new orders, production levels, and employment.

• A reading above 50 signals expansion, which tends to support earnings growth.
• A reading below 50 suggests contraction, often foreshadowing economic weakness and declining corporate profits.

As of late 2024, the ISM Manufacturing Index has been consistently below 50, marking a manufacturing recession. This data aligns with declining new orders and softer demand, raising concerns about corporate earnings resilience in 2025. However, while manufacturing only accounts for about 20% of U.S. GDP, it has an outsized influence that extends across supply chains, amplifying the impact on broader economic activity.

Corporate earnings growth, which correlates with economic indicators like the ISM Manufacturing index, suggests some caution about the more optimistic 2025 Wall Street estimates. However, even if we include the services side of the index, which comprises the bulk of economic growth, and weigh it accordingly, we see that the stock market has far outpaced underlying economic activity. Historically, such outsized returns have not been sustainable as earnings growth fails to meet expectations.

However, one of the better economic indicators to pay attention to is the Chicago Fed National Activity Index, which is a broad measure of the economy but does not receive much attention.

Chicago Fed National Activity Index (CFNAI)

The CFNAI aggregates 85 monthly economic indicators from four categories:

1. Production and income.
2. Employment, unemployment, and hours worked.
3. Personal consumption and housing.
4. Sales, orders, and inventories.

A CFNAI reading above zero indicates above-trend economic growth, while below zero suggests below-trend growth. In October 2024, the CFNAI registered at -0.15, reflecting subdued economic activity. Prolonged readings in negative territory often signal a rising risk of recession. Notably, the employment measure suggests that the annual rate of change in employment will continue to decline, industrial production will slow, and personal consumption will moderate lower.

The CFNAI’s broad scope provides a nuanced view of how various economic forces combine to affect corporate earnings. With production and employment metrics deteriorating, the outlook for robust earnings in 2025 appears increasingly strained. As shown, a high but volatile historical correlation exists between the CFNAI and corporate earnings.

Risks In 2025

Still, investors should note that analysts' outlook for 2025 is exceptionally optimistic compared to what is likely to be the actual outcome. This is because, as discussed in "Market Forecasts Are Very Bullish," there are numerous headwinds facing markets next year.

"The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth and record corporate profitability."

1. Economic growth must remain more robust than the average 20-year growth rate.
2. Wage and labor growth must reverse (weaken) to sustain historically elevated profit margins.
3. Both interest rates and inflation need to decline to support consumer spending.
4. Trump’s planned tariffs will increase costs on some products and may not be fully offset by replacement and substitution.
5. Reductions in Government spending, debt issuance, and the deficit subtract from corporate profitability (Kalecki Profit Equation).
6. Slower economic growth in China, Europe, and Japan reduces demand for U.S. exports, slowing economic growth.
7. The Federal Reserve maintaining higher interest rates and continuing to reduce its balance sheet will reduce market liquidity.

You get the idea. While analysts are currently very optimistic about economic and earnings growth going into 2025, there are risks to those forecasts. Such is particularly true when examining current economic data's relative strength and trend. Subdued manufacturing activity, slowing GDP growth, and cautious consumer behavior all point to an economic environment less supportive of aggressive earnings growth. As such, investors must carefully navigate the disconnect between high Wall Street expectations and softening economic conditions.

If these headwinds persist, corporate earnings may grow slower or contract slightly compared to Wall Street’s current projections. For investors, this scenario could mean lower returns from equities, particularly in high-growth sectors more sensitive to earnings disappointments.

How We Are Trading It

Heading into year-end, there is little need to be overly cautious. The bullish trend remains intact, corporate buybacks continue, and investment managers must be "fully dressed" by New Year's Eve for annual reporting.

However, even with the market in a seasonally strong period of the year, there is always the possibility of something "going wrong." As such, continue to follow the rules as needed to maintain a manageable level of volatility.

1. Tighten up stop-loss levels to current support levels for each position.
2. Hedge portfolios against major market declines.
3. Take profits in positions that have been big winners
4. Sell laggards and losers
5. Raise cash and rebalance portfolios to target weightings.

Notice, nothing in there says “sell everything and go to cash.”

The trick to navigating markets in 2025 is not trying to “time” the market to sell exactly at the top. That is impossible. Successful long-term management is understanding when “enough is enough” and being willing to take profits and protect your gains. For many stocks currently, that is the situation we are in.

Manage risk accordingly. (Read our article on “What Is RIsk” for a complete list of rules)

Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today's volatile markets.

Have a great week.

Research Report

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Bull Bear Report Market Statistics & Screens

SimpleVisor Top & Bottom Performers By Sector

S&P 500 Weekly Tear Sheet

Relative Performance Analysis

Last week, we noted that the first five days of December tend to be bullish for stocks and suggested remaining weighted to equities. That worked as expected, with markets hitting new all-time highs this past week. However, this week, mutual fund rebalancing begins, which could lead to increased volatility and sloppy trading action. The index is overbought along with Technology, Discretionary, and Bonds, so a rotation to Energy, Utilities, and Materials would be unsurprising.

Technical Composite

The technical overbought/sold gauge comprises several price indicators (R.S.I., Williams %R, etc.), measured using "weekly" closing price data. Readings above "80" are considered overbought, and below "20" are oversold. The market peaks when those readings are 80 or above, suggesting prudent profit-taking and risk management. The best buying opportunities exist when those readings are 20 or below.

The current reading is 86.97 out of a possible 100.

Portfolio Positioning "Fear / Greed" Gauge

The "Fear/Greed" gauge is how individual and professional investors are "positioning" themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, the more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: The Fear/Greed Index measures risk from 0 to 100. It is a rarity that it reaches levels above 90. The current reading is 83.31 out of a possible 100.

Relative Sector Analysis

Most Oversold Sector Analysis

Sector Model Analysis & Risk Ranges

How To Read This Table

• The table compares the relative performance of each sector and market to the S&P 500 index.
• "MA XVER" (Moving Average Crossover) is determined by the short-term weekly moving average crossing positively or negatively with the long-term weekly moving average.
• The risk range is a function of the month-end closing price and the "beta" of the sector or market. (Ranges reset on the 1st of each month)
• The table shows the price deviation above and below the weekly moving averages.

Last week, we suggested that with the Thanksgiving holiday rally behind us, we could continue to trade higher last week. That occurred, and now the market is overbought and heading into a seasonally weak period. The upside may remain limited, and a rotation to underperforming areas such as energy, utilities, and staples is possible. Overall, the market is very bullish, with every sector and market, except Energy, on a bullish buy signal. Maintain exposure, manage risk as needed, and use any short-term corrections to increase equity exposure.

Weekly SimpleVisor Stock Screens

We provide three stock screens each week from SimpleVisor.

This week, we are searching for the Top 20:

• Relative Strength Stocks
• Momentum Stocks
• Fundamental & Technical Strength W/ Dividends

(Click Images To Enlarge)

RSI Screen

Momentum Screen

Fundamental & Technical Screen

SimpleVisor Portfolio Changes

We post all of our portfolio changes as they occur at SimpleVisor:

No Trades This Week

Lance Roberts, C.I.O., RIA Advisors

Have a great week!

The post 2025 – Do Economic Indicators Support Bullish Outlooks? appeared first on RIA.

Investing is an essential part of building wealth, but the key to success lies in aligning your investments with your personal comfort level. Assessing risk tolerance is the foundation of a successful investment strategy. By understanding how much risk you’re willing and able to take, you can make informed decisions about your portfolio and achieve your financial goals with confidence.

What Is Risk Tolerance?

Risk tolerance is your ability and willingness to endure market fluctuations and potential losses in pursuit of financial gains. It’s influenced by factors such as your age, income, financial goals, and emotional response to risk.

For example, someone with a high risk tolerance may be comfortable investing in volatile stocks for the potential of higher returns, while someone with a low risk tolerance might prefer more stable, predictable investments like bonds. Understanding your risk tolerance helps you create a portfolio that matches your financial goals and minimizes unnecessary stress.

Methods to Evaluate Your Risk Tolerance

Assessing your risk tolerance involves examining both your financial situation and your emotional capacity to handle risk. Here are a few ways to evaluate your personal risk levels:

1. Reflect on Your Financial Goals

Ask yourself:

• What are your short-term and long-term financial objectives?
• How much time do you have to achieve these goals?

If you have a long investment horizon, you may be able to take on more risk because you have time to recover from market downturns. Conversely, if you need the money in the short term, a conservative approach may be more appropriate.

2. Consider Your Financial Stability

Your current financial situation significantly impacts your ability to take risks. Assess:

• Do you have an emergency fund in place?
• How much debt are you carrying?
• What percentage of your income can you afford to invest?

A solid financial foundation can provide the confidence to take on more risk, while a precarious situation may call for a more cautious approach.

3. Take a Risk Tolerance Questionnaire

Many financial advisors and investment platforms offer risk tolerance questionnaires to help you quantify your comfort level with risk. These tools typically ask about your reactions to hypothetical market scenarios, such as how you would respond if your portfolio lost 20% of its value in a single year.

4. Reflect on Past Experiences

Think about your previous investing experiences:

• How did you feel during periods of market volatility?
• Did you sell investments out of fear, or were you able to stay the course?

Your past behavior can provide valuable insights into your natural risk tolerance.

How Risk Tolerance Influences Investment Choices

Once you understand your risk tolerance, you can use that knowledge to guide your investment decisions.

1. Asset Allocation

Risk tolerance plays a significant role in determining your asset allocation—the mix of stocks, bonds, and other assets in your portfolio.

• High Risk Tolerance: You may allocate a larger percentage of your portfolio to equities, which offer higher potential returns but greater volatility.
• Moderate Risk Tolerance: A balanced mix of stocks and bonds can provide growth potential with reduced volatility.
• Low Risk Tolerance: Conservative portfolios emphasize fixed-income investments, such as bonds, which are less volatile but offer lower returns.

2. Investment Types

Risk tolerance also influences the types of investments you choose. For example:

• High-risk investors may explore growth stocks or emerging market funds.
• Low-risk investors might prefer dividend-paying stocks, municipal bonds, or high-yield savings accounts.

3. Portfolio Adjustments

Your risk tolerance isn’t static—it can change as your financial situation and goals evolve. Regularly reassess your risk tolerance to ensure your portfolio continues to align with your needs.

Build a Portfolio That Matches Your Comfort Level

Assessing risk tolerance is an essential step for any investor. By understanding your ability and willingness to take risks, you can make more informed decisions and build a portfolio that aligns with your goals and financial comfort level.

If you’re unsure how to start your investment journey or want expert guidance on assessing your risk tolerance, contact RIA Advisors today. Our team specializes in personalized investment risk assessment and portfolio construction to help you achieve your financial goals with confidence. Schedule a consultation and take the first step toward smarter investing.

The post How to Assess Your Risk Tolerance Before Investing appeared first on RIA.

Turn on CNBC, and you will notice a bright green box permanently affixed to the bottom right corner with the ever-changing price of Bitcoin. Bitcoin is all the rage as market speculation across crypto and other assets is robust. Moreover, with Donald Trump putting Bitcoin-friendly appointees in key financial regulatory jobs, the price surge has some fundamental basis. The breaking of 100k on Wednesday night will further fuel the price. Markets frequently gravitate to round numbers. Therefore,100k is an important milestone that should fuel more buying. For now, 100k and the additional speculation it generates will provide a base for the price. However, the rally in Bitcoin is getting overbought and could likely be in for a consolidation or decline soon.

The graph below shows the recent price spurt to get over 100k. In March 2024, Bitcoin had a similar surge, which pushed prices to overbought levels. The current MACD is slightly higher than in March, as highlighted in the circle. Furthermore, despite the excellent price action and eclipsing 100k, it appears to trigger a sell signal. Bitcoin will likely consolidate, but the big question is when and, equally importantly, how much higher it will go before taking a breather.

What To Watch Today

Earnings

• No Earnings Releases Today

Economy

Market Trading Update

In yesterday's discussion, we laid out the market's historical performance during the second and third weeks of December as mutual funds make annual distributions and rebalance portfolios. While we expect any pullbacks to be mild, there is an unappreciated risk that a correction in equity prices could be larger. As we head into year-end, any portfolio manager that runs a balanced portfolio of stocks and bonds will need to rebalance. As shown in the chart below, the appreciation in stocks has been significant this year, while bonds have dragged, suggesting that fund managers are likely heavily overweight stocks and underweight bonds.

Historically, the stock/bond ratio remained in a range between roughly 1:1 to 2.5:1. Today, that ratio has skyrocketed since the flood of liquidity following the pandemic as money chased risk assets over safety. At a ratio of 6.5:1, we suspect that, at some point, a reversion will take place. In the short term, given the outsized performance of stocks versus bonds in 2024, there is likely an unappreciated risk that portfolio rebalancing by managers could add a layer of selling pressure over the next couple of weeks.

While we certainly cannot discount the more extreme bullishness in the markets that could keep prices elevated, there seems to be very little harm in managing risk exposures between today and the end of the year.

Stock Versus Bonds

Many investors hold diversified portfolios, including stocks and bonds. Accordingly, actively managing the allocation between stocks and bonds can be fruitful for active investors.

Currently, the price ratio between stocks and bonds is at an extreme level. Such is not surprising given that investor sentiment clearly leans toward higher stock prices and lower bond prices. The graph below, courtesy of Callum Thomas and @i3_invest, shows that the price ratio of the S&P 500 (SPY) and long-term Treasury bonds (TLT) have been in a well-defined channel for the last twenty years. Contrarian investors, willing to go against popular sentiment, are indeed aware of the situation and licking their chops.

Even if you are a diehard contrarian investor, relying solely on the graph below is not a reason to shift allocations to bonds from stocks. As experienced in 2003-2006, the price ratio can ride along the upper channel line. Such could easily be the case again for the next few years. However, when the macroeconomic environment changes and the Fed starts aggressively cutting rates, those allocating between stocks and bonds should be mindful that bonds can significantly outperform stocks in the short run.

We remind you of a few of Bob Farrell’s investment rules to emphasize the graph's importance.

• Markets tend to return to the mean over time.
• Excess moves in one direction will lead to an excess move in the opposite direction.
• When all the experts and forecasts agree, something else is going to happen.

Another Market Warning

Over the last few weeks, we have shared evidence that markets are becoming very speculative. Similar to our lead thoughts on Bitcoin eclipsing 100k, speculation can drive speculation. While the circular feeding frenzy can continue for a while, we must be aware that when prices grow much faster than their fundamental basis, they become unstable.

The graph below, courtesy of Sentimentrader, is another example of speculative fever. It shows the ratio of leveraged long ETFs to short ETFs is surging to its highest level in five years. There is now approximately $14 invested in leveraged long ETFs to every dollar in a short ETF. The ratio has grown by over 50% in just the last month.

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Corporations are currently producing the highest level of profitability, as a percentage of GDP, in history. However, understanding corporate profitability involves more than glancing at quarterly earnings reports. At its core, the Kalecki Profit Equation provides a valuable framework, especially when exploring the reasons behind today’s elevated profit margins and what could disrupt them.

James Montier discussed the Kalecki profit equation in 2012 in a post entitled "What Goes Up, Must Come Down." However, that has not been the case, as noted recently by Albert Edwards at Societe Generale:

"Companies have been able to push through profit‑margin‑expanding price increases under the cover of two key events, namely 1) supply constraints in the aftermath of the Covid pandemic and 2) commodity cost-push pressures after Russia’s invasion of Ukraine. But we still emphasise that one of the main sources of the recent surge in profit margins is massive fiscal expansion. In short, the government has been spending more to the benefit of corporates."

It is that last statement that is most crucial for investors and the incoming Trump administration.

However, we need to understand the Kalecki Profit Equation.

The Kalecki Profit Equation Made Simple

Some economic equations or relations are inspired by guesswork and may not describe the real world precisely. Other equations always hold since they are simple accounting identities. The Kalecki Profit Equation is of the latter type. It describes precisely the factors that determine corporate profits. Knowing this relation can give investors a leg up in predicting earnings.

Named after the economist Michal Kalecki, this equation deciphers the macroeconomic elements that shape business earnings. Corporate profits derive from combining investment, government and household savings behaviors, dividends, and trade flows.

Profits = Investment – Household Saving – Foreign Saving – Government Saving + Dividends

Kalecki’s formula states that net investment, household and government savings, foreign trade balances, and corporate dividend payouts determine total corporate profits. The equation underscores how interconnected economic activities translate into business revenue. For example, when governments run deficits, they inject money into the economy, boosting overall demand and, by extension, corporate earnings. Conversely, business profitability can take a hit when households save more or governments cut spending.

As shown, after a massive spike in household savings during the pandemic, the surge in corporate profitability was unsurprising as households went on a shopping spree.

It is crucially important to understand the bolded statement above. Many economists and analysts are raising alarm bells about increasing government spending and deficits. However, over the past decade, record profit margins have become a hallmark of corporate America as politicians continue to "UN-save" by running more significant deficits. Therefore, corporate profit margins have averaged far higher than the historical norm, with both households and the government "dis-saving" at an increasing pace. From the aftermath of the 2008 financial crisis through the pandemic stimulus programs, fiscal policy has kept money flowing and profits robust.

As discussed previously, massive government interventions have kept economic growth humming for the last two decades. While the incoming Trump administration suggests cutting spending and the deficits, the consequences, which are long-term beneficial, will be painful in the short term.

Decoding Today’s Elevated Profit Margins

Government spending isn’t the sole contributor to recent profitability highs. Investment dynamics and changing consumer behavior have played critical roles. The post-pandemic stimulus created a consumption boom, reinforcing corporate earnings. Additionally, low interest rates over the last decade fueled significant business investment and stock buybacks, another source of profit strength. As Montier warns, record corporate profit margins can not last indefinitely.

"If the era of big government is here to stay then profits as a percent of GNP can remain higher than in the past. However, it should be noted that economic theory offers no reason as to why profit margins should mean revert. It is the return on capital, not the return on sales, that 'should' mean revert. Of course, because capital is not observable, we are forced to proxy it.

From a simple profit margins perspective, we can examine the Shiller P/E. This measure attempts to smooth out the cyclical elements of profitability by following Ben Graham’s advice to use 10 years of earnings in the denominator of the P/E. This makes it interesting to us in the current context as it automatically builds in the fact that profitability has been higher over the last 10 years.

So even if one believes that fiscal deficits are here to stay and that profitability is structurally higher as a result, the U.S. market is still trading at around 35x. This dooms investors to low long-run returns. Even if we don’t get any valuation or margin mean reversion, investors are facing a return of around 3% real – hardly likely to be sufficient recompense for the risk of owning equities."

Since the "Financial Crisis," massive Government spending has corresponded to a persistently elevated market valuation multiple.

Another anomaly caused by the massive surge in Government and Household spending (dis-saving) has been the detachment of margin-adjusted valuations from earnings-driven valuation measures. As Montier noted in his research:

"In the past both John Hussman and I have shown that various measures of margin-adjusted CAPE have performed better than standard CAPE as predictors of returns – naturally due to the mean reversion of margins over time. They show how if margins were to revert to their 'normal/historical levels,' then the CAPE
would be much higher than the standard CAPE shows – margin-adjusted measures of CAPE are around 50x today! If you believe in full reversion of both valuations and margins,then your return outlook would be exceptionally downbeat."

Of course, if we get valuation mean reversion, investors will face long-run returns significantly worse than 3% on an inflation-adjusted basis.

What would cause such a reversion? Any action that increases Government savings. As governments worldwide grapple with inflation and rising debt burdens, austerity measures may come into play. Consider the U.S. budget discussions around reducing expenditures on social programs and infrastructure. Any significant cuts could reduce aggregate demand, impacting corporate revenues.

Household savings trends are another factor to watch. As inflation erodes purchasing power and consumers face higher borrowing costs, the impulse to save rather than spend intensifies. This behavior can create a feedback loop in economic downturns, as lower consumption hits businesses, leading to reduced hiring and investment, further dampening growth.

Remember, in the Kalecki framework, rising household savings represent a direct drag on profits.

Why Stock Market Investors Should Be Concerned

The Kalecki Profit Equation clearly explains that while debts and deficits erode economic growth and are deflationary through the diversion of capital from productive investment, a reversal of deficit spending suggests risk for investors. Valuations are high, partly because investors assume elevated profit margins will persist. However, the cumulative change of the inflation-adjusted price of the market significantly exceeds the profits being generated. Previous such deviations have not ended well for investors, which is what the Kalecki equation suggests.

We see the same evidence in the correlation between corporate profits to GDP ratio vs the inflation-adjusted market price.

If economic conditions worsen or fiscal policies tighten, we could see a significant reset. Earnings projections would likely be revised downward, dragging down equity prices. As Montier suggests, long-term returns for U.S. equities look grim even under optimistic assumptions. He points out that price-to-earnings ratios reflect these outsized profit margins, leaving little room for error.

Importantly, as opposed to Yardeni's more ebullient forecasts, as we addressed last week, history suggests that periods of high profitability are not indefinite. From a macroeconomic perspective, unsustainably high margins eventually face downward pressure from mean reversion. The Shiller P/E ratio, which adjusts earnings to a 10-year average, remains elevated, implying rich valuations without much margin of safety. In other words, any move toward fiscal restraint or consumer belt-tightening could usher in a profit decline.

As always, the future of corporate profits and market performance remains unpredictable, but understanding the forces at play provides an edge. Acknowledging the interdependency of government policy, household behavior, and corporate actions is crucial for investors. The coming years may test the resilience of today’s profit levels, and prudent investors should prepare for a range of outcomes.

For more insights on market trends and strategic advice, visit RealInvestmentAdvice.com.

The post The Kalecki Profit Equation And The Coming Reversion appeared first on RIA.

The two market-leading weight loss/obesity drugs (GLP-1), Zepabound (Eli Lilly) and Wegovy (Novo Nordisk), just completed a clinical side-by-side trial. After 72 weeks of testing on 750 obese or overweight adults with at least one medical problem, Eli Lilly came out ahead by a substantial margin. Per Eli Lilly:

Zepabound provided a 47% greater relative weight loss compared to Wegovy^® (semaglutide). On average, Zepbound led to a superior weight loss of 20.2% compared to 13.7% with Wegovy.

Click HERE for the full press release.

The head-to-head test results are a big win for Lilly. The size of the global GLP-1 market is expected to grow significantly over the coming years. Accordingly, the GLP-1 that people think is the most effective will benefit the most. Current sales of all GLP-1 drugs are estimated at approximately $50 billion. Future estimates vary widely. UBS, for instance, forecasts the market will eclipse $125 billion by 2029. MarketsandMarkets thinks it could reach $471 billion by 2032, or a compounded growth rate of 33.2%. More competition is coming but Eli Lilly has a clear leg up on the competition. As shown below, the market has been betting on Lilly (LLY) for quite a while. Over the last five years, it has risen about twice as much as Novo Nordisk (NVO-ADR).

Disclaimer: We own Eli Lilly (LLY) in our equity models.

What To Watch Today

Earnings

Economy

Market Trading Update

As discussed yesterday, the market remains on a very bullish trajectory. However, it is becoming short-term overbought at a point in the monthly cycle that is normally weaker. As shown, in both the average monthly cycle and the average Presidential election year, the market tends to weaken mid-month as mutual funds make their annual distributions.

With the short-term overbought conditions, a pullback to the 20-DMA is likely due. However, it is not out of the question the market could test the 50-DMA. Such weakness does not last long and usually subsides by mid-month as portfolio managers begin to window-dress for year-end reporting. It is also worth noting that allocation-based portfolio managers will need to significantly rebalance given the outperformance of stocks and underperformance of bonds. Such could be one catalyst for a deeper correction to the 50-DMA. Such rebalancing could also boost bond performance.

As always, we have no idea what will occur. We are just making assumptions based on history and market tendencies. We suggest continuing to monitor your levels of risk relative to your goals and adjust accordingly. With the market up strongly this year, it is always worth locking in some gains today against those future goals. The market has a long history of taking away those gains when investors least expect it.

Trade accordingly.

ADP Slumps Yet Musalem Favors Patience

ADP was slightly weaker than expected at 146k versus estimates of 165k. However, last month's figure was revised lower by 49k jobs. The graph below shows that ADP employment has varied but been consistent between 125k and 200k. The BLS data has been much more volatile. Furthermore, the BLS data has been revised to a much larger extent than ADP. The second graph below shows that small and medium-sized businesses continue to see weakening trends. To wit, small business payrolls fell by 17k, the fourth decline in the last five months. This is likely a function of higher interest rates having a much more significant impact on smaller companies.

Despite the weaker ADP data, St. Louis Fed President Alberto Musalem said he favors a "patient" approach to monetary easing. It appears his thoughts are based on inflation running higher than 2% and less so on the labor markets. While he does see more rate cuts, he thinks a pause at the December meeting may be reasonable. Currently, the Fed Funds futures market is pricing in a 75% chance the Fed cuts rates at the December 18th meeting.

2019 Redux: Is Another Liquidity Crisis Near?

Might another market liquidity event be on the horizon? While there is generally good liquidity in the financial system, there are some nascent signs that problems could arise. A liquidity shortfall can have meaningful market impacts since asset prices rely heavily on liquidity. Liquidity problems lasting more than a few days typically require the Fed to inject liquidity into the financial system to stabilize it. Investors and traders, aware of the liquidity situation, are often rewarded handsomely for frontrunning the inevitable Fed response. Therefore, let’s review the current liquidity status in the financial system and harken back to 2019 to appreciate the potential timing for a liquidity shortage and, equally importantly, consider how the Fed may react to such a problem.

READ MORE...

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Might another market liquidity event be on the horizon? While there is generally good liquidity in the financial system, there are some nascent signs that problems could arise. A liquidity shortfall can have meaningful market impacts since asset prices rely heavily on liquidity. Liquidity problems lasting more than a few days typically require the Fed to inject liquidity into the financial system to stabilize it. Investors and traders, aware of the liquidity situation, are often rewarded handsomely for frontrunning the inevitable Fed response. Therefore, let's review the current liquidity status in the financial system and harken back to 2019 to appreciate the potential timing for a liquidity shortage and, equally importantly, consider how the Fed may react to such a problem.

Clear Signs Of Liquidity Problems

Imagine a friend asking for a favor. His rent is due today, but he isn't paid until tomorrow. To bridge his 24-hour liquidity gap, he asks for a loan. He offers to give you the keys to his new Mercedes in exchange for $5,000. He promises to pay you back in full, including interest, tomorrow. Moreover, if he doesn't pay, the car is yours.  

Not only can you be a good friend, but if he fails to pay you back, you will have a new Mercedes worth a lot more than $5,000. The proposal is as close to a risk-free, win-win proposition as possible.

The tell-tale sign of a liquidity problem in the banking system occurs when a profitable, risk-free lending situation, like our neighbor's proposition, arises and no lenders are willing or able to advance money or are only willing to do so at an exorbitant price.

The most recent liquidity event occurred in 2019. As a result, the Fed came to the market's rescue by restarting QE, advancing funds through its repo program, and lowering the Fed Funds rates. Stock investors frontrunning the Fed were able to take advantage of a 15% S&P 500 surge in just four months.

The 2019 Repo Market Liquidity Crunch

In September 2019, the $4 trillion overnight repo market froze. Overnight repos are one-day loans collateralized with U.S. Treasury and Mortgage-Backed Securities. Like our example, ample collateral exists to prevent any loss if the borrower defaults. Accordingly, overnight repos should trade better than Fed Funds, which have no collateral backing.

Equally important, many leveraged portfolios holding stocks, bonds, and other assets depend on overnight repo for funding. If money can't be borrowed, leveraged asset holders must sell assets.

The graph below from the Fed shows that overnight repo rates traded 25 basis points higher than the norm on September 16^th and then surged on the 17^th. Borrowers had to pay 3.00-3.50% more than was typical for a fully collateralized overnight loan.

The combination of quarterly corporate tax payments, Treasury auction settlements, and the Fed's ongoing QT activities drained excess liquidity from the banking system. Significant liquidity demands may move the overnight markets by a few basis points, but this instance was a different animal.

The Fed provided immediate liquidity via an overnight repo operation. The emergency operation was soon extended through the second quarter of 2020. As shown below in red, the amount borrowed from the Fed via this facility was about two times the peak borrowed during the financial crisis.

To further bolster liquidity, the Fed announced $60 billion per month in Treasury Bill purchases (QE) and reduced the Fed Funds rate twice by the end of the year.

There is a limited amount of liquidity in the system. In 2019, QT, tax payments, and heavy Treasury issuance drained liquidity. Accordingly, investors with leveraged portfolios dependent on overnight repo had to pay dearly to borrow. Some likely sold assets to reduce their funding needs. The Fed came quickly to the rescue to prevent a liquidity-driven market meltdown. 

Sources Of Liquidity

Beginning in 2019, to address the liquidity shortfall and then to counter the pandemic for the next three years, the Fed flooded the banking system with reserves, allowing the banks to create ample liquidity for the markets. The Fed's balance sheet peaked at nearly $10 trillion in May 2022. Since then, excess liquidity has slowly been leaving the banking system. Let's look at three predominant sources of liquidity to help ascertain when or if the financial system might be near another liquidity deficit. For those looking at frontrunning Fed liquidity operations, these liquidity sources are vital to follow.

Fed Balance Sheet

The Fed uses its balance sheet to add or remove liquidity from the markets and banking system through Treasury and MBS purchases and sales. QE, in which the Fed buys bonds from the largest banks, removes assets from banks' balance sheets and replaces them with banking reserves. The reserves are the basis on which banks make loans, i.e., provide liquidity.

Conversely, the Fed removes liquidity with its balance sheet via QT. This occurs when they sell their bonds back to the market or let them mature. In either instance, the banks add bonds to their balance sheets requiring reserves. QT removes reserves available to make loans; thus, liquidity declines.

As we discussed earlier, the Fed's repo program, residing on its balance sheet, is also used to add liquidity. Conversely, the Fed has a reverse repurchase program (RRP), which we describe further in this article, that reduces liquidity.  

The following graph shows the Fed's balance sheet increased by $407 billion in 2019 to meet the market's liquidity shortfall and another $4.8 trillion during the pandemic to flood the banking system with liquidity. The graph also shows a decline of $1.905 trillion over the last two years due to QT and declining RRP balances. Since the Fed started addressing the market's liquidity shortfall in 2019, its balance sheet has grown by $3.3 trillion.

Overnight Reverse Repurchase Agreements

The massive addition of liquidity by the Fed during the pandemic was more than the system needed. The Fed wanted to provide the markets with excessive liquidity to ensure they didn't crash due to the potential economic hardships and anomalies caused by the pandemic.

The drawback was that the excess liquidity would force Fed Funds and money market rates well below zero percent. The Fed removed liquidity via its overnight reverse repurchase program (RRP) to avoid negative interest rates. Essentially, the Fed would borrow money (liquidity) from the banks backed by Treasury collateral. Simply put, the Fed added and withdrew funds daily to balance liquidity.

As shown below, RRP removed about $2.5 trillion of excess liquidity from the market at its peak usage. Today, the program sits below $200 billion. RRP is a good barometer of excess liquidity. The declining trend represents liquidity, leaving the Fed's balance sheet and fortifying the market. However, the dwindling excess liquidity means that the remaining pool of potential market liquidity is limited.

The Treasury Department And TGA

When the Treasury Department issues debt, it removes liquidity from the banking system. Like any other borrower from a bank, Treasury debt requires reserves. When banks use reserves to hold Treasury debt, they have fewer reserves for other forms of bank lending. Not all Treasury debt ends up on bank balance sheets, but even if a citizen or private institution buys the Treasury debt, the cash to pay for it comes from a money market account. Ergo, higher Treasury debt balances require more system-wide liquidity.

Currently, there is approximately $27.6 trillion in federal debt oustanding. That figure is about $10 trillion more than at the start of 2020.

Further complicating the analysis of the Treasury's role is its Treasury's General Account (TGA) held at the Fed. This is essentially the Treasury's checking account. When the account increases, the Treasury is removing liquidity from markets. Conversely, a declining TGA balance represents the addition of liquidity.

As shown below, the TGA account is well above pre-pandemic levels. Spending down the account is a potential source of liquidity for the market.  

Net Liquidity Monitor 

We can use the Fed and Treasury sources of liquidity to calculate a liquidity proxy, as shown below. It's most important to focus on its trend and not as much on the absolute dollar amount.

We shy away from focusing on the actual number because there is more to liquidity than the three inputs we employ. Furthermore, it doesn't tell us how much liquidity the market requires or how those needs may change. We know that the size of the asset markets has grown appreciably since 2019; therefore, today's liquidity needs are significantly greater than five years ago.

Our proxy measure has been relatively stable for the last two years, unlike the steadily declining trend leading to the 2019 problems.

Two Liquidity Clues

The liquidity proxy we share above is not overly concerning. However, we are watching a few other liquidity monitors that are more concerning. For instance, the Fed's RRP balance is below $200 billion. Its decline, which has offset the liquidity-draining QT operations, has resulted in a stable liquidity proxy. However, there isn't much gas in that engine.

Also of concern is the recent jump in repo rates, as shown below. While the occurrence was only at the most recent quarter-end, when liquidity is often compromised, the leap in the collateralized SOFR rate was far and away the largest since COVID.

While RRP and the recent spike in overnight borrowing costs are alarming, the graphs below show that bank reserves are ample.

The first graph below shows that banks' reserves are declining slightly but well within the range of the last few years. A sharper or extended decline, like 2018-2019, would be more concerning. Similarly, the second graph shows reserves as a percentage of banks' assets.

Summary

There is no imminent concern about a liquidity problem, albeit a few indicators tell us to pay attention. Liquidity problems arise quickly. With the excess liquidity in the RRP program dwindling, our liquidity radars must attune.

Liquidity problems will likely first appear via spiking overnight borrowing rates. If it persists, asset market prices will feel the effect. However, the Fed is very attuned to liquidity conditions and the markets. Accordingly, they will likely supply liquidity when needed and arrest any market disruption quickly.

While a liquidity shortage is alarming, it is at that time we should think about the benefit of the emergency liquidity on asset prices that the Fed is likely to flood the markets with. Frontrunning Fed liquidity operations are not for the faint of heart but can be very rewarding if timed correctly.

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Bond yields are primarily driven by macroeconomic factors such as inflation and economic growth. Given their impact on inflation and the economy, the U.S. dollar and oil prices are frequently well correlated with bond yields. Therefore, bond traders often take their cue from the dollar and oil markets.

The dollar (blue), as graphed on the right, has been on a tear since early October. As is typical, bond yields (orange) closely followed the dollar higher. The graph below the dollar/yield shows the correlation between .75 and 1.00 over the period. The dollar is now at the upper end of a two-year range, and its MACD sends a strong sell signal. The blue vertical lines show the prior periods when similar sell signals were triggered. The technical sell signal for the dollar, thus a buy signal for bond prices (lower yields), aligns with the table on the left. It shows that the dollar has traded down in the last seven December's. Moreover, since 2010, December has been the worst month for the dollar.

The graph on the bottom left highlights the strong correlation between crude oil and bond yields. In this case, crude oil trades at the lower end of its two-year range. However, bond yields have yet to "catch down" to oil prices. Assuming the correlation holds up, which is not necessarily a given, bond yields could revisit September's lows.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the market's more extended and overbought conditions. This suggests that some "sloppy trading" action is likely over the next week or so until that reverses somewhat.

As discussed in our blog post yesterday, one thing to note is the more speculative positioning in the market. We have seen that positioning in various assets this year, from gold to stocks to bitcoin. Unsurprisingly, a "thesis" is generated when assets increase significantly, explaining why this time is different. History has taught us that it never is, and speculative risk-taking, particularly when combined with leverage, always ends badly. For example, the chart below compares Bitcoin to the S&P 500 index. The high correlation suggests that despite the many stories behind the rise in Bitcoin, such as decentralization, an offset to fiat currency, etc., the real reason is that it is an asset being chased by investors. Eventually, the speculative chase will reverse, as it always does, and the price will likely decline along with the general shift in sentiment in the broader stock market.

It is worth noting that when Bitcoin's RSI and the MACD indicator were elevated in previous periods, a correction or long-term consolidation occurred, along with the S&P 500 index. Given the more extreme run in both asset classes over the last two years, it may be prudent to expect a rise in volatility as we head into 2025 and a reversal of those overbought conditions through stagnation or reversion.

This is just something to consider as we wrap up the year and Wall Street analysts become increasingly emboldened in predicting higher stock prices next year.

JOLTs

The BLS JOLTs data, a precursor to today's ADP and Friday's employment reports, registered an uptick in the labor market. The downward trend in job openings remains intact despite the better-than-expected reading of 7.74 million, well above the consensus of 7.52 million. Additionally, the rising quits and layoffs rates were better than expected and point to a healthy jobs market. The only fly in the ointment is the hiring rate, which fell to 3.3%, the lowest since the pandemic started.

Leverage And Speculation Are At Extremes

Financial markets often move in cycles where enthusiasm drives prices higher, sometimes far beyond what fundamentals justify. As discussed in last week’s BullBearReport, leverage and speculation are at the heart of many such cycles. These two powerful forces support the amplification of gains during upswings but can accelerate losses in downturns. Today’s market environment shows growing signs of these behaviors, particularly in options trading and leveraged single-stock ETFs.

While leverage and speculation are not new to the financial markets, they manifest investor exuberance. We made this point in a recent post on “Exuberance,” as consumer confidence in higher stock prices has reached the highest level since President Trump enacted sweeping tax cuts in 2018. However, that was before his re-election in November; since then, investor confidence has soared to record levels.

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Financial markets often move in cycles where enthusiasm drives prices higher, sometimes far beyond what fundamentals justify. As discussed in last week's #BullBearReport, leverage and speculation are at the heart of many such cycles. These two powerful forces support the amplification of gains during upswings but can accelerate losses in downturns. Today’s market environment shows growing signs of these behaviors, particularly in options trading and leveraged single-stock ETFs.

While leverage and speculation are not new to the financial markets, they manifest investor exuberance. We made this point in a recent post on "Exuberance," as consumer confidence in higher stock prices has reached the highest level since President Trump enacted sweeping tax cuts in 2018. However, that was before his re-election in November; since then, investor confidence has soared to record levels.

Notably, confidence and the desire to increase leverage and speculation in the markets are represented in current valuations.

Of course, the rise in investor confidence should be unsurprising, given nearly 15 years of abnormally high market returns. The chart below shows the average annual inflation-adjusted return of the S&P 500 over different periods. Note that since 1900, the average real market return has been 7.25%. However, since 2009, that annual real return has increased by more than 50%, even more so since President Trump enacted the TCJA in 2017, reducing corporate tax rates.

Given the level of high consistent returns, combined with an extended period of low volatility, and continued monetary and fiscal interventions, it is unsurprising there has been an explosion in speculation and leverage. That activity is seen in options trading, especially short-dated call options, and the surge in single-stock levered ETFs.

The question for investors is what this means for future market returns, and the risk of when, not if, something goes wrong.

Speculation in Today’s Markets: A Closer Look

In March 2021, I wrote an article titled "Long On Confidence And Short On Experience" about how retail investors flooded the market.

"In a “market mania,” retail investors are generally “long confidence” and “short experience” as the bubble inflates. While we often believe each 'time' is different, it rarely is. It is only the outcomes that are inevitably the same. A recent UBS survey revealed some fascinating insights about retail traders and the current speculation level in the market. The number of individuals searching “google” for how to “trade stocks has spiked since the pandemic lows."

For anyone who has lived through two “real” bear markets, the imagery of people trying to learn how to “daytrade” their way to riches is familiar. From E*Trade commercials to “day trading companies,” people left their jobs to trade stocks. Of course, about 9-months later, it ended rather badly as we wrote in detail in "Retail Traders Go Bust."

What is interesting is that after that painful lesson, just 24-months later, retail investors are again "long on confidence." The painful lesson of losing large amounts of money has morphed into the "fear of missing out" on further gains. It is quite remarkable, but the signs are undeniable.

One sign of leverage and speculation we are watching are options. Options provide a leveraged way to bet on stock movements, requiring relatively little capital for potentially outsized returns. In November, US stock options volume hit nearly 70 million contracts on average per day; that is the second-highest on record, and trading activity has DOUBLED over the last two years.

As long as the market rises, those bets will pay off handsomely. The problem is that leverage works excellently on the way up but quickly turns into massive losses when markets decline.

Options trading has become a focal point for modern speculation. The accessibility of trading platforms and low costs have made it easier than ever for retail investors to engage in speculative bets. Short-dated call options, also known as "zero-day" options, which expire in less than 24 hours, are attractive for speculators hoping to capitalize on short-term stock price movements. These contracts allow investors to control large positions for a fraction of the cost of owning the underlying shares outright, effectively providing leverage.

For example, the surge in options volume on tech giants like Nvidia and Tesla has coincided with sharp moves in their stock prices. This speculative activity feeds into a cycle where dealer hedging magnifies stock volatility, detaching prices from fundamental values.

Don't understand how to trade options? No problem, as Wall Street has got your back, or rather, your wallet. The newest speculation and leverage tool of choice is leveraged single-stock ETFs. These funds, designed to amplify the daily performance of a single stock, were developed to meet investor demand for an easy-to-understand product. For example, GraniteShares’ NVDL offers 2x exposure to Nvidia and has seen soaring trading activity. While the ETF can double the returns of Nvidia on any given day, it also doubles the losses. Such instruments are inherently risky, especially in volatile market conditions. Their popularity reflects an increasing appetite for speculative investments, often at the expense of prudent, long-term decision-making.

These trends are not unprecedented. Historically, periods of excessive leverage and speculation have driven markets to dizzying heights before sharp corrections followed. Investors today must understand these dynamics, learn from history, and adopt strategies to safeguard their portfolios.

Lessons from History: What Excessive Leverage Teaches Us

Periods of extreme leverage and speculation are not new, and the outcomes have consistently been painful for unprepared investors. The late 1990s dot-com bubble serves as a prime example. Speculative bets on internet stocks drove valuations to extraordinary levels, with investors leveraging margin accounts and options to chase gains. When the bubble burst, the Nasdaq lost nearly 80% of its value, leaving leveraged traders especially vulnerable to devastating losses.

Similarly, the 2008 financial crisis highlighted the dangers of leverage on a systemic scale. Banks, hedge funds, and individuals had layered debt onto overvalued housing assets, creating a fragile structure that crumbled when housing prices fell. What began as a localized issue in the U.S. housing market cascaded into a global financial meltdown.

More recently, the GameStop frenzy of 2021 showcased how speculative trading, often fueled by leverage, could drive wild price swings.

“Young investors are taking on personal debt to invest in stocks. I have not personally witnessed such a thing since late 1999. At that time, ‘day traders’ tapped credit cards and home equity loans to leverage their investment portfolios. For anyone who has lived through two ‘real’ bear markets, the imagery of people trying to  ‘daytrade’ their way to riches is familiar. The recent surge in ‘Meme’ stocks like AMC and Gamestop as the ‘retail trader sticks it to Wall Street’ is not new.“

Retail traders on platforms like Reddit’s WallStreetBets used call options to amplify their bets, forcing institutional investors to cover short positions. While some traders enjoyed massive gains, the stock’s eventual collapse left many with significant losses.

While this time certainly "feels' different, particularly with Wall Street analysts ramping up market predictions for 2025, several warning signs warrant caution. First, valuation metrics, particularly in the technology sector, have reached more extreme levels. Stocks like Nvidia and Tesla are priced for perfection, with their valuations reflecting speculative enthusiasm rather than underlying fundamentals.

Second, the widespread use of leveraged products amplifies market volatility. Options trading and leveraged ETFs can cause rapid price swings, especially when market sentiment shifts. For example, a sharp decline in Nvidia’s stock could force a cascade of selling in instruments like NVDL, exacerbating broader market declines.

Finally, the systemic risks of leverage should not be overlooked. While today’s risks may not resemble the subprime mortgage crisis, the interconnectedness of financial markets means that unwinding leveraged positions in one area can ripple through the system, creating broader instability.

What Investors Should Do Now

Prudent risk management is essential in a market increasingly driven by speculation. Investors should begin by reassessing their portfolios to ensure they align with long-term goals and risk tolerance. High-risk assets, particularly those with stretched valuations or heavy reliance on speculative flows, may warrant trimming.

Diversification remains a cornerstone of effective risk management. Allocating across a mix of asset classes, sectors, and geographies can reduce the impact of a sharp downturn in any single area. Investors should also focus on quality, prioritizing companies with solid fundamentals, strong cash flows, and sustainable growth prospects.

Hedging can be a valuable tool in speculative markets. Simply increasing bonds or cash allocations can protect against downside risk. While these strategies may dampen potential near-term upside, they can mitigate risk during an unexpected reversion.

Finally, staying informed about market dynamics is critical. Monitoring speculative indicators, such as options volume and leveraged ETF flows, can provide early warning signs of frothy conditions. As discussed recently, pay attention to "Junk Bond To Treasury Spreads," which have consistently been a leading indicator of financial risk.

"As investors, we suggest monitoring the high-yield spread closely because it tends to be one of the earliest signals that credit markets are beginning to price in higher risks. Unlike stock markets, which can often remain buoyant due to short-term optimism or speculative trading, the credit market is more sensitive to fundamental shifts in economic conditions."

Conclusion

The market remains extremely bullish, and leverage and speculation continue to play a crucial role in driving extraordinary gains. However, as with everything, good times do not last forever. The current speculative environment is leaving investors exposed to significant risks when this current trend eventually reverses. The surge in options trading and leveraged single-stock ETFs reflects a speculative environment that requires vigilance. While markets may continue climbing in the near term, history shows that excesses often end with sharp corrections.

Investors can navigate these challenging conditions. A focus on fundamentals, managing risk, and maintaining a disciplined approach without succumbing to speculative temptations are required.

Those steps sound easy, but are difficult in a rising and speculative bull market where gains are easy to make. However, the benefit avoiding a bulk of the losses helps win the long game.

For more actionable insights on protecting and growing your portfolio, visit RealInvestmentAdvice.com.

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Based on early Black Friday sales estimates, sales were strong, but shoppers were much more inclined to take advantage of online sales than go to the malls and stores in person. Mastercard SpendingPulse estimates that in store sales only grew by 0.7% from last year, while online sales rose by nearly 15%. Facteus, another data source, claims that in-store sales fell by 5.4% compared to an increase of 8.5% for online sales. Per ABC News and Adobe Analytics:

Black Friday online shopping this year set a new high, reaching $10.8 billion in sales, according to Adobe Analytics, which tracks U.S. e-commerce data.

That's more than double what online consumers spent on online shopping in 2017, when sales were just over $5 billion, according to Adobe.

Bear in mind that the data we share does not include inflation. Moreover, it's hard to make assumptions about the holiday shopping season based solely on Black Friday sales data. Since Black Friday discounts are the largest, more and more consumers elect to purchase on that day. Furthermore, more consumers are shifting their purchases to take advantage of the sales without having to wake up early and brave lines and crowds, as was traditional on Black Friday. Thus, it's too early to claim that holiday sales were better or worse than last year. However, we have a good inkling that consumers gravitate to online shopping instead of going into stores and malls. The graphic below, courtesy of Hostinger, shows that almost a third of shoppers will rely inclusively on online shopping. While the other two-thirds will shop online and in stores, they clearly prefer digital shopping.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we noted that the recent rally reversed the short-term “sell” signal leading the market to breakout to all-time highs. However, with the market now very overbought, it will be unlikely the market can make further substantial gains without a pullback or consolidation first. We think that will happen over the next two weeks, as noted yesterday:

“The rising trend line from the August lows remains the likely peak to any rally in December, and as noted last week, expect some weakness in the second and third week of December as mutual funds make annual distributions. For now, any corrective action in early December should be bought in anticipation for a rally into year end.”

That remains the most likely case over the next two weeks, particularly with most sectors and markets trading well outside their normal risk ranges. Such is shown in the risk range report from last week’s #BullBearReport.

“With that rally behind us, which could continue early next week, it should be noted that most sectors and markets are overbought. Therefore, the upside may remain limited, and a rotation to underperforming market areas, like Bonds, Gold, and Gold Miners, is possible. Overall, the market is very bullish, with every sector and market, except Energy, on a bullish buy signal.”

Furthermore, professional managers are extremely bullish with allocations above 97%. As shown by the red shaded areas, when allocations exceed 97% such has historically been close to short-term market peaks or consolidations.

While the levels of bullishness are certainly cause for short-term risk management, December tends to be one of the better performing months of the year. Therefore, with buybacks still in play, investors chasing performance, and year-end portfolio window dressing coming, use any short-term weakness to add equity exposure as needed for trading purposes. However, one theme we will start discussing more in January, is the impact of policies that could undermine corporate profitability next year. But that is a story we will get into in January.

2025 Year-End Forecasts

The graphic below, courtesy of Yahoo Finance, shows some S&P 500 forecasts for the year-end of 2025. The dotted vertical line shows the forecasts hugging the average annual return. Since 1928, the average annual return has been slightly over 8%. The average return over the last two years has been 25.35%, well above the historical average. Interestingly, there have only been five other times during this period when the average two-year return was 25% or greater. The average return over the following two years was 8.82%, not far from the average. Maybe the forecasters are on to something!

SimpleVisor Points To Frothy Markets

Our SimpleVisor absolute and relative analysis shows that markets are getting frothy. The first graph below highlights that four of the twelve sectors have scores above .75, denoting very overbought conditions. Furthermore, the S&P has an absolute score of .65, which is not as overbought but still a high level. Financial stocks, up nearly 10% over the last month, are the most overbought sector. The second graphic shows that small-cap and buyback achievers are also very overbought. About half of the factors are at .75 or higher.

Unlike most of the year, the technology sector and mega-cap stocks are among the worst performers. Of note, the emerging and developed markets, alongside gold miners, are the weakest relative performers. Largely to blame is the dollar, which has been up about 6% since October.

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New home sales fell by 17.30% in October, marking the most significant monthly decline in ten years, as shown in the graph on the left below. Furthermore, the supply of new homes on the market rose from 7.7 to 9.5 months. Not surprisingly, building permits fell by 0.4% following a 3.1% decline last month due to slowing sales. New home sales have been negative in six of the previous eight months.

Furthermore, the Case-Shiller home price index shows weakness in the housing market. The latest report shows that previously owned home prices fell by 0.3%, bringing annual home inflation down from 5.2% to 4.6%. As the graph on the right shows, the index is now back to levels or even below those seen in the five years before the pandemic. Furthermore, it continues to decline from the recent peak of 7.5% earlier this year.  

The housing data is important to the Fed for two reasons. Most critical, shelter prices, accounting for 40% of CPI, have been elevated. Alongside zero-inflation rental data, which we have shared numerous times, yesterday’s data further confirms that current housing inflation is well below reported CPI shelter prices. Therefore, CPI is overstated. Secondly, employment in the homebuilding industry has been robust. With declining sales and fewer new homes permitted for construction, homebuilders will likely have to pare some of their workforce. Given the Fed’s attention to employment and inflation, the recent housing data supports the Fed if they elect to cut by 25bps in December.

What To Watch Today

Earnings

Economy

Market Trading Update

Last week, we discussed the increasingly bullish market forecasts for next year. We also noted that the market tends to trade positively heading into the Thanksgiving holiday, to which the market did not disappoint.

For the week, while there was a bit of sloppy trading along the way, the market finished at new highs, eclipsing the 6000 level on Friday. Technically, the market remains in a very bullish setup, holding support at the 20-DMA and then breaking out to new highs. That rally reversed the short-term "sell signal," which gives the market room to trade higher into the first week of December. The rising trend line from the August lows remains the likely peak to any rally in December, and as noted last week, expect some weakness in the second and third week of December as mutual funds make annual distributions. For now, any corrective action in early December should be bought in anticipation for a rally into year end.

As we discussed previously, the key drivers for December will be continued share repurchases, portfolio manager rebalancing, and window dressing for year-end reporting. These supports will continue into year-end, and with the Federal Reserve likely to cut rates in mid-December, we expect market participants to remain on the "bull train" for now. As suggested last week:

"If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly."

The Week Ahead

This week's jobs data will help guide the Fed's rate decision on December 18th. The BLS JOLTs report leads the way on Tuesday. Analysts expect the number of job openings to continue to decline to 7.38 million, down from 7.44 million. Job separation and hires will be closely followed as well. Forecasts expect ADP to show the addition of 240k jobs last month. Lastly, after the disappointing addition of only 12k jobs last month, forecasts are for nearly 200k in the BLS report on Friday. The BLS data and any revisions to last month's data will make gauging employment tricky due to the two hurricanes and their impact on the job market. Also of note this week is the ISM manufacturing and services surveys. It will be interesting to see how the election results initially impact economic sentiment.

The Fed will go into a media blackout after this week. Therefore, we should expect many members to prepare the market for their coming meeting. The speakers on Friday after the employment data may be most relevant.

Memories Of PIIGS

Following the U.S. financial crisis, several eurozone members, known as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), saw their bond yields surge as investors feared they could not refund maturing debt and make payments on existing debt. The first graph below shows how the bond yields on the debt of the PIIGS rose sharply while the European bellwether Germany fell. We bring this up because French bond yields have been rising rapidly. As the second graph shows, yields on French sovereign debt are at their widest spread to German debt since the Euro crisis.

The market is concerned that France may not pass a budget and enact spending reductions. Per Bloomberg:

The market nerves reflect investor concerns over Prime Minister Michel Barnier’s ability to pass a budget for next year and enact spending cuts to reduce the country’s deficit. The far-right National Rally party’s Marine Le Pen has vowed to bring down his administration with a no-confidence motion if its demands are not met, with the matter likely to come to a head in December.

Adding to the unease, Le Parisien newspaper reported that President Emmanuel Macron believed that Le Pen would carry out her threats, and that Barnier would be ousted soon by a no-confidence vote. Macron’s office denied he made such comments. Barnier warned the country faces a “storm” in financial markets if his budget proposals are rejected and the government is voted out of power.

Unlike in 2012, other European nations do not appear to have credit issues. However, the situation in France could escalate and spread fear among sovereign debt investors. Such would likely manifest in higher yields for associated countries and demand for safer bonds like those of Germany and the U.S.

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Inside This Week's Bull Bear Report

• Extreme Speculation Has Returned
• How We Are Trading It
• Research Report -Trumpflation Risks Likely Overstated
• Youtube - Before The Bell
• Market Statistics
• Stock Screens
• Portfolio Trades This Week

A Note Of Thanksgiving

While belated, we sincerely hope you had a happy and fulfilling Thanksgiving holiday. In the words of Henry David Thoreau,

“I am grateful for what I am and have. My Thanksgiving is perpetual.”

All of us at RIA Advisors and Real Investment Advice are grateful for you, our readers, this holiday season. I never imagined that when I started publishing at the beginning of this century, it would have evolved into all the things it has. However, that success is all a function of you, your loyal readership, and your ongoing support. We are so grateful for that.

We look forward to continuing to provide you with our research in the future and have many great projects on the horizon to assist you in your pursuit of wealth-building.

Thank you.

A Holiday-Shortened Week

Last week, we discussed the increasingly bullish market forecasts for next year. We also noted that the market tends to trade positively heading into the Thanksgiving holiday, to which the market did not disappoint.

For the week, while there was a bit of sloppy trading along the way, the market finished at new highs, eclipsing the 6000 level on Friday. Technically, the market remains in a very bullish setup, holding support at the 20-DMA and then breaking out to new highs. That rally reversed the short-term "sell signal," which gives the market room to trade higher into the first week of December. The rising trend line from the August lows remains the likely peak to any rally in December, and as noted last week, expect some weakness in the second and third week of December as mutual funds make annual distributions. For now, any corrective action in early December should be bought in anticipation for a rally into year end.

As we discussed previously, the key drivers for December will be continued share repurchases, portfolio manager rebalancing, and window dressing for year-end reporting. These supports will continue into year-end, and with the Federal Reserve likely to cut rates in mid-December, we expect market participants to remain on the "bull train" for now. As suggested last week:

"If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly."

While there is no reason to be bearish, this does not mean you should abandon risk management. As we will discuss this week, investors are becoming exceedingly optimistic once again.

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Investors Are Very Optimistic

I recently wrote an article on how investors have rarely been so "exuberant" in the markets. To wit:

“Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the 2017 “Trump” tax cuts.“

We also discussed households’ allocations to equities, which, according to Federal Reserve data, have reached the highest levels on record.

But we also see exuberance in overall equity allocations in the markets climbing higher with the market.

Professional investors are ramping up exposure to chase the market into year-end. The chart below of the NAAIM Index highlights when professional investor allocations exceed 97%. Such has historically been at or near short-term market peaks. In other words, professional investors are no different than retail investors who " buy tops" and "sell bottoms."

While allocation levels and optimism are certainly signs of market bullishness, those levels are more of a function of a massive flow of liquidity. In other words, there is "too much money chasing too few assets." However, it is crucial to understand that “exuberance” is a necessary ingredient for pushing asset prices higher. This is why “sellers live higher, and buyers live lower.” In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.

Currently, rising liquidity levels support investor optimism as asset prices continue to rise. However, as we will discuss, such activity does not necessarily equate to more "extreme speculation," which often precedes significant market corrections. While optimism can drive short-term gains, history shows that extreme speculation detaches valuations from fundamentals, leaving the market vulnerable to larger declines.

As we noted in that previous article:

“Risk isn’t always what it seems. When the market feels the safest, that’s often when it’s often the riskiest. Think about it — when everything is going smoothly, people tend to take more risks, which can lead to market bubbles and crashes.”

However, when investor optimism morphs into more extreme speculative behaviors, investors should consider a more cautious outlook.

Signs Of Extreme Speculation

Following the 2020 pandemic shutdown, the Government and Federal Reserve went into overdrive, providing round after round of fiscal and monetary support. Money flooded into the economy, from PPP Loans to rent moratoriums, $1500 checks directly to consumers, debt forgiveness, zero interest rates, and quantitative easing. Unsurprisingly, much of that money entered the financial markets, and retail investors plowed nearly $900 billion in market-related ETFs. Interestingly, in 2024, most of those supports are gone, interest rates have risen sharply, and the Federal Reserve is reducing its balance sheet. Yet, somehow, investors figured out a way to push $913 billion (YTD) into ETFs, which is a record inflow.

That surge of capital into ETFs has contributed to the outsized performance of large capitalization companies, primarily the "Magnificent 7," relative to the rest of the index.

However, it is not just U.S. investors dumping money into the financial markets. Foreign investors have also been shifting capital to the U.S. financial markets versus other countries.

As noted above, there is nothing wrong with investor optimism, which moves markets higher. However, when markets continually rise, even in an environment where they shouldn't (high interest rates), such leads investors to throw caution to the wind by taking on additional risk. As that risk-taking builds and is rewarded by higher prices, risk-taking morphs into more extreme speculation. For example, the surge of capital into 3x Leveraged S&P 500 ETFs has been remarkable.

However, it isn't just that one ETF that investors are aggressively piling funds into. The chart below shows the surge in all levered ETFs.

In addition to the two examples of growing leverage and market speculation, Michael Lebowitz noted in our Daily Market Commentary:

"We see surging volume in leveraged single-stock ETFs. An example of such an ETF is Granite Shares NVDL. The ETF offers a 2x leveraged holding of Nvidia shares. If Nvidia falls by 3%, the ETF will decline by 6%. Conversely, if Nvidia rises by 5%, the ETF will climb 10%. Accordingly, leveraged single-stock ETFs can be incredibly speculative. Furthermore, the massive surge in volume in such ETFs, as we share below, further confirms speculative behaviors are growing.

Leverage and extreme speculation can drive markets higher than most investors forecast. However, in the process, they create a divergence between fundamentals and valuations, thus exposing the markets to risk. Increased leverage and speculation are not reasons to sell immediately, but they indicate that markets are getting frothy, warranting our close attention."

As he notes, the problem with taking on leverage is that while leverage works to your benefit on the way up, it will crush investors on the way down. A good example is the levered 2x Long ETF (MSTU) for Microstrategy (MSTR), the 5th most traded ETF on November 20th.

The problem is that MicroStrategy peaked the following day and has since wiped out a large chunk of that more extreme speculation.

However, such is always the consequence of speculation, and the end results are always poor. While speculation can last for some time, it always does end. Unfortunately, what causes it to end is a failure of the underlying fundamentals to keep up with the fantasy.

Signs To Watch To Signal The End Of Extreme Speculation

This brings us to the obvious question, "What should I be watching for to signal a shift in investor sentiment?"

Part of that answer falls into forward earnings expectations. Forward earnings estimates are optimistic and well above their long-term historical logarithmic growth trend. While such deviations existed previously, they were usually close to the point where such optimism ended. The ends of those exuberant periods of earnings growth generally coincided with a recession or a mean-reverting event. However, while estimates are currently very elevated, they can remain that way longer than you think possible.

The timing of an event that reverses extreme speculation is always the most challenging part. However, as discussed this past week, credit spreads can provide us vital clues as to a shift in sentiment that has not yet become apparent in the equity markets. To wit:

"Watching spreads provide insights into the health of the corporate sector, which is a major driver of equity performance. When credit spreads widen, they often lead to lower corporate earnings, economic contraction, and stock market downturns. Widening credit spreads are commonly associated with increased risk aversion among investors. Historically, significant widening of credit spreads has foreshadowed recessions and major market sell-offs. Here’s why:"

1. Corporate Financial Health: Credit spreads reflect investor views on corporate solvency. A rising spread suggests a growing concern over companies’ ability to service their debt. Particularly if the economy slows or interest rates rise.
2. Risk Sentiment Shift: Credit markets tend to be more sensitive to economic shocks than equity markets. When credit spreads widen, it typically indicates that the fixed-income market is pricing in higher risks. This is often a leading indicator of equity market stress.
3. Liquidity Drain: As investors become more risk-averse, they shift capital from corporate bonds to safer assets like Treasuries. The flight to safety reduces liquidity in the corporate bond market. Less liquidity potentially leads to tighter credit conditions that affect businesses’ ability to invest and grow, weighing on stock prices.

Given the exceptionally low spread between corporate and treasury bonds, the bull market remains healthy, so extreme speculation is being rewarded. However, as shown below, such periods ALWAYS end.

"While there are several credit spreads to monitor, the high-yield (or junk bond) spread versus Treasury yields is considered the most reliable. That spread has been a reliable predictor of market corrections and bear markets. The high-yield bond market consists of debt issued by companies with lower credit ratings. Such makes them more vulnerable to economic slowdowns. As such, when investors become concerned about economic prospects, they demand significantly higher returns to hold these riskier bonds. When that happens, the spreads widen warning of increasing risks.

Historically, sharp increases in the high-yield spread have preceded economic recessions and significant market downturns, giving it a high degree of predictive power. According to research by the Federal Reserve and other financial institutions, the high-yield spread has successfully anticipated every U.S. recession since the 1970s. Typically, a widening of this spread by more than 300 basis points (3%) from its recent low has been a strong signal of an impending market correction."

As investors, we suggest monitoring the high-yield spread closely because it tends to be one of the earliest signals that credit markets are beginning to price in higher risks. Unlike stock markets, which can often remain buoyant due to short-term optimism or speculative trading, the credit market is more sensitive to fundamental shifts in economic conditions.

The current bullish sentiment will continue to push asset markets higher in the near term. However, extreme speculation like we are seeing in various areas of the market will eventually end, and likely end badly for most. The timing of the event is the most difficult part.

How We Are Trading It

That brings us to what we stated last week:

"With this in mind, we suggest focusing on what is important to you: your specific goals, risk tolerance, and time frames, and conservatively growing your savings to outpace inflation. This is why we always focus on risk management. Greater returns are generated from managing “risks” rather than attempting to create returns. Although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.

We can’t control outcomes; the most we can do is influence the probability of specific outcomes. Thus, managing risks daily and investing based on probabilities rather than possibilities is vital to capital preservation and investment success over time."

Continue to take small actions to manage your portfolio risk over time.

1. Build a diversified portfolio and adjust based on evidence, not fear.
2. Keep perspective,
3. Focus on your financial goals and;
4. Communicate with your financial advisor to remain steady amid uncertainty.

Yes, you may miss out on some of the gains to the upside. However, I assure you that at some point in the future, articles will be written about the devastating losses taken by those who speculated in the market.

It is a story as old as time itself, and this time will not be different.

Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today's volatile markets.

Have a great week.

Research Report

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Bull Bear Report Market Statistics & Screens

SimpleVisor Top & Bottom Performers By Sector

S&P 500 Weekly Tear Sheet

Relative Performance Analysis

Last week, we noted that Energy, Financials, Real Estate, Staples, and Mid-Caps are overbought, so a rotation to Bonds and Healthcare this coming week would be unsurprising. That occurred this past week. However, while Energy and Technology lagged, the rest of the market pushed further into overbought territory. Nonetheless, as noted at the outset of this week's report, the end of November tends to trade bullishly, so the move was unsurprising. The good news is that the first 5-days of December tend to also be bullish for stocks, so we suggest remaining weighted to equities. However, with the market overbought, expect some sloppy trading heading into Mutual Fund distributions next week.

Technical Composite

The technical overbought/sold gauge comprises several price indicators (R.S.I., Williams %R, etc.), measured using "weekly" closing price data. Readings above "80" are considered overbought, and below "20" are oversold. The market peaks when those readings are 80 or above, suggesting prudent profit-taking and risk management. The best buying opportunities exist when those readings are 20 or below.

The current reading is 85.87 out of a possible 100.

Portfolio Positioning "Fear / Greed" Gauge

The "Fear/Greed" gauge is how individual and professional investors are "positioning" themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, the more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: The Fear/Greed Index measures risk from 0 to 100. It is a rarity that it reaches levels above 90. The current reading is 81.38 out of a possible 100.

Relative Sector Analysis

Most Oversold Sector Analysis

Sector Model Analysis & Risk Ranges

How To Read This Table

• The table compares the relative performance of each sector and market to the S&P 500 index.
• "MA XVER" (Moving Average Crossover) is determined by the short-term weekly moving average crossing positively or negatively with the long-term weekly moving average.
• The risk range is a function of the month-end closing price and the "beta" of the sector or market. (Ranges reset on the 1st of each month)
• The table shows the price deviation above and below the weekly moving averages.

Last week, we suggested that the recent correction set the market up to rally into the Thanksgiving holiday. That occurred with the market hitting record highs on Friday. With that rally behind us, which could continue early next week, it should be noted that most sectors and markets are overbought. Therefore, the upside may remain limited, and a rotation to underperforming market areas, like Bonds, Gold, and Gold Miners, is possible. Overall, the market is very bullish, with every sector and market, except Energy, on a bullish buy signal. Maintain exposure heading into year-end and expect another patch of sloppy trading in the second and third week of December.

Weekly SimpleVisor Stock Screens

We provide three stock screens each week from SimpleVisor.

This week, we are searching for the Top 20:

• Relative Strength Stocks
• Momentum Stocks
• Fundamental & Technical Strength W/ Dividends

(Click Images To Enlarge)

RSI Screen

Momentum Screen

Fundamental & Technical Screen

SimpleVisor Portfolio Changes

We post all of our portfolio changes as they occur at SimpleVisor:

No Trades This Week

Lance Roberts, C.I.O., RIA Advisors

Have a great week!

The post Extreme Speculation Has Returned appeared first on RIA.

In a recent Commentary- MicroStrategy Is A Leveraged ETF In Disguise - we discussed the company's business model, which revolves almost entirely around highly speculative bitcoin and leverage. To wit:

So, what is MicroStrategy? It’s a leveraged Bitcoin fund disguised as a non-profit technology company.

Regarding leverage and speculation, we also recently discussed the surging use of options, particularly those with short time frames. Options employ significant leverage. Thus, record options volume, especially in calls with short periods until expiration, is another sign that speculation is rising.

In addition to the two examples of growing leverage and market speculation, we see surging volume in leveraged single-stock ETFs. An example of such an ETF is Granite Shares NVDL. The ETF offers a 2x leveraged holding of Nvidia shares. If Nvidia falls by 3%, the ETF will decline by 6%. Conversely, if Nvidia rises by 5%, the ETF will climb 10%. Accordingly, leveraged single-stock ETFs can be incredibly speculative. Furthermore, the massive surge in volume in such ETFs, as we share below, further confirms speculative behaviors are growing.

Leverage and speculation can drive markets higher than most investors forecast. However, in the process, they create a divergence between fundamentals and valuations, thus exposing the markets to risk. Increased leverage and speculation are not reasons to sell immediately, but they indicate that markets are getting frothy, warranting our close attention.

What To Watch Today

Earnings

• No notable earinngs releases.

Economy

Market Trading Update

In yesterday’s update, we touched on the recent surge in small and mid-cap stocks. At the same time, the large-cap index finally pushed through the 6000 level, and momentum continued. With the market getting short-term overbought, it is possible we could see a bit of a pullback before a year-end push to close above 6000. However, with the market already up 24%+ this year, I am not sure it makes much of a difference one way or the other.

Currently, the market is on a bullish push higher, but short-term market conditions are becoming more overbought. Notable, the MACD “sell signal” is reversing to a “buy,” which could help push prices higher in the near term. With that said, the upside is likely limited momentarily due to the deviation from 50-DMA, but those deviations can become more stretched, particularly at this time of the year when trading volume is light and volatility tends to increase. It is still advisable to remain weighted to equity risk for now, but don’t be surprised if we see some sloppy trading between Friday and the first week of December.

Insiders Are Selling, Should You?

A recent article in the Financial Times sheds a concerning light on U.S. corporate executives. Per the Financial Times:

Record numbers of US executives are selling shares in their companies, as corporate insiders from Goldman Sachs to Tesla and even Donald Trump’s own media group cash in on the stock market surge that has followed his election victory.

The rate of so-called insider sales has hit a record high for any quarter in two decades, according to VerityData. The sales, by executives at companies in the Wilshire 5000 index, include one-off profit-taking transactions as well as regular sales triggered by executives’ automatic trading plans. The Wilshire 5000 is one of the broadest indices of US companies.

Insiders sell stock for various reasons, many of which are unrelated to their company's prospects. Therefore, record selling is not necessarily a dire warning. However, given recent returns, high valuations, the growing use of leverage, and a generally highly speculative environment, insider sales are another warning that markets may underperform expectations in 2025.

In regards to correlating insider sales and market performance, Ben Silverman of VerityData shares the following from the Financial Times article:

Generally with selling, in terms of predictiveness, insiders are early by about two or three quarters,” he said. “As they start seeing froth in the market is when they try to generate liquidity more aggressively.

Credit Spreads: The Market's Early Warning Indicators

Credit spreads are critical to understanding market sentiment and predicting potential stock market downturns. A credit spread refers to the difference in yield between two bonds of similar maturity but different credit quality. This comparison often involves Treasury bonds (considered risk-free) and corporate bonds (which carry default risk). By observing these spreads, investors can gauge risk appetite in financial markets. Such helps investors identify stress points that often precede stock market corrections.

The chart shows the annual rate of change in the S&P 500 market index versus the yield spread between Moody’s Baa corporate bond index (investment grade) and the 10-year US Treasury Bond yield. Rising yield spreads consistently coincide with lower annual rates of return in the financial market.

READ MORE...

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The post Leverage And Speculation: Signs Of A Raging Bull Market appeared first on RIA.

Donald Trump nominated seasoned hedge fund manager Scott Bessent as the next Treasury Secretary. While the Treasury Secretary has many responsibilities, debt management is one of the most important. Therefore, given the recent scrutiny the bond market has been paying to high deficits and associated debt, Scott Bessent appears to be a timely appointment. Bessent appears to appreciate the bond market's concern, which helps explain why he immediately released his 3-3-3 rule. As the name suggests, the 3-3-3 rule has three components as follows:

• Cut the budget deficit to 3% of GDP by 2028
• Push GDP growth to 3%
• Pump out an extra 3 million barrels of oil per day

The bond market is cheering Bessent's selection and his 3-3-3 rule. Given the recent spate of excessive debt issuance, his hawkish views on government spending and managing budget deficits to 3% is welcome news. Moreover, boosting GDP growth to a steady 3% will raise taxes and reduce deficits. Lastly, his oil production goal will lower oil prices. The strong relationship between oil prices and inflation will help reduce yields, thus funding costs, on the margin. Our Tweet of the Day below highlights that the easiest way for Bissent to achieve the first bullet point of his 3-3-3 rule is to reduce Federal interest expense via lower interest rates. This is the lowest-hanging fruit and one he is likely to pursue early in his tenure.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we noted that after holding support at the 20-DMA for several days, the market gained some traction late in the week. That buying pressure is reversing the short-term MACD sell signal, which should allow the market to rally further this week. The market did rally yesterday on news of Scott Bessent's appointment as Treasury Secretary, which both the stock and bond markets liked. Regulatory reform, deficit reduction, and tax cuts are all economically friendly in the long term.

The election of Donald Trump and the various appointments pointing toward more deregulation fuel the rise in small and mid-cap stocks. As you know, we recently added a position to both our equity and ETF models. Currently, that trade is a bit ahead of itself is significantly deviated from long-term moving averages, and is overbought on a relative strength basis. While we think that small and mid-cap companies may continue to get bids, there are a lot of losses in those markets that could be harvested during the first couple of weeks of December. We will look to add to our current position on a pullback as mutual funds harvest losses and make their annual distributions.

The weekly chart below of the iShares Russell 2000 index ETF (IWM) remains bullish-biased after breaking out to new highs from the 2022 peak. While small and mid-cap stocks have underperformed their large-cap brethren, we should expect some flows to continue into early 2025. There is risk in this sector due to the lack of profitability in about 40% of companies, but the bullish setup remains for now.

China Backs The U.S. Dollar

The same media pundits arguing for the dollar's death now claim that China's new dollar-denominated debt issuance will introduce a new world financial order. China issued $2 billion of a U.S. dollar-dollar bond in Saudi Arabia. The bond was well subscribed to and at interest rates similar to those in the U.S.

The bonds were 20x oversubscribed, meaning there was $40 billion of interest. We don't know at what rate the interest was and from whom. We suspect China directly or indirectly provided many bids to give the appearance of a robust auction. Yes, the interest rate is in line with U.S. rates. However, the bond was "only" $2 billion. The U.S. issues about $2.5 trillion of securities a month. Assessing rates based on a tiny bond is insane. If China were to approximate U.S. issuance, the rate would be much higher than Treasury rates, and they would struggle to find buyers to fulfill such a need.

It is also critical to mention that this debt issuance is not a new strategy and only represents about 1% of the total debt in foreign currencies. Per Wikipedia:

As of March 2024, China's total external debt stood at approximately $2.51 trillion, with U.S. dollar-denominated debt comprising a significant portion. Specifically, 80% of China's foreign debt was denominated in U.S. dollars, 6% in euros, and 4% in Japanese yen.

Lastly, many countries issue debt in dollars rather than their home currency because they need dollars for global trade. While the fearmongers claim the end of the dollar is approaching, China's debt issuance only strengthens the dollar.

The Banks Are The Hottest Sector Since The Election

Since Donald Trump was elected President on November 5th, the financial sector has been on fire. The first table below, courtesy of SimpleVisor, shows that the financial sector (XLF) has outperformed the S&P 500 by over 5% since the election. During the same period, healthcare stocks (XLV) underperformed by a similar amount.

The over and underperformance shows up clearly in the SimpleVisor Absolute and Relative sector analysis in the second graphic. XLF is now grossly overbought from a relative and absolute perspective, while the opposite holds for healthcare. The third table highlights that the banks are largely responsible for the great performance of the financial sector. Non-banks like Visa, Mastercard, Berkshire, and S&P Global have near-zero absolute and relative scores compared to the market.

The relationship between financials and healthcare is approaching three standard deviations. Therefore, a change in the relative performance between the two is becoming likely. To appreciate which stocks are most vulnerable to a rotation, SimpleVisor allows users to run the relative and absolute scores for the top ten holdings, as we do in the third graphic. Not shown, Thermo Fisher and Eli Lily are the two most oversold healthcare stocks.

Tweet of the Day

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If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post The 3-3-3 Rule appeared first on RIA.

Credit spreads are critical to understanding market sentiment and predicting potential stock market downturns. A credit spread refers to the difference in yield between two bonds of similar maturity but different credit quality. This comparison often involves Treasury bonds (considered risk-free) and corporate bonds (which carry default risk). By observing these spreads, investors can gauge risk appetite in financial markets. Such helps investors identify stress points that often precede stock market corrections.

The chart shows the annual rate of change in the S&P 500 market index versus the yield spread between Moody's Baa corporate bond index (investment grade) and the 10-year US Treasury Bond yield. Rising yield spreads consistently coincide with lower annual rates of return in the financial market.

Another measure we watch is the spread between corporate "junk" bonds (BB), often referred to as "high yield," to the "risk-free" rate of U.S. Treasury bonds.

The "Junk to Treasury bond" spread provides signals of market stress or impending market corrections. The reason is that if you are buying bonds that have a high risk of default (aka "junk bonds"), you should be paid a premium for the risk that is undertaken relative to the "risk-free" rate offered by U.S. Treasury bonds. The spread identifies when investors are willing to speculate in the markets and forgo the "risk premium."

As shown, this has typically not ended well, which is why understanding credit spreads is important to investing outcomes.

Why Credit Spreads Matter

Many financial prognosticators on YouTube and other media suggest that an imminent crash is coming. This is understandable, given the substantial advance over the last two years. But just because the market has increased significantly doesn't mean a crash is imminent. As Carson Research pointed out recently, the current advance following the 2022 correction is relatively young regarding months of advance. However, 1966, 1970, and 2020 show a reversion after a two-year advance is not out of the question.

However, credit spreads can greatly assist in determining the risk of a correction or bear market.

Credit spreads reflect the perceived risk of corporate bonds compared to government bonds. The spread between risky corporate bonds and safer Treasury bonds remains narrow when the economy performs well. This is because investors are confident in corporate profitability and are willing to accept lower yields for higher risks. Conversely, during economic uncertainty or stress, investors demand higher yields for holding corporate debt, causing spreads to widen. This widening often signals investors are growing concerned about future corporate defaults, which could indicate broader economic trouble.

The two charts above show that credit spreads are essential for stock market investors. Watching spreads provide insights into the health of the corporate sector, which is a major driver of equity performance. When credit spreads widen, they often lead to lower corporate earnings, economic contraction, and stock market downturns.

Widening credit spreads are commonly associated with increased risk aversion among investors. Historically, significant widening of credit spreads has foreshadowed recessions and major market sell-offs. Here’s why:

1. Corporate Financial Health: Credit spreads reflect investor views on corporate solvency. A rising spread suggests a growing concern over companies' ability to service their debt. Particularly if the economy slows or interest rates rise.
2. Risk Sentiment Shift: Credit markets tend to be more sensitive to economic shocks than equity markets. When credit spreads widen, it typically indicates that the fixed-income market is pricing in higher risks. This is often a leading indicator of equity market stress.
3. Liquidity Drain: As investors become more risk-averse, they shift capital from corporate bonds to safer assets like Treasuries. The flight to safety reduces liquidity in the corporate bond market. Less liquidity potentially leads to tighter credit conditions that affect businesses’ ability to invest and grow, weighing on stock prices.

Given the exceptionally low spread between corporate and treasury bonds, the bull market remains healthy.

The Most Important Credit Spread: High-Yield vs. Treasury Spread

While there are several credit spreads to monitor, the high-yield (or junk bond) spread versus Treasury yields is considered the most reliable. That spread has been a reliable predictor of market corrections and bear markets. The high-yield bond market consists of debt issued by companies with lower credit ratings. Such makes them more vulnerable to economic slowdowns. As such, when investors become concerned about economic prospects, they demand significantly higher returns to hold these riskier bonds. When that happens, the spreads widen warning of increasing risks.

Historically, sharp increases in the high-yield spread have preceded economic recessions and significant market downturns, giving it a high degree of predictive power. According to research by the Federal Reserve and other financial institutions, the high-yield spread has successfully anticipated every U.S. recession since the 1970s. Typically, a widening of this spread by more than 300 basis points (3%) from its recent low has been a strong signal of an impending market correction.

Key Historical Examples:

• 2000 Dot-Com Bubble: Before the tech bubble burst, the high-yield spread began widening in early 2000, warning of increased corporate credit risk. As the spread expanded, the stock market declined steeply later that year.
• 2007–2008 Financial Crisis: The high-yield spread widened significantly as early as mid-2007, well before the 2008 stock market crash. Investors recognized the growing credit risk among corporations, particularly in the financial sector, which eventually led to the Great Recession.
• 2020 COVID-19 Crash: As the global economy ground to a halt, the high-yield spread soared in early 2020, anticipating the severe stock market correction that followed in March.

I reconstructed the chart above to show the Treasury Bond to Junk Bond (BB) spread versus the annual rate of change in the market. The spread between Treasury and "high yield" bonds rose before significant market corrections. Currently, that spread shows no sign that the risk of a more severe market correction is prevalent.

As investors, we suggest monitoring the high-yield spread closely because it tends to be one of the earliest signals that credit markets are beginning to price in higher risks. Unlike stock markets, which can often remain buoyant due to short-term optimism or speculative trading, the credit market is more sensitive to fundamental shifts in economic conditions.

A significant increase in the high-yield spread typically suggests that:

• Corporate earnings may decline: Companies with lower credit ratings may struggle to refinance debt at favorable rates, leading to lower profitability.
• Economic growth is slowing: A widening spread often reflects concerns that the economy is heading for a slowdown, which can lead to reduced consumer spending, lower business investment, and weaker job growth.
• Stock market volatility may rise: As credit conditions tighten, investor risk appetite tends to decrease, resulting in higher volatility in equity markets.

What This Means for Your Portfolio

If the high-yield spread does start to widen, it may be time to reassess your portfolio's risk exposure. Consider the following steps:

• Reduce exposure to high-risk assets: This includes speculative stocks and high-yield bonds, likely to be hit the hardest in a downturn.
• Increase exposure to defensive assets: Treasury bonds, gold, and other sectors like utilities and consumer staples may offer protection in a volatile market.
• Review liquidity needs: Ensure your portfolio has enough liquidity to weather market stress without selling assets at unfavorable prices.

While bear market and crash predictions generate headlines, clicks, and views, most perennial calls continue to be wrong, leading investors to miss out on generating investment gains. Instead of listening to generally incorrect market analysis, credit spreads, particularly the high-yield spread versus Treasuries, are critical indicators for predicting stock market downturns. Historically, they have been a reliable early warning signal of recessions and bear markets.

However, there is no evidence that a "bear is on the prowl."

When spreads do widen, we will certainly let you know.

Stay ahead of the market by regularly monitoring credit spreads and other key financial indicators. For more in-depth analysis and tailored investment advice, visit RealInvestmentAdvice.com to ensure your portfolio is prepared for any market environment.

The post Credit Spreads: The Markets Early Warning Indicators appeared first on RIA.

Since the election, Bitcoin has risen nearly 50%. While Bitcoin investors are licking their chops, believing the magnificent rally will continue, they need to realize that Bitcoin is entering a period of pronounced seasonal volatility. The graph below from Sentimentrader shows that the recent performance has tracked the typical performance for the time of year. However, as they highlight with the green line, the recent gains may fade, and volatility in Bitcoin may pick up. The lower graph highlights that Bitcoin's RSI is very extended. The prior three times it was as overbought resulted in a pause to the sharp rate of assent in Bitcoin. Sentimentrader sums it up nicely in their quote below:

Is it time to lock in some profits on Bitcoin? Who could say for sure? But this rally does seem to be reaching the “Gosh, it sure is easy to make a ton of easy money” stage. That stage usually doesn’t last forever.

To further support their comment about bitcoin being in the "easy money" stage of a rally, please see our Tweet of the Day at the bottom of this Commentary.

What To Watch Today

Earnings

Economy

Market Trading Update

Last week, we discussed the impact of the Trump Presidency on the financial markets based on expectations of tax cuts, tariffs, and deregulation. Since then, the "Trump Trade" went into full swing, pushing the markets higher; however, as we noted, that trade had gotten a bit ahead of itself, and we saw some consolidation and profit-taking that reverted the market to the 20-DMA. Such is unsurprising given the overbought conditions with a more extreme deviation from the 50-DMA. However, the market recovered somewhat this past week, with buyers entering and reversing early morning market declines.

Notably, after holding support at the 20-DMA for several days, the market finally gained some traction late in the week. That buying pressure is reversing the short-term MACD sell signal which should allow the market to rally further next week.

That action aligns with Friday's Daily Market Commentary, wherein we noted the market seemed to be setting itself up for a pre and post-holiday trading bump into the end of the month. To wit:

"The good news is that we just past the normal “weak” period for the market in November. While not always the case, on average, the market trends to trade better the week before and after the Thanksgiving holiday. If that turns out to be the case again this year, a retest of recent highs at 6000 seems likely."

While the trade into month-end tends to be positive, we expect to see another patch of weakness in early December as mutual funds complete their annual distributions. However, post that weakness, the bullish bias remains into year-end as professionals window dress their portfolios for year-end reporting.

If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly.

While there is no reason to be bearish, this does not mean you should abandon risk management.

The Week Ahead

For a holiday-shortened week, there is a good amount of economic data to watch for. On Wednesday, the BEA will release the PCE prices index. This Fed-preferred measure of inflation is expected to rise by 0.2%, equating to a 2.2% year-over-year rate. In addition, personal income and spending data are due on Wednesday. The Chicago Fed National Activity Index (CFNAI) will be released on Monday. The CFNAI is a broad measure of economic activity using 84 data points.

In addition to the economic data are the minutes from the last FOMC meeting, which is due Tuesday afternoon. As previously noted, we are looking for signals that the Fed is watching liquidity more closely as its RRP program moves toward zero. Such concerns may appear in a discussion of overnight repo rates or potential changes to its QT program.

The markets will close early on Friday due to the holiday.

"Trumpflation" Risks Are Likely Overstated

With the re-election of President Donald Trump, the worries about tariffs and pro-business policies sparked concerns of “Trumpflation.” Inflation has been a top concern for policymakers, businesses, and everyday consumers, especially following the sharp price increases experienced over the past few years. However, growing evidence shows inflationary pressures continue to ease significantly, paving the way for lower interest rates. The question is whether policies in consideration by the next Presidential administration will lead to “Trumpflation” or not.

READ MORE...

Tweet of the Day

“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.”

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

The post Bitcoin Is Entering Volatility Season appeared first on RIA.

Inside This Week's Bull Bear Report

• Market Forecasts Are Very Bullish
• How We Are Trading It
• Research Report -Trumpflation Risks Likely Overstated
• Youtube - Before The Bell
• Market Statistics
• Stock Screens
• Portfolio Trades This Week

A Holiday Rally Is Likely

Last week, we discussed the impact of the Trump Presidency on the financial markets based on expectations of tax cuts, tariffs, and deregulation. Since then, the "Trump Trade" went into full swing, pushing the markets higher; however, as we noted, that the trading had gotten a bit ahead of itself, and we saw some consolidation and profit-taking that reverted the market to the 20-DMA. Such is unsurprising given the overbought conditions with a more extreme deviation from the 50-DMA. However, the market recovered somewhat this past week, with buyers entering and reversing early morning market declines.

Notably, after holding support at the 20-DMA for several days, the market gained some traction late in the week. That buying pressure will likely reverse the short-term MACD sell signal, allowing the market to rally further next week.

That action aligns with Friday's Daily Market Commentary, wherein we noted the market seemed to be setting itself up for a pre and post-holiday trading bump into the end of the month. To wit:

"The good news is that we just passed the normal “weak” period for the market in November. While not always the case, on average, the market trends to trade better the week before and after the Thanksgiving holiday. If that turns out to be the case again this year, a retest of recent highs at 6000 seems likely."

While the trade into month-end tends to be positive, we expect to see another patch of weakness in early December as mutual funds complete their annual distributions. However, post that weakness, the bullish bias remains into year-end as professionals window dress their portfolios for year-end reporting.

If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly.

While there is no reason to be bearish, this does not mean you should abandon risk management. As we will discuss this week, the market forecasts for 2025 are exceedingly optimistic.

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Market Forecasts Are Very Bullish

It's that time of year when Wall Street analysts begin trotting out their predictions for where the S&P 500 index will be by the end of the coming year. As is always the case, these market forecasts are ALWAYS higher, and this year is no exception

Goldman Sachs and BMO have already forecasted that the market will rise to 6500 and 6700, respectively, by the end of 2025. However, one of the more interesting market forecasts came from long-time bear Michael Wilson of Morgan Stanley. This past week, he matched Goldman's forecast of 6500 as a base case with a bullish case of 7400. That is interesting because Michael Wilson has been a long-time market bear.

His basis for that call was quite interesting:

"A potential rise in corporate animal spirits post the election (as we saw following the 2016 election) could catalyze a more balanced earnings profile across the market in 2025." 

If you don't understand the importance of "animal spirits," we discussed this in detail concerning Yardeni's recent prediction of S&P 10000 by the end of the decade:

"The term Animal Spirits” comes from the Latin term “spiritus animals,” meaning “the breath that awakens the human mind. Its modern usage came about in John Maynard Keynes’ 1936 publication, “The General Theory of Employment, Interest, and Money.” He used the term to describe the human emotions driving consumer confidence. Ultimately, the financial markets adopted the “animal spirits” to describe the psychological factors that drive investors to take action. This is why human psychology is essential in understanding the close linkage to short-term valuation measures.

Note that this has nothing to do with underlying fundamentals; it is purely "sentiment" or "hope" that things will improve. However, as investors, we must focus on the ultimate driver of market prices over time: earnings. Three very obvious facts about earning growth currently should concern investors heading into next year.

First, as noted in last week's Bull Bear Report, valuations on both a forward and trailing basis are significantly elevated. While this does NOT mean the market is about to crash, it does suggest that earnings have not kept up with investor's expectations. The problem with elevated valuations is the risk an event occurs that causes investors to realign expectations with actual reality.

Secondly, earnings expectations, which support Wall Street's market forecasts, are very optimistic.

Lastly, the equity risk premium currently suggests that investors are not getting "paid" for the risk they are taking. We last saw equity risk premiums at these levels heading into the "Dot.com" bubble.

Let me reiterate that none of this data suggests a market crash is imminent. However, investors should be aware that given the current market conditions, the risk of disappointment in the future is much greater today than it was just two years ago.

The Historical Problem Of Analyst Market Forecasts

Here is the critical question for investors: "If the market is priced based on future earnings expectations, then how reliable are those estimates?" The chart below is from Yardeni Research and shows the evolution of earnings forecasts over time. You will notice that analysts' initial forecasts were wrong in almost every case.

In other words, if you bought stocks at the beginning of virtually every analyst's annual forecast, based on the assumption that earnings would grow, you overpaid for investments virtually every given year. However, in most cases, you make money anyway, so why worry about it?

The reason to worry is that over-estimation eventually leads to reverting events.

The biggest single problem with Wall Street today and in the past is the consistent disregard for the possibilities of unexpected, random events. In a 2010 study by the McKinsey Group, they found that analysts have been persistently overly optimistic for 25 years. During the 25-year time frame, Wall Street analysts pegged earnings growth at 10-12% a year when, in reality, earnings grew at 6%, which, as we have discussed in the past, is the economy's growth rate.

This is why using forward earnings estimates as a valuation metric is so incredibly flawed—the estimates are always overly optimistic.

As the McKenzie study noted, on average, “analysts’ forecasts have been almost 100% too high,” which leads investors to make much more aggressive bets in the financial markets. 

With valuations elevated, why are analysts once again pushing more optimistic forecasts?

Why Are Analysts Always So Optimistic?

It's a great question.

Wall Street is a group of highly conflicted marketing and PR firms. Companies hire Wall Street to “market” for them so that their stock prices will rise, and with executive pay tied to stock-based compensation, you can understand their desire. The chart below is from the survey conducted by WSJ researchers, showing the main factors that play into analysts' compensation. What analysts are “paid” to do is quite different from what retail investors “think” they do.

If analysts are bearish on the companies they cover, their access to information about them is cut off. This reduces fees from the company to the Wall Street firm, hurting their revenue. Furthermore, Wall Street has to have a customer to sell their products to—you.

Talk about conflicted. Just ask yourself why Wall Street spends billions of dollars each year in marketing and advertising just to keep you invested at all times.

Since optimism is what sells products, it is not surprising, as we head into 2025, to see Wall Street’s average expectation ratcheted up another 7.5% this year. Of course, comparing your portfolio to the market is often a mistake anyway. Unsurprisingly, earnings have grown at 7.5% over the last 70 years because the companies that make up the stock market reflect real economic growth. Stocks cannot outgrow the economy in the long term. 

“Since 1947, earnings per share have grown at 7.7% annually, while the economy expanded by 6.40% annually. That close relationship in growth rates should be logical, particularly given the significant role that consumer spending has in the GDP equation.”

This correlation is more apparent when looking at corporate profits as a percentage of GDP versus stock prices.

With future earnings already being revised lower for 2025, as seen below, and corporate profitability at risk due to less government stimulus and fiscal support, the risk of current market forecasts being overly optimistic is likely elevated.

The Headwinds In 2025

The problem with current forward estimates is that several factors must exist to sustain historically high earnings growth and record corporate profitability.

1. Economic growth must remain more robust than the average 20-year growth rate.
2. Wage and labor growth must reverse (weaken) to sustain historically elevated profit margins.
3. Both interest rates and inflation need to decline to support consumer spending.
4. Trump's planned tariffs will increase costs on some products and may not be fully offset by replacement and substitution.
5. Reductions in Government spending, debt issuance, and the deficit subtract from corporate profitability (Kalecki Profit Equation).
6. Slower economic growth in China, Europe, and Japan reduces demand for U.S. exports, slowing economic growth.
7. The Federal Reserve maintaining higher interest rates and continuing to reduce its balance sheet will reduce market liquidity.

You get the idea. While analysts are currently very optimistic about economic and earnings growth going into 2025, there are risks to those forecasts. For example, on December 7th, 2021, we wrote an article about the predictions for 2022.

“There is one thing about Goldman Sachs that is always consistent; they are ‘bullish.’ Of course, given that the market is positive more often than negative, it ‘pays’ to be bullish when your company sells products to hungry investors. It is important to remember that Goldman Sachs was wrong when it was most important, particularly in 2000 and 2008.

However, in keeping with its traditional bullishness, Goldman’s chief equity strategist David Kostin forecasted the S&P 500 will climb by 9% to 5100 at year-end 2022. As he notes, such will “reflect a prospective total return of 10% including dividends.”

The problem, of course, is that the S&P 500 did NOT end the year at 5100.

While analysts are currently rushing to “out-predict” the other guys, it is worth noting:

• Markets are pushing historic levels of extreme overbought conditions,
• 2nd highest level of valuation on record,
• Extreme deviations from long-term growth trend lines,
• Investor sentiment and confidence pushing extreme bullishness, and
• Investors fully committed to the market with low levels of cash.

In other words, after 15 straight years of a bull market advance, The “risk” of something derailing continued optimistic expectations has risen significantly.

While the odds of a positive year in 2025 are more or less balanced, one should not dismiss the potential for a decline. With the current market already well advanced, pushing more extreme overvaluations, and significant deviations from long-term means, the risk of a decline is not minuscule.

How We Are Trading It

With this in mind, we suggest focusing on what is important to you: your specific goals, risk tolerance, and time frames, and conservatively growing your savings to outpace inflation.

This is why we always focus on risk management. Greater returns are generated from managing “risks” rather than attempting to create returns. Although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.

Another benefit of acknowledging uncertainty is it keeps you honest.

“A healthy respect for uncertainty and focus on probability drives you never to be satisfied with your conclusions.  It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.”  – Robert Rubin

We can’t control outcomes; the most we can do is influence the probability of specific outcomes. Thus, managing risks daily and investing based on probabilities rather than possibilities is vital to capital preservation and investment success over time.

I read most mainstream analysts' predictions to gauge the “consensus.” This year, more so than most, the outlook for 2025 is universally, and to some degree exuberantly, bullish.

What comes to mind is Bob Farrell’s Rule #9, which states:

“When everyone agrees…something else is bound to happen.”

The real economy is not supportive of asset prices at current levels. The more extended prices become the greater the potential for a future market dislocation. For investors close to or in retirement, some consideration should be given to capital preservation over chasing potential market returns.

Will 2025 turn in another positive performance? Maybe. But, honestly, I don’t know.

As noted last week, the stock market reflects both challenges and opportunities. Therefore, we can take action to participate if the market continues its bullish trend but hedge against the risk of something going wrong.

1. Build a diversified portfolio and adjust based on evidence, not fear.
2. Keep perspective,
3. Focus on your financial goals and;
4. Communicate with your financial advisor to remain steady amid uncertainty.

While there is no reason to be bearish, this does not mean you should abandon risk management.

Feel free to reach out if you want to navigate these uncertain waters with expert guidance. Our team specializes in helping clients make informed decisions in today's volatile markets.

Have a great week.

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Bull Bear Report Market Statistics & Screens

SimpleVisor Top & Bottom Performers By Sector

S&P 500 Weekly Tear Sheet

Relative Performance Analysis

Last week, we noted that the previous post-election sell-off pushed most markets and sectors into oversold territory and would lead to a rally heading into and post-Thanksgiving. Such is what occurred last week as the market rallied off 20-DMA support. Energy, Financials, Real Estate, Staples, and Mid-Caps are overbought, so a rotation to Bonds and Healthcare this coming week would be unsurprising. Nonetheless, as noted at the outset of this week's report, the end of November tends to trade bullishly, so investors should remain allocated to equities for now.

Technical Composite

The technical overbought/sold gauge comprises several price indicators (R.S.I., Williams %R, etc.), measured using "weekly" closing price data. Readings above "80" are considered overbought, and below "20" are oversold. The market peaks when those readings are 80 or above, suggesting prudent profit-taking and risk management. The best buying opportunities exist when those readings are 20 or below.

The current reading is 90.34 out of a possible 100.

Portfolio Positioning "Fear / Greed" Gauge

The "Fear/Greed" gauge is how individual and professional investors are "positioning" themselves in the market based on their equity exposure. From a contrarian position, the higher the allocation to equities, the more likely the market is closer to a correction than not. The gauge uses weekly closing data.

NOTE: The Fear/Greed Index measures risk from 0 to 100. It is a rarity that it reaches levels above 90. The current reading is 80.41 out of a possible 100.

Relative Sector Analysis

Most Oversold Sector Analysis

Sector Model Analysis & Risk Ranges

How To Read This Table

• The table compares the relative performance of each sector and market to the S&P 500 index.
• "MA XVER" (Moving Average Crossover) is determined by the short-term weekly moving average crossing positively or negatively with the long-term weekly moving average.
• The risk range is a function of the month-end closing price and the "beta" of the sector or market. (Ranges reset on the 1st of each month)
• The table shows the price deviation above and below the weekly moving averages.

Last week, we suggested that the recent correction set the market up to rally into the Thanksgiving holiday. That started to occur on Thursday and Friday. While the market will likely rally a bit further this coming week, it should be noted that many sectors and markets are overbought. Therefore, the upside may remain limited, and a rotation to underperforming market areas, like Healthcare and Bonds, is likely. Overall, the market is very bullish, with every sector and market, except Energy, on a bullish buy signal. Maintain exposure heading into year-end and expect another patch of sloppy trading in the second and third week of December.

Weekly SimpleVisor Stock Screens

We provide three stock screens each week from SimpleVisor.

This week, we are searching for the Top 20:

• Relative Strength Stocks
• Momentum Stocks
• Fundamental & Technical Strength W/ Dividends

(Click Images To Enlarge)

RSI Screen

Momentum Screen

Fundamental & Technical Screen

SimpleVisor Portfolio Changes

We post all of our portfolio changes as they occur at SimpleVisor:

Nov 21st

Trade Alert – Equity & ETF Model

"This morning, we added half a percent to Ely Lilly (LLY) and reduced our exposure in the sector model to the SPDR Energy ETF (XLE) by 1%. After a significant run, Ely Lilly has been consolidating for almost a year. It is decently oversold and turning up on buy signals. We also added half a percent to Lilly on November 7th. We are reducing exposure to energy in the ETF model, which is overweight relative to the benchmark."

Equity Model

• Increase Ely Lilly (LLY) by 0.50% of the portfolio to a weight of 3.5% in total.

ETF Model

• Reduce SPDR Energy ETF (XLE) from 4% to 3% of the portfolio.

Lance Roberts, C.I.O., RIA Advisors

Have a great week!

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