Saturday , January 16 2021
Home / Bull Markets / Jump in SKEW, small caps, financials, and material stocks

Jump in SKEW, small caps, financials, and material stocks

Summary:
Jump in SKEW A wall of money continues to flow from market to market based on the popular narrative at the time. 6 months ago it was “tech does well under corona”, so everyone rushed headlong into tech stocks. Now it’s “vaccines are good for the economy”, so everyone is rushing into small caps. Result: small caps jumped higher today while the NASDAQ fell. In the meantime, SKEW‘s 3 week average continues to rise. SKEW measures the risk of a black swan event, so traders usually interpret high SKEW readings = bearish. In the past, such high readings were something to be concerned about, but didn’t always result in an immediate correction. October 2017: stocks rallied for another 3 months before VIX spiked and stocks fell. July 2018: stocks rallied for another 2 months before stocks

Topics:
Troy considers the following as important:

This could be interesting, too:

Troy writes Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

Troy writes Market Report: Will Markets Melt-Up before Melt-Down

Troy writes Will the stock market “bubble” last until spring?

Troy writes Bull case for commodities and ex-U.S. stocks in 2021

Jump in SKEW

A wall of money continues to flow from market to market based on the popular narrative at the time. 6 months ago it was “tech does well under corona”, so everyone rushed headlong into tech stocks. Now it’s “vaccines are good for the economy”, so everyone is rushing into small caps. Result: small caps jumped higher today while the NASDAQ fell.

In the meantime, SKEW‘s 3 week average continues to rise. SKEW measures the risk of a black swan event, so traders usually interpret high SKEW readings = bearish.

Jump in SKEW, small caps, financials, and material stocks

In the past, such high readings were something to be concerned about, but didn’t always result in an immediate correction.

  1. October 2017: stocks rallied for another 3 months before VIX spiked and stocks fell.
  2. July 2018: stocks rallied for another 2 months before stocks fell in Q4 2018.
  3. January 2020: stocks rallied for another 1.5 months before the crash in March.
  4. September 2020: stocks fell immediately.

Watch out for SKEW in the coming months.

Jump in small caps, financials, and material stocks

Small caps, financial stocks, and material stocks popped higher yesterday. 36% of the S&P 500 jumped above their upper Bollinger Bands:

Jump in SKEW, small caps, financials, and material stocks

In recent years this often led to short term pullbacks, but weren’t consistently bearish after that.

Jump in SKEW, small caps, financials, and material stocks

Similarly, a large % of financial stocks jumped above their upper Bollinger Bands:

Jump in SKEW, small caps, financials, and material stocks

Short term bearish, bullish over the next 6-12 months:

Jump in SKEW, small caps, financials, and material stocks

Here’s materials:

Jump in SKEW, small caps, financials, and material stocks

And here’s small caps:

Jump in SKEW, small caps, financials, and material stocks

Once again, this is just a short term concern:

Jump in SKEW, small caps, financials, and material stocks

Jump in SKEW, small caps, financials, and material stocks

Our market outlook & trading strategies

Here’s my market outlook based on 3 different time frames:

  1. Long term investors should be highly defensive right now. The bubble may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
  2. Medium term traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a bubble can end in disaster.
  3. Short term trend followers should continue to ride the bull wave because no one knows exactly when it will end. In a highly speculative environment like today, the most profitable traders are short term trend followers who trade markets with strong animal spirits. Animal spirits generate strong uptrends and downtrends. If you are a short term trend follower, you must have tight stops.
About Troy

Leave a Reply

Your email address will not be published. Required fields are marked *