December 2021

Greetings from warm and sunny Florida!

This will be somewhat abbreviated today, but I wanted to pass along a few quick thoughts about recent market action.

Rotation to Defense Continues

I wrote a very cautious ChartWatchers article over the weekend and nothing has really changed. Here are two S&P 500 charts that I included in that article, highlighting the relative strength of both aggressive and defensive sectors:

S&P 500 vs. Aggressive Sectors:

S&P 500 vs. Defensive Sectors:

This latest rally has definitely been about defense. The rally off the most recent bottom shows the defensive groups leading and the aggressive groups lagging. That doesn't guarantee us that this rally will fail, but it certainly brings the sustainability into question. As a trader, I grow very cautious with this development.

As the S&P 500 moves above 4800 for the first time in history, check out the sectors leading the advance:

Utilities (XLU) and consumer staples (XLP) are in the top 3 sectors. Technology (XLK) is one of three sectors in negative territory and not participating. Again, this guarantees us nothing, but I just wouldn't approach this market as bullish as the S&P 500 record high might suggest.

Keep Trailing Stops in Place

If you're trading the recent strength, I'd make sure I had trailing stops in place. If stocks that you've been trading have been printing higher highs and higher lows on a daily basis, you might consider raising your stop each day just beneath the prior day's low. That would simply be a disciplined approach to taking profits if the market begins to sell off again. Or possibly consider selling on strength if a key price, trendline, or moving average resistance is tested or approached. Many growth stocks are now trading beneath their 20-day EMAs, so a move up to test that moving average with a weak PPO makes sense. As an example, check out CrowdStrike (CRWD):

Failure at the 20-day EMA is always a concern, but when a potential warning sign is in place for all growth stocks, I'd rather be safe than sorry.

Value-Oriented Stocks are Leading

There's been very little interest in growth stocks on a relative basis, which is concerning as we head into 2022. Below are the charts of small cap growth vs. value ($DJUSGS:$DJUSVS) and mid cap growth vs. value ($DJUSGM:$DJUSVM):

Small cap growth vs. value:

Mid cap growth vs. value:

Until proven otherwise, it appears to me that the next move in both of these relative ratios is lower. If I'm right, that'll likely result in many growth stocks selling off. We do need to keep in mind that earnings season will kick off in the next few weeks, so large cap growth may already be starting a pre-earnings-related move higher. Large cap growth vs. value ($DJUSGL:$DJUSVL) remains in a relative uptrend dating back to the spring of 2021. If I felt compelled to own growth stocks, right now it'd likely be among the large cap growers.

Many of the value-oriented stocks reside in financials, industrials, and the defensive sectors. They present less risk in the near-term, in my opinion. They would make more sense trading in the short-term, simply to be more cautious.

I hope everyone is enjoying the holiday season with family and friends. I may or may not publish another Daily Market Report in 2021. If I don't, we'll be back to our regular schedule next week.

Happy trading!

Tom