3 Potential Stock Market Headwinds To Be Aware Of

January 25, 2021

I'm getting trolled more than I have in a long time. It's almost like people are mad at me for being as bullish of equities as we've been, and continue to be...

What's everyone so angry about? I don't understand.

Anyway, yes there are stocks we want to buy. Can some stocks go down? Sure. Does that change the fact that there are stocks we want to buy or own? No.

As far as potential headwinds for stocks go, I've got 3 pretty simple ones today.

First of all, February is historically one of the worst months of the year for stocks. Seasonally, the best 3 month period ends this week. Remember, "Welcome to the Best 3 Months of the Year?". Boy did that work out well.

So the way I see it, if stocks are going to come under some pressure, and it's going to be harder to find stocks that are going up, February would be a logical time for that to happen. In Post-Election years, it actually gets even worse. This from the Stock Traders' Almanac:

February’s post-election year performance since 1950 is miserable, ranking dead last for S&P 500, NASDAQ and Russell 2000. Average losses have been sizable: -1.5%, -3.3% and -1.6% respectively. February ranks tenth for DJIA in post-election years with an average loss of 1.1%. February 2001 and 2009 were exceptionally brutal. NASDAQ dropped 22.4% in February 2001, its third worst monthly loss ever."

Does that change the bigger underlying trends? No.

Meanwhile, who's been the leader this whole time? Not large-caps, that's for sure. See: The Stealth Correction

It's been Small-caps, which are just now reaching the 161.8% extension of the entire 2018-2020 bear market.

Again, if Small-caps are going to correct, this would be a logical place for that correction to start.

Is there any evidence that small-caps are about to sell-off? No.

Can the Russell2000 rip through these extension levels like they're not even there? Yes.

Does the market care what JC thinks? No.

Finally, from a more defensive perspective, my bet is that any meaningful correction in stocks will be accompanied by a bid in U.S. Treasury Bonds. If you're seeing $TLT above 155, that would likely mean that stocks are really under pressure and a much more defensive position is best:

You can see this 155 level acting as support in June, again in November, one last time in December, and then we broke down to start 2021.

That former support, should turn into resistance, meaning that $TLT should remain stuck below all of that broken support.

I put emphasis on "should" because if $TLT does not hold below 155 and this turns into a major failed breakdown, then a ripper in bonds and interest rates rolling over are to be expected. That will most likely be occurring in an environment where investors are being rewarded for selling stocks, not for buying them, even if only temporarily.

Again, we have yet to see any evidence of this occurring. None whatsoever. In fact, we've only seen the opposite: Breadth expansion, healthy Sector Rotation and consolidations in stocks regularly resolving higher, not lower.

When that changes, we'll act accordingly. But I see no reason to act just for the sake of acting.

People keep telling me that I'll get what I have coming to me when "the music stops", whatever that means.

Why can't we just short stocks when they start going down, instead of fighting trends for no reason.

Do you have a reason?

I don't.