@theMarket: Stocks Regain Momentum

What a difference one week makes! Stocks recouped all their losses this week, and then went on to make new highs. The outcome of President Biden's proposed stimulus bill will determine the market's next move.

 

Let me set the record straight. Last week, I wrote that I expected stocks to stumble, and hopefully preparing readers for a possible decline of 10-15 percent. That was a mistake. Instead, traders bought last week's 3 percent dip and, at this point, we are now back to square one. Well, not quite.

 

The U.S. dollar, the 10-Year U.S. Treasury Bond, and the price of gold have all moved substantially since last Friday. The greenback, as represented by the U.S. Dollar Index (DXY), has gained 1.22 percent. That may not sound like much, but in the world of currencies that is a big move. If it continues to gain momentum from here, we could see some of the biggest natural resources gainers in the market hit a brick wall.

 

As for interest rates, the yield on the 10-Year Treasury Bond is now hovering in the 1.14 percent-1.15  percent range. The rise in rates is a reflection of the current negotiations underway in Washington over the timing and amount of the latest stimulus package. Here's why.

 

There is a whole breed of bond market investors out there (called Bond Vigilantes), who are quick to buy or sell bonds based on how they interpret the government's monetary or fiscal policy moves will impact inflation. In this case, additional stimulus by the Biden Administration would be considered inflationary, so the Vigilantes are selling bonds. Remember, there is an inverse relationship between the price of bonds (which are going down) and their yield or interest rate. Prices down, rates up.

 

Commodities, and to some extent, emerging markets, could experience a bout of profit-taking if interest rates and the dollar continue to climb higher. Which brings us to precious metals, specifically gold and silver. This week, gold fell below $1,800 an ounce, since a stronger dollar and higher interest rates are like kryptonite to gold.

 

Normally, silver would have declined as well with its bigger brother. And it has, but not nearly by the same percentage points. You can thank the Reddit/Robin Hood traders for that. After their initial success with Game Stop, some retail speculators believe they can push the heavily shorted silver price higher by large and concerted purchases of the silver Exchange Traded Fund (SLV).

 

I doubt they will succeed, since silver is a huge global commodity that would require a heck of a lot of buying power to do more than move the silver price on a short-term basis. I would not recommend readers participate in this endeavor, although I do like silver for other reasons; but wait until the speculation subsides.  

 

We are halfway through earnings season and investors have been pleasantly surprised by the results. Initially, Wall Street was bracing for an average 10 percent decline in the numbers, but at this point, the shortfall overall is less than 1 percent.  Those results breed confidence in analysts' projections for this year, which are in the 20-25 percent-plus range right now.

 

Those expectations are based on the success of the U.S. vaccination program and the reopening of the economy. It is why I am bullish over the medium-term, even though I am still of the mind that somewhere ahead in this first quarter we will experience a pullback. On the upside, I could see the markets possibly approach the 3,950-4,000 level on the S&P 500 Index in a burst of irrational exuberance.

 

As the market climbs, I continue to advise investors to slowly-but-surely take some profits in those stocks where you have experienced outside gains. This is not market timing. This is common sense talking. You will be happy you did, if only because it will afford you an opportunity to buy the same, or different stocks at a cheaper price.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.