The large cap technology sector bounced back this week as bond yields fell. It is a see-saw market filled with several cross-currents. But if you want to know where stocks are going, keep your eyes focused on the U.S. Ten-Year Bond yield.

 

In my last column, I explained how rising bond yields are like kryptonite to the continued performance of what I call "super tech stocks." Over the last two weeks, the NASDAQ 100, for example, experienced a 10 percent-plus down draft, as bond yields rose to 1.60 percent from 1.25 percent. Investors sold FANG stocks, and technology shares in new-era sectors, like solar and electric vehicles, and bought old economy stocks, like in energy, financials, and cyclicals.

 

This week, that trade reversed somewhat as bond yields stopped rising, drifted lower, and seem to be stabilizing around 1.50 percent -- until Friday. While the S&P and Dow Indexes pulled back a little in response, NASDAQ dropped 1.5 percent. The question is whether the rate rise in yields is coming to an end, or will we see yet another backup in yields as investors become even more concerned over future inflation.

 

There is no reason why the yield on the "Ten Year" couldn't rise further, in my opinion, maybe as high as 1.80 percent to even 2 percent later in the year. After all, that was where yields were on the Ten Year just before the pandemic. What could drive yields higher? Inflation concerns.

 

I believe the Federal Reserve Bank Committee is expecting the inflation rate to hit their long-term target of 2 percent in the next few months. Fed Chairman, Jerome Powell, has already said they would be willing (and happy) to see that happen. That would be a textbook and natural occurrence in any recovering economy. But what the Fed expects, and what the markets are prepared for, may be two different things.

 

"As long as yields rise gradually, and not all at once," say the experts, then investors can and will adjust accordingly. That remains to be seen. In this world of instant price reactions and compressed time periods, I am not so sure "gradual" is in the dictionary of today's traders. To them, a 25-30 basis point rise in yields could mean the end of the world. I fear a mad exit for the door could occur all at once at some point. It is a possibility, so be on guard.

 

The good news is that the $1.9 trillion American Relief Bill passed in what amounted to a one-party rescue of the American people. Not one Republican voted for the rescue plan, despite the fact that between 65-80 percent of Americans approved of the plan. The ink was barely dry on President Biden's signature, however, before investor attention turned to the passing of a future infrastructure package.

 

Unlike the relief package, which was passed through the budget reconciliation process, an infrastructure bill of real substance would require bi-partisan support. If that turns out to be a non-starter, President Biden could still provide some money ($300 billion or so), but nothing like the $2 trillion that would be needed to really address the nation's decrepit highways, bridges, seaports, and airports.

 

An infrastructure bill would actually provide a needed stimulus to grow the economy, while providing a real need that is long overdue. But it would also take longer to thread its way throughout the economy and would require a year or two before we would really see the impact in the data.  

 

In any case, the prospect of such a bill will be enough to occupy investors' attention over the next few months. I suspect "infrastructure plays" will be bid up in anticipation of this potential government spending program. This happened four years ago, you may recall, when the Trump Administration announced their intentions to pass similar legislation. We all know that effort hit a brick wall, despite a Republican-held Congress and White House.

 

Today, with countries like China breathing down our necks, the U.S. is falling further and further behind in so many areas. We fiddle in bitter partisan politics, while the rest of the world plows ahead. A substantial infrastructure program would be a first step in stemming our economic slide.  

 

In any case, we have two weeks left of volatility, so use the time to employ any excess cash you may have on down days. I expect stocks to regain their luster in April, so hang in there.

 

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.

It was a rough week in the markets. Investors were whipsawed throughout the week and finished down once again. I expect more of the same for investors this month.

 

However, I don't expect stocks to go straight down, find a bottom and then rebound. This downdraft is occurring at about the same time that markets sold off last year, but I do not expect the kind of severe correction we suffered through then. Overall, I am anticipating a 10-15 percent decline as I mentioned last week. Actually, as of Friday (March 5, 2021) morning we have suffered a 6.3 percent decline from the top on the S&P 500 Index futures contract. The pullback, by the way, is long overdue. I am hoping it will flush out some of the speculation and froth that were rising to dangerous levels among certain stocks.

 

The small backup in interest rates we have been experiencing in the last three weeks has been an excuse for a sell-off, in my opinion, but not a reason to fear the future.  My evidence: we are on the cusp of an additional $1.9 trillion in fiscal stimulus, which may be passed by the Senate as early as this weekend. An even larger government spending program in infrastructure may also be in the offing in the coming months.

 

Of course, as I have been saying for a year, the key element to the future health and well-being of the economy, and the stock market, will be the country's battle to vanquish the coronavirus. Right now, thanks to the vaccination, and rapid distribution of the drugs by the present administration, that battle looks winnable in the months ahead.

 

But investors have not been waiting around for that to occur. A re-opening trade has been ongoing since the beginning of the year. Airlines, cruise lines, hotels, and casino stocks, among others, have all been gaining. That is an area where I would add some money in this pull back.

 

All my recommended natural resource plays have also been booming, led by energy. The bull market in commodities has a number of tailwinds that I believe will propel that sector even higher this year, but runaway inflation is not one of them. The present belief by a growing group of Wall Street analysts, namely that "inflation is here to stay so buy commodities" is too simple.

 

There is a big difference between expecting reflation (my opinion) and inflation, (or worse, hyperinflation). As global economies re-open, the demand for materials and other commodities should rise. If you throw in some supply chain issues and other pandemic-related conditions, sure, prices are going to rise, some substantially, but that is simply textbook economics. That doesn't automatically translate into an inflationary problem as so many are predicting.

 

It has been so long since we have had any real inflation, that there are investors out there that have never seen inflation in their professional careers. If you throw in the two-thirds of professional investors and traders who have also never experienced a rising interest rate environment, you have the makings of a perfect storm of inexperience, ineptitude, and chaos. I believe that is what we are witnessing in today's financial markets.

 

The Ides of March is actually on the 15th of this month and I expect to see a continuation of this chop fest at least until then, if not longer. The best declines are those that are sharp, short, straight down, and over before you know it. Unfortunately, I expect this correction to be different. There will be relief rallies like the pre-market 1  percent gains in the markets on Friday mornings followed by sharper down days. This kind of action should keep us all biting our nails, and if you attempt to trade it, emotionally exhausted and stressed out.  The time to take profits is in the past. Hopefully, you followed my advice last month and did just that, but it is still too early to employ those funds.

 

The good news is that once this month comes to a close, I expect stocks and the economy to explode in the third and fourth quarters. All we need do is get through this month.

 

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.

In the grand scheme of things, a small, upward blip in the yield of the U.S. 10-year Treasury bond should be of little concern to equity investors. But sometimes, when the conditions are ripe, even the tiniest spark can cause a conflagration within a speculative stock market.

 

As readers are aware, interest rates have been trading at historically low levels for some time. The onset of the coronavirus forced our Federal Reserve Bank to pin them even lower. Essentially, it is why the stock market has been having such a great run. Investors have been conditioned to just assume that, if anything, interest rates might trend even lower but not higher. However, during the last few weeks, the yield on the benchmark 10-year U.S. Treasury bond has been moving higher. Since the beginning of the year, it has gained roughly one-half percent. But real interest rates (minus the inflation rate) are still yielding nothing.

 

In just about every economic recovery, one should expect to see longer-term rates begin to rise somewhat. Economists have been arguing that a moderate rise in this benchmark bond's yield should be good news for the stock market. That may be true, but skittish investors — accustomed to low rates, for longer, and imbued with so much speculative fever — are finding it difficult to accept that concept.

 

Investors are concerned that all the stimulus that the government has poured into the economy, plus all the trillions of dollars that the Biden Administration is planning in the near future, will spark inflation. That, in turn, could force the Federal Reserve to raise interest rates and tighten monetary policy prematurely.

 

It doesn't matter that just this week, Federal Reserve Bank Chairman Jerome Powell, in testifying before Congress, once again reiterated that the central bank has no intention of doing that. In fact, he said just the opposite.  That calmed down investors for about a day, but it didn't last. Suddenly, the yield shot up to above 1.50 percent on the benchmark bond, and bond traders panicked. It was as if some magic level of interest rates was unearthed that would suddenly put an end to the entire economic recovery. The bears appear to be betting we are at the doorstep of that level.

 

It is the main reason why technology shares, especially the large-cap favorites, have been taking it on the chin all week. Higher rates are considered the "Achilles Heel" for that group. It is why the NASDAQ has suffered far greater declines than the S&P 500 Index this week. But these large cap companies are now also in so many equity indexes that investors cannot escape them. If stocks like Apple and Google decline, they will (and are) take the whole market down with them.

 

This week, we have seen the increasing volatility I have been expecting throughout the stock market. We have also seen another uptick in speculation, both to the upside and to the downside. Bitcoin has had some enormous swings, while gold has dropped to six-month lows. The U.S. dollar was first in a free fall and then soared higher. On top of all this, the Reddit/GameStop crew has returned with a vengeance.

 

For weeks, I have been advising readers to raise cash gradually while the markets climbed to new highs after new high. If you had followed my advice, you should have a nice pile of cash available at this point in the event that markets take a real tumble. That time could be almost upon us.  

 

As I write this, the markets are battling with an important technical level. A sustained move below 3,830-3,840 on the S&P 500 Index would signal to me that a correction is already unfolding. If so, my potential target would be around 3,550. It hasn't happened yet, but it could. In any event, whether it happens now or sometime in March, that correction is coming. Stay tuned.

 

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.

There was no contest this week. Cryptocurrencies took center stage as the stock market churned, chopped and gave investors a little indigestion. Welcome to the market's brave new world.

 

It appeared that Bitcoin was the answer to whatever ails you. Higher interest rates, the threat of higher inflation, weaker (or stronger) dollar, no problem just buy Bitcoin. By the end of this week, the crypto coin had chalked up a 15 percent gain and was trading above $52,000. Ethereum, Bitcoin's younger cousin, was also up 10 percent.

 

None of the financial market's usual suspects — stocks, bonds, or commodities — could come close to those kinds of gains. Detractors warn that the entire cryptocurrency run-up is just a fad and will end badly. Maybe so, but that didn't stop some of the largest institutions on Wall Street to at least consider investments in cryptocurrencies. And while Bitcoin soared, gold has plummeted.

 

Normally, in times of a weaker dollar and expectations of higher inflation ahead, gold would be soaring. As a result of price declines, traditional commodity analysts have been forced to adjust their bullish precious metals forecasts downward. The most common explanation given for this down draft is that Bitcoin has become the modern-age digital alternative to gold.

 

After all there is no need to pay storage costs, which you do for gold bullion; nor do investors need to worry about what central banks will do with their gold supplies. As for purchasing power, Bitcoin is accepted at some of the largest credit card companies in the world, as well as PayPal. You can even buy a Tesla with it, if you so desire.

 

Bitcoin is one reason, but not the only reason, why I wrote last month that although I expected most commodities to do well in 2021, gold was my least favorite among the group. Silver, platinum and copper, for example, are used in industry and are considered part of the re-opening trade. Rare earth metals, such as lithium, which are used in the manufacturing of electric batteries, should also see their prices continue to rise.

 

Oil has already performed well this year. The shutdown of almost 40 percent of the country's oil production this week, thanks to the deep freeze in Texas and the Mid-West, has resulted in what I suspect could be a short-term, "blow-off" top in oil and gas prices. But, longer-term, I expect energy prices to continue higher.

 

But what of equities? As we get closer to 4,000 on the S&P 500 Index, (if we actually get to that target) I expect to see more volatility in the markets. Right now, it is all about the stimulus package, which is expected to pass in early March. Will passage be a sell-on-the-news event?

 

You may have noticed by now that large cap tech continues to advance, but the real action is in small cap stocks. This is also part of my 2021 thesis. What has worked for investors over the last decade (think FANG stocks) may not perform as well this year. 

 

My advice for now is to hold tight, continue to take some profits when you can, and set that cash aside for the future. The next 100 points higher on the S&P 500 are not a sure thing, so be ready for some possible downside as we work our way towards the end of the month.

 

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.

 

One sure sign that stocks are getting overdone, is the actions of overconfident investors that bid up stocks in a euphoric frenzy, only to dump them at the first sign of trouble. These behavior patterns normally usher in a corrective stage in the stock market, but exactly when that will occur is anyone's guess.

 

Investopia's definition of froth "refers to a market condition where an asset's price begins to increase beyond its intrinsic value." Wall Street's "Reefer Madness" event this week is just such an example. Certain stocks in the Cannabis sector saw their share prices double and then triple in a matter of days. Penny pot stocks with little to no fundamentals skyrocketed higher as well, notching up 50 percent gains or more each day.

 

I, for one, was quite happy with those results; at least at first. After all, marijuana stocks were on my 2021 list of sectors investors might want to consider this year. My reasoning had more to do with expectations that Congress would finally legalize the substance. If so, it would allow companies to finally access capital from the banking sector, and possibly trigger a wave of mergers and acquisitions. I never counted on a Reddit Raid by traders.

 

Evidently some investors, emboldened by their success in pushing up (and then down) some stocks like GameStop and AMC, turned their sights on pot stocks. While traders couldn't get enough of these shares on Monday and Tuesday, by Wednesday those same stocks saw declines of 50 percent or more. But those stocks were not the only example of froth. Bitcoin had its own bout with buyers.

 

Cryptocurrencies were another area, which was on my recommendation list for this year. Bitcoin soared this week after Elon Musk announced that his company, Tesla, the electric vehicle manufacturer, had invested up to $1.5 billion in Bitcoin last month. Bitcoin gained 25 percent this week as a result. Several stocks that were leveraged to cryptocurrencies did far better than that.

 

Platinum, and platinum stocks (another of my recommendations), hit six-year highs as well this week. Let me go on. Special Purpose Acquisition Companies (SPACs) of all shapes, sizes, and colors are being snapped up faster than they can be created as well.  No never mind that the majority of these investment vehicles in search of an asset have left investors holding the bag more times than not if you wait around too long to sell.

 

It has gotten to the point that traders are now monitoring the feed of Reddit, the internet App, as well as tweets from "Wallstreetbets," which is popular with the Robin Hood retail crowd looking for clues on the next stock or sector that could rise from the ashes.

 

And yet, if readers were to simply look at the major averages of the stock market, nothing much has happened this week. The S&P 500 Index made minor new highs, as did NADSAQ, but then fell back again. If anything, the indexes have simply consolidated this week.

 

One would think that a series of successive new highs, combined with a series of frothy escapades, would lead to a wildly bullish investor base. Not so. Instead, recent fund flows suggest investors are rather cautious on stocks. Fund flows have favored bonds, rather than stocks since the beginning of the year.

 

Bullish investment sentiment, as measured by the AAII Index, also fell in January and has still not recovered. Since the beginning of the year, money market cash has increased by $10 billion and roughly $50 billion has been pulled out of equity funds. One possible reason for the sour sentiment could be the froth I have been referring to.

 

Media coverage of some of these massive, short-squeezes and the rapid rise and fall of stocks (and even commodities such as silver) may have frightened off the more conservative investor — at least for now.

 

As readers are aware, I have been advising that you take some profits in investments in which you have out-sized gains. I have been taking my own advice this week. I sold some of those stocks that had run up to what I considered nose-bleed levels. I will continue to do so if the opportunity presents itself. I expect we may see one more surge higher (2-3 percent) before we encounter a more serious pullback, so enjoy the froth while it lasts.

 

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.