Gold Loses Ground, Emerging Markets Gain, USD Under Pressure

The US presidential election looks like it’s pretty much over (except for the lawsuits) with Biden the victor along with the stock market.

At this critical juncture, major thematic shifts are underway with a historic move from red hot growth stocks to more value stocks participating to mid and small caps taking leadership.

For the week, Small Caps were up +6% while the Nasdaq 100 (QQQ) was down -1.25%, making this spread in weekly performance the most extreme in 75 years.

Lurking in the background are two key longer-term indicators that are at historic overbought extremes; Margin Debt and The Buffet indicator (GDP versus Stock Market valuations).

However, both of these long-term value measures have been overbought for quite some time. Hence, these metrics are not very good for timing.

The highlights of this week’s market action:

• Risk gauges stayed green across the board The Q’s flipped positive last but have been the laggard.
• Small Caps (IWM or Grandpa Russell) has the strongest TSI (TREND Strength Indicator) among all key stock indexes and currently working off overbought conditions
• Volume patterns show improvement, most evident in the regional banks (KRE) and certainly Oil and Energy Services, which have had a terrible year thus far.
• The Advance /Decline line looks poised for a major breakout after months of sideways action
• Rotation out of leading Technology Stocks (NYSE:XLK) continues at a historic pace
• The dollar is under pressure, trading under key moving averages in all time frames while the inverse is happening with the Chinese yuan which is flirting with all-time highs
• Gold lost ground and needs to hold recent lows to stay in a positive mode. However, both gold and silver miners have caught some of the positive stock momentum and have held up.
• Emerging Markets (EEM) continue to lead but they are running a bit rich short term indicating a possible pause.
• Developed countries are beginning a “comeback” and our ETF Complete Model is currently enjoying strong gains from three such countries.

As we wrap up the earnings season and move into a seasonally bullish time of the year, the trend to watch is the Small Caps or Russell 2000 ETF (IWM).

Small Caps typically lead markets out of recessions, and this week’s all-time trading and closing high by Grandpa Russell (IWM) is following that pattern by marking the end of a 3-year bear market in this index.

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This underappreciated segment of the market is moving on up and likely to become the talk of the town in 2021.

Written By: Keith Schneider