Jump in SKEW, small caps, financials, and material stocks

Jump in SKEW

A wall of money continues to flow from market to market based on the popular narrative at the time. 6 months ago it was “tech does well under corona”, so everyone rushed headlong into tech stocks. Now it’s “vaccines are good for the economy”, so everyone is rushing into small caps. Result: small caps jumped higher today while the NASDAQ fell.

In the meantime, SKEW‘s 3 week average continues to rise. SKEW measures the risk of a black swan event, so traders usually interpret high SKEW readings = bearish.

In the past, such high readings were something to be concerned about, but didn’t always result in an immediate correction.

  1. October 2017: stocks rallied for another 3 months before VIX spiked and stocks fell.
  2. July 2018: stocks rallied for another 2 months before stocks fell in Q4 2018.
  3. January 2020: stocks rallied for another 1.5 months before the crash in March.
  4. September 2020: stocks fell immediately.

Watch out for SKEW in the coming months.

Jump in small caps, financials, and material stocks

Small caps, financial stocks, and material stocks popped higher yesterday. 36% of the S&P 500 jumped above their upper Bollinger Bands:

In recent years this often led to short term pullbacks, but weren’t consistently bearish after that.

Similarly, a large % of financial stocks jumped above their upper Bollinger Bands:

Short term bearish, bullish over the next 6-12 months:

Here’s materials:

And here’s small caps:

Once again, this is just a short term concern:

Our market outlook & trading strategies

Here’s my market outlook based on 3 different time frames:

  1. Long term investors should be highly defensive right now. The bubble may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
  2. Medium term traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a bubble can end in disaster.
  3. Short term trend followers should continue to ride the bull wave because no one knows exactly when it will end. In a highly speculative environment like today, the most profitable traders are short term trend followers who trade markets with strong animal spirits. Animal spirits generate strong uptrends and downtrends. If you are a short term trend follower, you must have tight stops.

2 comments add yours

  1. Great post and great data as usual.

    Yes, it’s a ‘bubble’. But as history shows, the bubble can continue to grow for a while, sometimes quite a while, and usually long enough so that even the skeptics start to come around and buy stocks. And that’s about when it bursts.

    As you have highlighted, nobody knows when that will be, just as nobody can tell you when an actual physical bubble will burst. Some just keep growing…bigger than you could imagine….

    But ultimately, they explode.

    Then it’s just a question of ‘how much will it go down and for how long’.

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