Leaders Index 12-31-21

The market continued its consolidation of recent gains in its year end session yesterday. The major averages were moderately lower on light volume, as you would expect on the day before the new year. The action of the market was solid in 2021, bur not as good as 2020.The returns on the major averages were strong, but individual leading growth stocks performed worse than the overall market. This is likely due to the narrowing of the advance as fewer and fewer big cap stocks fueled the rally. This is the kind of action you see in the late stages of a bull market. We are seeing a lot of these signs now. The advance has gotten so narrow that only a handful of mostly big cap tech stocks are accounting for almost all of the gains in the major averages. We recently had a Hindenburg Omen signal that you see in the late stages of a bull market. Also the narrowing of the advance and the weak advance decline lines indicate that we are late in the game. Much of this action looks a lot like the market of late 1999 and early 2000 when the market made a major top. This is the time of the year when everyone is giving their forecasts for 2022. Mine id the same as it always is. I don’t know, and neither does anyone else. Calling a top in this environment is very difficult as every time it looked like there would be a correction the market turned around and rallied. The best way to do this is to use the three road scenario, developed by my friend Ian Woodward. You see what would the market have to do to continue the bull market. Next you determine what the market will have to do if it is going to sell off. The middle road is basically a flat market. You then watch which one plays out, letting the market tell you what it is going to do. I think that the Fed will be the real driving force behind this. They have said that they will taper and end QE by March and then begin increasing rates. They are talking about three rate increases in 2022 and four in 2023. They have said this before only to cave when the market started selling off and the economy weakened. If they do this again they might be able to prevent a meaningful decline . If they stick to their guns if would likely produce a real correction or even a bear market. I think this would be a positive for the market and the economy as we need a good clean out to set the stage for a new cycle that could produce sizable profits for market operators attuned to what is happening. A problem now is that the Fed is so far behind the curve that even this might not be enough. Seven quarter point rate increases combined with current Fed funds levels would still leave the Fed with a rat of between 1.75% and 2%. Recent inflation numbers put it at between 6.5% and 9.5% depending on which index you are looking at. Even if inflation recedes the Fed would have to increase the Fed funds rate by more than a quarter point to catch up. I don’t believe that market has factored this in. We will have to see if the Fed can stand up to the political pressure that would surly come if they follow this course. I hope they do. As always we have to let the market tell us what it is going to do and work with that. We are at extremes of valuation that we have not seen since late 1999 and early 2000. At this point a bear market would be welcome as we need to get a real clean out. We will have to wait and see if this happens. Jerry