With the Democrats taking control of the White House, Congress, and Senate, the election is complete. One of the major concerns is if they will raise taxes. We feel they will be slow to do so; with an economy that is very weak and unemployment high, it would put additional burden on the economy. With the Democrats controlling all three legislative branches comes the added burden that they own whatever happens. The economy falters, debt increases, wages lag, unemployment lags, businesses continue to fail, well, they own all of that going forward for the next two years. Hopefully smart decisions will be made to revive the economy and get everyone back to work.
I have always found that the first few days, if not a couple of weeks of trading into a new year, is always a bit crazy. Lots of investors are readjusting their portfolio, and with last year’s returns some are certainly taking profit. The first few weeks of each year are often volatile, and despite the myths, not particularly telling of how the coming 12 months will unfold. 2021 began with yet another volatile Monday, which while damaging to many charts in the short-term, is unlikely to be the beginning of a major top in our opinion.
Our outlook remains unchanged, viewing Monday’s sell-off as a mean reversion reaction to the end of year equity rally, Georgia election uncertainty and general profit taking. Despite the magnitude of Monday’s decline, the S&P continues to hold above first trading support between 3633-3643 with a heavier band of support between ~3550-3590. More stocks declined than advanced yesterday, but the S&P and NYSE advance-declines remain in confirmed uptrends and have yet to show the type of divergences that often develop as a market uptrend begins to reverse. The HCM-BuyLine® is positive and strong, and a pullback is warranted and needed, but there is still a lot of road left in 2021. We are just getting started.
Our expectation is for a normal, tactical choppy rotational pullback to develop through Q1 into Q2 with a 7-10% pullback. If we get the pullback sometime in the next 3 months, we expect, in all probability, that it will not change the HCM-BuyLine®, but will give investors a chance to either add to their positions, or for those who have not re-entered from last year, a chance to move back in.