Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODLE PORTFOLIO
Bull traps occur when bulls fail to support a rally above a breakout level, which could be due to a lack of momentum or a break out on low volume and weak breadth.
Breakouts are usually followed by strong moves higher, but in Bull Traps, the security quickly reverses direction. The stock or Index makes a new high above a resistance level but a rally fails to develop as profit-taking kicks-in and Bears jump on the opportunity to sell the security if they see divergences.
When prices drop back below the break out resistance levels, the bear trap is completed and that usually triggers stop-loss orders.
These are known as “bull traps” because traders and investors who bought the breakout are “trapped” in the trade.
Traders and investors can avoid bull traps by looking for confirmations following a breakout. For example, a trader may look for higher than average volume and bullish candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a bull trap.
The best way to handle bull traps is to recognize warning signs ahead of time, such as low volume breakouts, and exit the trade as quickly as possible if a bull trap is suspected.
Last week, despite the worse US inflation data since 1992, the MSCI World Equity Index recorded a marginal new all-time high. However, low volume, significant divergences and weakening breadth all point to a classic Bull Trap.
The US SP500 posted a new all-time high at 4249, but on low conviction.
The current bout of strength in global equities has all the hallmarks of a bull trap and it will be interesting to see if there is follow up on the SP 500.
One of the question that begs to be asked is whether the entire 2020 – 2021 rally is a massive bull trap as our cover illustration asks. We do not think so…
However the following long-term chart of the S&P500 shows a disturbing pattern of over-extension.
What it says is that when the markets turn, either now or in 2022, the magnitude of the bear market will be significant.
Inflation is clearly back… but who cares ?
On Thursday, data coming out of the US showed that inflation gauges gained momentum, surpassing all market expectations. The US CPI reached 5 %, its highest level since 1992 while the CPI ex Food and Energy reached 3.8 %, a recent record as well.
Next week will see the release of the US PPI, incorporating commodity prices and labor costs.
More importantly, Inflation expectations have now recede levels that in the past indicated that it inflation would be sustainable according to the Fed’s own model.
BUY THE RUMOUR SELL THE NEWS
The jump in inflation was greeted by a rally in US Bonds. Fixed Income Investors had been positioning for the resurgence in inflation and the release of the number led to a large phenomenon of short covering. We had been prepared for that and are benefitting form it in our MODEL PORTFOLIO
The End of Tech
We have been developing the end of Tech theme since 2018 now, arguing that the major US online platforms had reached a stage that would trigger a political and anti-trust backlash.
We are certainly reaching this stage, but the market is not yet taking the risks inconsideration.
On Friday, US House lawmakers introduced sweeping antitrust legislation aimed at restraining the power of Big Tech and staving off corporate consolidation. If passed, the bills would be the most ambitious update to monopoly laws in decades.
The bills — five in total — take direct aim at Amazon, Apple, Facebook and Google and their grip on online commerce, information and entertainment. The proposals would make it easier to break up businesses that used their dominance in one area to get a stronghold in another, would create new hurdles for acquisitions of nascent rivals and would empower regulators with more funds to police companies.
The legislation could reshape the way the companies operate. Facebook and Google, for instance, could have a higher bar to prove that any mergers aren’t anticompetitive. Amazon could face more scrutiny when selling its own branded products like toilet paper and clothing. Apple could have a harder time entering new lines of business that are promoted on its App Store.
“Right now, unregulated tech monopolies have too much power over our economy. They are in a unique position to pick winners and losers, destroy small businesses, raise prices on consumers and put folks out of work,” said Representative David Cicilline, Democrat of Rhode Island and chairman of the antitrust subcommittee. “Our agenda will level the playing field and ensure the wealthiest, most powerful tech monopolies play by the same rules as the rest of us.”
The introduction of the bills, which have some bipartisan support, is the most aggressive challenge yet from Capitol Hill to Silicon Valley’s tech giants, which have thrived for years without regulation or much restraint on the expansion of their business. Last year, the antitrust subcommittee released a scathing report about the industry after a 16-month investigation, declaring that Amazon, Apple, Facebook and Google engaged in a variety of monopolistic behavior. The proposals released on Friday try to address the concerns detailed in the report.
Over the past decade, dozens of bills addressing data privacy, speech liability and children’s online safety have failed. But efforts to curb the dominance of the biggest tech companies have gained broad support in recent years. The Justice Department and the Federal Trade Commission during the Trump administration accused Google and Facebook of anticompetitive practices and filed lawsuits that are expected to be fought for years. Democrats and Republicans point to the dominance of a handful of firms as a root cause for the spread of disinformation, inequality in labor and wages, and haphazard rules for speech across the internet.
The G-7 meeting happening over the weekend will likely address global taxation on the heels of an agreement reached last week.
And finally, the lawsuit opposing EPIC and APPLE could have gamechanging implications when the ruling is out.
Experience shows that when these dynamics have started rolling, they usually end-up having major implications for the targeted businesses.
The US tech mega-caps have become a threat to Nations, and the recent revelations that Donald Trump’s administration had forced the US giants to provide personal data on political opponents may be the straw that will break the Camel back.
US Mega cap stock are more expensive than ever, despite weak growth and earning growth prospects and they have globally lost upward momentum.
Contrary to the rest of the market, we see the next break down as the Beginning of a lasting bear market and not just a correction.
See GET READY FOR THE COMING CRASH
MODEL PORTFOLIO + 46.55 % Year-to Date
Mechelany Advisors’ MODEL PORTFOLIO was up another +0.69 % last week, outperforming again the major indexes-
With a NAV at 447, the Year to date performance now reaches +46.55 % and an IRR or +22.38 % over the past 7.5 years
The Portfolio was pushed by the rally in US treasury bonds, our European stocks, our Short positions in Meme Stocks and our Chinese equity exposure. Our best performers were Intercept Pharmaceuticals in the US and China Zheng Tong in China
During the week, we took more profits in China and Europe, Shorted Meme stocks with success and shorted soft commodities
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