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Bullish Outlook Intact

Our outlook remains bullish as market dynamics continue to suggest the path of least resistance remains higher for US and foreign equities.

  • S&P 500. The S&P 500 continues to consolidate/back-and-fill, something we suggested in our 11/10/20 Compass as likely to happen following the ~9% gains in the week surrounding the election which resulted in a bullish reversal. We view recent consolidation following the bullish reversal as healthy as the market collects itself before a likely upside continuation. Short-term support we are watching is at 3510-3520 and there is little reason for concern if the S&P 500 is above this level… see chart below.
  • Small-Caps. The small-cap Russell 2000 is not consolidating. Rather, it is trending higher as small-caps continue to show leadership characteristics. We reiterate our recommendation to overweight small-caps relative to large-caps. This is a classic risk-on signal that is consistent with historical bull markets… see chart below.
  • Sector Relative Strength Rankings & Weighting Recommendations. We made several upgrades last week in our Macro Vision, including upgrading Manufacturing and Transportation to overweight, and upgrading Energy to market weight.
  • Big Picture Trends. Value continues to gain on growth and we continue to monitor for a longer-term shift in favor of value. The US dollar (DXY) remains weak as it tests key support at 92; a breakdown would be a bullish sign for global equities. This weaker dollar and shift toward value has allowed foreign equities to improve relative to US equities. We are upgrading foreign equities to neutral with the ACWI ex-US vs. S&P 500 ratio bullishly inflecting; shift exposure to stocks with foreign exposure where possible. Commodities are strengthening as WTI crude oil breaks above $41.50 short-term resistance and copper hits multi-year highs. Additionally, the gold vs. S&P 500 ratio is breaking major support, a risk-on signal for the broad equity market. Avoid the yellow metal.
Russell 2000, S&P 500
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