The equities markets have reached a top and are due for a pullback by about 15% - 20% in the New Year, said Gareth Soloway, chief market strategist at InTheMoneyStocks.com. “We’re now getting to a point where we have such inflated valuations that if you don’t get this monstrous beyond 35% earnings growth [that some analysts are forecast] then markets are going to sell-off pretty sharply,” Soloway said.
Gareth Solloway chief market strategist at in the money. stocks.com joins us today to give us his market outlook for 2021 and some grim news that investors should be paying attention to Gareth. Welcome back. Hey, thank you, David, for having me appreciate it. Before we talk about the call that you have for 2021, let's revisit your last call.
So you had said that we're not about to see a Santa Claus rally a few weeks ago, and that turned out to be more or less the correct call because the stocks have not rallied. They've been sort of just flat up a little bit, then come down. So choppiness for the last couple of weeks. Can you explain again what the Santa Claus rally means and why we didn't see it?
Yeah, absolutely. So generally a Santa Claus rally occurs when you have smaller investors that make up a much bigger portion of the volume in the market participating and usually into Christmas new year's, you're going to have institutions that take off early. They're going to move aside. And that leaves the smaller investor, which is inherently bullish.
For the market as buyers, and they're going to float the market up. And that's what the Santa Claus rally is. Everyone's in a good mood. It's Christmas granted, it's COVID Christmas this year, but, but it certainly is, uh, that, that type of effect. So we didn't see it this year in a cup for a couple of reasons.
Number one, markets are extremely overbought, right? So you have that kind of working against it. Where you have institutions that are certainly still sticking around because of COVID, they're not totally abandoning their, their posts to go on vacation early. So that volume is kind of mixing in with the market.
And that creates more of a chop that we've seen lately. And you also have this, this effect where. There's a chance that the Senate could still go to the Democrats. And if that happens, you get this corporate tax rate for the top earners or this, this long-term capital gains earnings, uh, that is going to be doubled from 15%, 30%.
So there's going to be a certain amount of. Of bigger players, people that have invested for, you know, multiple years that are sitting on hundreds of millions of dollars in gains, uh, like these billionaires and big funds, and they are going to want to take some profits to ensure that they don't see a doubling of that tax rate in 2021.
So this combination is creating this scenario. You then have the worry over COVID as well. Yes, the vaccines are rolling out. But by no means, is it going to be a smooth ride? We've already seen vaccines that the amount of the vaccine is not getting out to a lot of the States that they had hoped for, which does push the curve out on recovery.
Just a little bit. I know you were short on the market while specifically a few stocks like Tesla, for example, a couple of weeks ago. Now Tesla stock has written a little bit since we last spoke or you stopped out of that trade. Are you still short? Uh, how you position now? Yeah. So I'm still short Tesla.
I think when we last talked, it was around $640 a share, um, per Friday's closed, it closed at six 95. Uh, now it's back down to about six 66 as a current price, but for me, this is a valuation call. Um, as much as I think it could still go up a little bit, there is a time limit on this. Um, you have the S and P.
Fully integrating Tesla, as of today's start of trading, uh, that's going to take a lot of buyers out of the mix, and there's also a lot of talk. This is an interesting point. If that a lot of fund managers already had a big allocation in Tesla going into this, and now a lot of the positions they're holding, they have more Tesla in it because it's included in their foldings of the S and P 500.
So the creation of that means that they're overweight in Tesla and they need to actually sell Tesla into year end. To get back in alignment for their clients. Otherwise they're, you know, even though Tesla's been such a great runner in the last really the last year, Hedge fund managers and institutional managers, money managers, they can't over risk for their clients.
They can't be caught with their pants down essentially. So there could be some selling into year-end end as well. So let's take a look at the broad equities indices, uh, Gareth. Now the chart here, I'm looking at this, correct me if I'm wrong, but I'm looking at this as a breakout to the upside. But I know that we spoke offline.
I know that you have an outlook for 2021. That is a little bit more bare. So can you explain why I'm reading this chart, Bob? Yeah, no problem. So, so basically what you see before you is a chart of the spy, the S and P 500 tracking ETF. And if you zoom out here, you can clearly see that this trend line starts just before the massive decline.
In 2018, I think it was about a 20% drop very, very quickly. And that occurred when the federal reserve. Started to talk about raising interest rates and the market just took this huge dive. And then we rallied back as the fed became looser in their policy and rally all the way up to the high just before the COVID collapse.
All right. And you can see that big decline of about 30% on the spy there. So if you take that pivot high to this pivot high, you can see that this trendline on a technical basis. Is very, very important. You can see here, you hit it. You add a decline here, you hit it. You had a very small decline. And now while you've inched above it right here, this is what I would call the kind of the lighter holiday volume traffic, where think about it.
Like, you know, when you have less participants in the market, things can overshoot just a little bit. I'm not sold that this is breaking up to the upside just yet. This is still waffling around the trend line. And very likely should break down, coming into January. So this breakdown is a more short term or are we going to see sort of a longer term secular downtrend in the market?
Yeah. So, so one of the interesting little tidbits to recognize is that if you look when the market has its biggest years and biggest gains, it actually coincides with unemployment being the highest. All right. So when unemployment was maximum in March, 2019 or 2009, we actually got the biggest market move percentage wise during that period, as inflation, as, as unemployment comes down.
You actually see the market games coming down. So the idea here is that the market is always forward-thinking. So the more it looks to the future and factors in good news. It goes up really soon, you know, really quickly. But then as that period actually arrives, it doesn't have much more in it because it's already factored that in.
So I think that's what's going on here and that's why I actually think we could be yeah. A multimodal, at least a multi-year high here. Wow. Right. I know that's a crazy call. So many people are like, Oh, we that'd be crazy to be saying that considering what the market is doing, but time will obviously tell, but.
Considering the market has priced in a major Epic recovery. I mean, analysts are coming out and saying earnings growth is going to be 35% sure. You're seeing all of that, which stinks. But what they don't realize is the market is up to that point. It's already factoring that in. So now you have to beat it by even more.
And this happens a little bit of a story here. This happens with earnings. So many people have come to me and said, you know, XYZ reported, great earnings, and the stock sold off. You know, the analysts had him at a dollar, a share. They came at a dollar 20 and the stock still sold off. The reason is, is because that stock rallied up so much going into those earnings that the market wanted even better earnings.
And I think that's happening here with the stock market. You're now getting a point where we're such, we have such inflated valuations that if you don't get this monstrous, uh, even beyond the 35% revenue, uh, earnings growth, The markets are going to sell off pretty sharply. If you look at the longer term trend line, the turquoise blue line on your chart here, it does seem to me lightly, the longer term trend has just been up.
Like, yes, it's made new lows, but it's also just made new highs. So what you're saying is that this longer-term trend line is going to reverse. Very shortly. Yes. Yeah. I mean, that's what should happen based on the technicals of the chart. And I think it's important to recognize is that, you know, not only are we trading up at this level against this big trend line that has stretched back to 2018, but you have so many other signals.
So just to go over a few. Insider selling is at an unprecedented levels right now, uh, compared to insider buying. So that's concerning. I mean, think about that. If, if these companies are going to just rock it in the next year, two years, why are these insiders dumping this amount of shares? And then you look at the IPO mania, which mirrors 1999.
I mean, these companies like Airbnb and door dash. The companies get priced at this, then it gets raised going in. Then it opens a hundred percent higher. I mean, it's lunacy to see these valuations going to this point. You have a put-call ratio, which for those of you that don't know, the put call ratio basically tells us how many calls there are, which you basically are telling you.
People are betting. The marketer is going to go up versus how many puts. Where they're betting the market is going to go down. And the way a trader uses that is it's a contrarian indicator. When there's a huge amount of calls out there, which we've had now for about two weeks, a huge amount, more calls, it's actually a better signal for the market.
And the reason it's bearish is because of this. And this is going to be a new thing for a lot of you guys. It's an institutional game and it's a rigged game. That's what the options market is. Can you make money in it? Yes. But institutions sell about 95% of the puts calls have puts in calls to the average investor.
All right. They make money on these by taking in as much premium as they can. And they maximize their profit by the options expiring worthless. So if you think about that line, right, and institutions don't take big losses, they don't, they can manipulate the market whatever way they need to make sure that they at least come out flat or slightly ahead.
So if there's a ton more calls in the market, The institutions will purposely drive stocks or the market in, in the opposite direction, in this case down so that they do not take a loss on selling those options to the average public. All right. And just to, just to keep this in perspective. If you walk down an options expiration Friday, you'll see that Apple, for instance, all of a sudden in the last 10 minutes on options X, it flushes $2.
And you know, so many average investors think, you know, why on earth did that happen? I mean, what was what happened in the last five minutes of the day to make that drop? And the answer is institutions figured out where they need the stock to close, to maximize their profits. And they pushed the stock down so they could use $10 million to drop the stock two bucks.
If they're going to make 25 million, I mean, that math makes sense. It's better than them taking a loss. So, you know, keep in mind that these signals out there are they're fund managers are, are overweight stocks for the first time, since 2013. The average investors are more bullish than they've been since 1999.
All these types of things make me very concerned here, especially when it coincides with what are some of the ways that institutions, pushups stocks, or maybe pushed down or just looking at the stocks that you've been following. Yeah. So, I mean, there there's multiple ways, but the best way is, is upgrades and downgrades.
They could also use, um, money, but just to put it put one thing to your viewers, which I'm a big believer in making sure wall street is as transparent as possible. Sure. There was a situation recently that really bothered me. And in this situation, basically, it's with Tesla. Um, Tesla announced a $5 billion share offering, right?
And we all heard about this. It was about a week and a half, two weeks ago. And just five days before that announcement, Goldman Sachs came out and upgraded the stock to a street high $780 a share price target. All right. So you think, okay, well an analyst five days before upgraded no big deal, it is a big deal because the stock ran up $80 basically to where it was, where it is now going into that announcement of that, that selling of 5 billion in chairs, who was the lead underwriter that stood to profit the most from that stock sale and the lead underwriter was Goldman Sachs.
So if you now reverse it, you get a scenario where Goldman Sachs pumped the stock up. Purposely upgrading it five days before to shoot the stock up into the announcement of his $5 billion share offering. And again, this stuff happens on wall street folks. This is why I don't trust analysts fully. I mean, it's important to recognize what they say, but keep in mind, it's a little bit more of a gray area on wall street and you have to kind of use your senses.
Is the sec looking into this. Uh, I wish, I wish my guess is it's kind of the persona non grata. Like we won't look into it. We won't see, you know, I I've, I've read some stuff where there's a little bit of an uproar about it, but I wish there was more because it's just not right. I mean, again, think about if this is a high on Tesla and it ends up dropping to $300 over the next couple months.
Um, and think about someone bought it because Goldman Sachs upgraded it and didn't sell it because they said, like Goldman said, it's going to $780. I'm going to hold it there. Yeah. And then they're sitting on a 30, 40% loss, you know, six months from now, you know, that's kinda messed up. The average investor doesn't have the knowledge that these institutions do, and you really expect these institutions to use more of an ethical, you know, high level, at least in my opinion, but here you're short on Tesla, right.
You're personally shown on Tesla. Yeah. Yeah. I'm sure. I'm sure. Are you, are you shorting it because of where valuations are at currently? I know you think valuations are out of whack. Do you also not like the company itself, are they. Do you, do you not think that the, uh, company's products are in line with where the prices should be?
How are you seeing the company as a whole? Well, how do you make these kinds of decisions too long or short? Yeah, so, so they're all technical for me. Um, they're based on they're based on charts, how extended it is on the monthly chart on the weekly chart, looking at the RSI, I look at the RSI as well. The RSI on the weekly is just mindbogglingly high and it's been high.
So there's a lot of signals that it's getting exhausted. Um, but. In all fairness. I know, I know a lot of people are like, Oh, he must, he must not like the company. I actually am. Pre-ordered I pre-ordered the cyber truck. So I, I love it. Um, I have solar panels. They're not from Tesla, but I love solar energy.
So I love the company, but it's just a matter of at what price, right. If I'm going to invest my money, I have to believe I'm going to make good money on it. And, and right now I couldn't be a buyer of Tesla because. The valuation is setting up where they have to, they have to grow at the current rate they're growing for like 15 years to grow into their valuation.
Um, now has it been an amazing run? Yes. So amazing. But ultimately I think a lot of that was the stock split. Got people excited. And then this, this added to the S and P 500. And the one thing you could look at is what tech, what, what fundamentally changed at the company from the run it's had from the stock split announcement to the inclusion in the S and P 500 nothing's changed.
Nothing has changed and that's a concern. So for me, I put my money where it's going to make money. Will I go home Tesla at some point techie? I will. Absolutely. So this multi-year high in the markets. Let's revisit that one more time. Are you expecting that? I'm assuming that means you're expecting some sort of market decline or correction in the next quarter.
Am I correct to say that? And if so, if so, what is a magnitude of such a decline that you can anticipate. So basically what I do is I average out the last decline. So just on a technical basis. Right? So, so if you look at this chart where I'm using this trend line, right? So this trend line marking the pivot high from 2018, 2020 in these subsequent highs, basically what you would do is to find a general target.
You would average them. So you take a 30% decline, a 20% decline, a 10% decline, and then very, a minor decline. And it basically, it comes out to be somewhere between between 10 and 20% decline, uh, in the next, probably in the next quarter. I think by the end of the first quarter of 2021, we should see that.
Absolutely. And let me just see if I can do something here, but I think. So I would say at a minimum, this would be your minimum pullback here. You have a parallel line down to about the three 20 ish area. So you're looking at right in this vicinity, that would be the minimum decline. Uh, a bigger decline and I use bands.
This is called banding folks. For those of you that don't fully understand, it's basically using parallel lines to understand market market targets. And basically you have this band here, which is your first target, second target and third target. So worst case scenario would be this one down here, which would be around 250 on the spiders.
But my guess is it's going to be somewhere between three 20 and the 300, uh, three 20 to 300. What is that? A percent of terms in terms of a decline from current levels. That would be about 15 to 20%. Okay. So, all right. So you're expecting a 15 and 20% correction in, uh, in first quarter of 2021. All right.
Well, uh, would anything change your mind? Let's say, let's say a new fiscal stimulus deal. Come in. Uh, let's say, let's say a vaccine were to be rolled out and it's effective. Would it, would, it would any fundamental factors in the markets, any headlines that you see, would that make you say, well, gee, maybe I should reverse in this call.
Anything looking out for. I would say if, if everything aligned, meaning that Biden came in and said, okay, I'm going to remove everything against China. I'm going to open up free trade again. Um, again, these are very unlikely because Biden is in a position where, you know, he's going to have to. Be strong against these other countries, but if all of a sudden you had free trade ringing again and stuff.
And, and let's be honest, if, if somehow more stimulus came out, uh, to the tune of, you know, three to 5 trillion. Yes. Then, then of course the markets could still go up. I'm sure. You know, the odds of that happening are very low. And this is the issue. Is that the Republicans, from what I'm hearing. They were okay with the $600 checks passing in this latest stimulus because they wanted to ensure that the Republicans keep the Senate in the Georgia election.
So. Once that's passed, assuming the Republicans keep it. There doesn't seem to be incentive for more stimulus, unless the economy really goes into a nosedive, which if it goes into a nosedive, then obviously markets are gonna follow suit as well. So it would be hard pressed, but there are, like I mentioned, you know, if, if everything worked out in roses, then yeah, maybe the markets could continue to climb.
So how are you positioned right now? What are the sectors you do? Like for 2021. I would say, I would say you definitely want to focus on since I'm more on the short outside of, of technology high PE ratio stocks, look for those lower PE ratio is a Kraft. Heinz would be a good play. Um, look for things that pay a dividend.
So you can kind of, even if the stock comes down a little bit, you can offset. Maybe the stock goes up as well, but good dividend paying stocks, value names. They have to be the ones at the forefront, because I do think that the, the high valuation names are going to see a reduction in money flow and that money likely will look for other places to go that safe and a golden Bitcoin.
Do you like those? Yeah, absolutely. So you got to love gold here, folks. I just want to show you a couple charts here real quick. On gold. Uh, you can see a calculated target of 28 60 here. It's a measured move target. If you take this, move up from the early two thousands to the 2008 higher. So that's an easy measured move.
And if you take this little pivot here, it brings you up to about a $2,860 price target probably within the next two years or so. And lastly, I just want to show you guys one thing here is that the recent pullback in gold, off of the recent highs matches the exact Fibonacci retrace we saw in 2000 and basically 2007 to 2008 before this run-up of the big run-up.
So notice this pullback here in 2007, 2008, Fibonacci three 82. And then same pullback just occurred. And now we've started to move up. If I go to my chart here on, uh, the GLD. You're now starting to attach the high end of a bullish consolidation phase here. So you can see you hit the bottom of the range.
This is a little channel that we've been in, but this is a bullish consolidation channel. Now you're right up against the upper range here. If this breaks, you're going back to the recent highs and you should head towards that 28 2,900 price target. Uh, lastly, just to touch on Bitcoin Bitcoin, likely topped out.
This is such a cool chart to look at here. Um, take a look at this folks. This is repeating the 2017 move to a T what do I mean by that? Well, look at this. Look at let's count. The monthly candles one, two, three, four, five, six. Well, let's go over here. One, two, three, four, five, six, so six choppy upside candles.
And then you had a three bar surge, three monthly bar surges. One, two, three. One, two, three, exactly how 2017 played out. And if you look at the distance of those three bar surges, this is something so cool. It was $13,500 from the low of that three bar surge to the high pivot. If you take that exact amount and you add it to the low of 10,007 50, which was right here.
What do you get? 2,400, $1,250. What was the high? Just over the weekend right there. So to me, this is a picture. Perfect. Um, coordinated move up and you should see some sort of pull back here on Bitcoin, maybe to, you know, maybe back to about 15,000 or so then I would say buy it, buy it, buy it. Bitcoin is here to stay.
I still think it goes to 100,000 within five years. You've got to be long Bitcoin once it pulls back. But I I'd say, you know, don't chase it here, folks. There's no reason to chase it up here. Let it pull back. Be patient then. Bye. All right, Garrett. That was very interesting. Thanks a lot. Hey, thank you so much, David.
A lot of fun. Take care and have a happy holidays to you and your family. You too, buddy. Thank you. Thanks for watching. Kitco news. Stay tuned. I'm David Lynn. .