Numerous markets are at critical inflection points once again. Strong big tech earnings, coupled with expectations for more stimulus, could drive the S&P 500/SPX (SP500) and stocks in general higher in the short term (four to eight weeks).
However, once we look in the intermediate and longer term, there's increased risk of a significant correction. The Presidential election, a possible second wave of COVID-19, a slowdown in the real economy, and other detrimental economic factors should be enough to cause a notable downturn in the fall.
As I see it, we have approximately four to six weeks of potential upside in select stocks, sectors, GSMs, etc. The short-term fundamental setup with the stimulus, and strong earnings from many huge corporations, coupled with the technical image, implies certain markets are very likely to go higher from here.
Let Us Look at the Nasdaq First
Nasdaq looks like it's going to hit and surpass ATHs. Momentum is extremely strong post big tech earnings, and the composite is likely to melt up from here. We see support holding, and a breakout to new ATHs about to occur. Now, the SPX:
SPX futures look relatively strong here as well, and we expect a move higher throughout the day. After we break out above 3,285, the composite is likely to go toward ATHs, in my view. Probability for further upside appears quite likely in the near term.
However, in the intermediate and longer term, SPX and stocks in general have many issues to overcome. The uncertainty about the upcoming Presidential election, a possible, or even probable second wave of the coronavirus, a slowdown in overall consumer spending and business activity could be enough to derail the stock market. Therefore, a significant (10%-15%) correction is likely to occur sometime leading into the fall.
Nevertheless, SPX and stocks in general probably still have at least four to six weeks of upside potential before the next drop starts. Also, some sectors like gold, silver, mining/GSMs are very likely to outperform most (80%-90%) of non-GSM stocks, in my view.
The Bright Side of the Moon
Gold continues to look extremely attractive here. We may see a slight consolidation phase, but a transitory move beyond a few percentage points lower seems unlikely in my view. Once gold breaks out decisively above $2,000, there are no points of resistance, so I suspect a relatively quick melt up to around $2,250-2,500 before year end is likely.
Silver we see is consolidating here, very likely before its next move major higher. Silver moves extremely fast, so I would not be surprised to see $50-$60 silver prices within the next 12-18 months.
Stocks to Consider:
We have an allocation of roughly 28% in GSMs right now given the promising potential going forward in the gold and silver ming space.
Let's Look at Oil for a Second
Oil, not looking too great technically, and the fundamental backdrop is likely to worsen into the fall as well. Oil demand is relatively "robust" now mostly due to summer time travel season. However, in the fall, things could become much worse.
Less driving, not as much flying, possible increased lockdown restrictions, etc. Therefore, there's not much interest being in oil here, in my view. To put things into perspective, fewer than 2% of our portfolio holdings are in this sector right now.
Bitcoin: Saved the Best for Last
Bitcoin had a remarkable flash crash during which BTC got slammed by around $1,500 in about 15 minutes. However, we see a very nice recovery developing which is likely to proceed going forward from here. Disclosure: QTD our cryptocurrency basket is up by over 40% and comprises about 26% of total portfolio holdings.
The Bottom Line
We remain overweight GSMs and the Bitcoin/digital asset segments. We also see some short-term upside in select equities. Nevertheless, we expect a correction to occur going into mid fall, and feel that there may be around four to eight weeks of upside left before the next drop of approximately 10%-15% occurs. For now our base is for a 10%-15% correction but if economic conditions deteriorate further we may see increased diverted effects on the stock market and society as a whole. In a worst-case scenario SPX could fall by around 20% in the fall crash. There's a worst-case scenario, but we will consider it only if market conditions continue to deteriorate significantly.
Several sectors that we like include:
Aside from GSMs and Bitcoin, we see short-term opportunities in:
- Metals/Raw materials