After March kicked off with a session that indicated the worst for stocks may be over (for now), Tuesday saw the indices sell-off towards the close.

At least Rocket Mortgage (RKT) had a good day, though! And, at least the 10-year yield didn’t spike either. But that could change. Yields ticked up overnight to 1.433%, after President Biden pledged enough vaccine supply to inoculate every American adult by the end of May.

So, where do we go from here? This positive economic and health news is excellent for reopening. But rising bond yields are a blessing and a curse. On the one hand, bond investors see the economy reopening and heating up. On the other hand, with the Fed expected to let the GDP scorch without hiking rates, inflation may return.

I don’t care what Chairman Powell says about inflation targets this and that. The price of gas and food is increasing already. In fact, according to Bloomberg, food prices are soaring faster than inflation and incomes.

For January, Consumer Price Index data also found that the cost of food eaten at home rose 3.7 percent from a year ago — more than double the 1.4 percent year-over-year increase in the prices of all goods included in the CPI.

Can you imagine what this was like for February? Can you imagine what it will be like for March? I’m not trying to sound the alarm - but be very aware. These are just the early warning signs.

So about March. Will it be more like Monday or Tuesday? Was the second half of February the start of the correction that I’ve been calling for? Or is the “downturn” already over? Only time will tell. While I still do not foresee a crash like we saw last March and feel that the wheels are in motion for a healthy 2021, I still maintain that some correction before the end of this month could happen.

Rising bond yields are concerning. Inflation signs are there. But structurally, I don’t think it will crash the market (yet).

Corrections are also healthy and normal market behavior, and we are long overdue for one. It’s been almost a year now. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

A correction could also be an excellent buying opportunity for what could be a great second half of the year.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one to help people who needed help instead of the ultra-high net worth.

With that said, to sum it up:

There is optimism but signs of concern. A further downturn by the end of the month is very possible, but I don’t think that a decline above ~20%, leading to a bear market, will happen.

Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.

When Will the Russell Be Buyable?

Figure 1- iShares Russell 2000 ETF (IWM)

I wish the answer to the above question was “today.”

It pains me not to recommend a BUY for the small-cap Russell 2000 just yet. I love this index’s outlook for 2021- aggressive stimulus, friendly policies, and a reopening world.

Consumer spending, especially for small-caps, already appears to be very pent-up as well. But we just need to hold on and wait for it to cool down just a little bit more for a better entry point.

Since February 9, the Russell 2000 is down about 2.9%. I feel this slowdown was long overdue, but that’s all it is- a slowdown. The Nasdaq’s downturn is probably more buyable than the Russell’s right now, even though I feel the current climate favors the Russell more.

As tracked by the iShares Russell 2000 ETF (IWM), small-cap stocks have been on a rampage since November.

Since the market’s close on October 30, the IWM has gained about 45.25% and more than doubled ETFs’ returns tracking the larger indices.

If you thought that the Nasdaq was red hot and frothy, you have no idea about the Russell 2000. Not to mention, year-to-date, it’s already up approximately 14.58%.

HOLD. If and when there is a deeper pullback, BUY for the long-term recovery.

Where Could the Streaky S&P Go?

Figure 2- S&P 500 Large Cap Index $SPX

The S&P 500 is a complicated index to call. It’s incredibly streaky and is between a rock and a hard place right now. It’s literally sandwiched between its 50-day moving average and all-time high right now.

It’s too close to call.

February was an up and down month for the S&P. It kicked off the month by ripping off a streak of gains in 6 of 7 days. It then promptly went on a 3-day losing streak, followed by a two-day winning streak and more record closes.

Last week, the S&P snapped a 5-day losing streak with a 2-day winning streak, then plummeted on Thursday (Feb. 25) and declined by almost another half a percent to end the month (Feb. 26).

For now, it’s best to sit and wait this one out. March has started off with largely the same ups and downs. We saw its best one-day gain since June, promptly followed by a 0.81% decline.

HOLD for now, but be prepared to either BUY or SELL depending on its moves. For an ETF that attempts to directly correlate with the performance of the S&P 500, the S&P 500 SPDR ETF (SPY) is a great option.

Similar Uncertainty for the Dow Jones

Figure 3- Dow Jones Industrial Average $INDU

We’re not as buyable as we were at the end of last week.

The Dow is trading more stable than other indices and is the only index to trade marginally flat since February 12. Others are way more down in comparison.

However, after seeing a record close on Wednesday (Feb. 24), the Dow plummeted by almost 560 points on Thursday (Feb. 25) and another 469 points on Friday (Feb. 26).

March 1 was a much better day for the index, but March 2 saw another decline.

Where do we go from here? Dropping by roughly 1000 points in two days does not scream “stability” to me as I’ve been preaching about the Dow.

Like the S&P, the Dow is between a rock and a hard place right now. It’s not far from its all-time high, but it’s also one bad day away from dropping below the 50-day moving average. The RSI is also not indicating that the index is as buyable as it was a few days ago.

Yes, there are underlying concerns, and the market is more of a house of cards than anyone realizes. But the Dow is still comparatively stable to the others, and I can appreciate that.

Many analysts believe the index could end the year at 35,000, and the wheels are in motion for a furious rally for the second part of the year. It’s at a decent entry point, but you can do better.

The Dow could see more pullbacks.

From my end, I’d prefer to HOLD and assess the situation.

My call on the Dow stays a HOLD, but this could change soon.

For an ETF that aims to correlate with the Dow’s performance, the SPDR Dow Jones ETF (DIA) is a reliable option.

Beware of Inflation

“The rich world has come to take low inflation for granted. Perhaps it shouldn’t.” -The Economist.

This is becoming more and more concerning. As I said in the intro, Bloomberg claims that food prices are soaring faster than inflation and incomes, and January, Consumer Price Index data also found that the cost of food eaten at home rose 3.7 percent from a year ago — more than double the 1.4 percent year-over-year increase in the prices of all goods included in the CPI.

I think Jay Powell is being a bit cavalier in his inflation thoughts. Yeah, inflation hasn’t reached his magic 2% target, but the signs are already there. It could worsen 6 months from now, 9 months from now, and especially a year from now.

How long will the Fed do this song and dance?

While Jay Powell’s statement two weeks ago certainly did a lot to ease fears, there’s an air of “if not if, but when” concerning inflation.

Pent-up consumer demand is great. Retail sales crushing expectations reflect this. However, rising bond yields coupled with a Fed showing no signs of hiking interest rates is as strong a sign of inflation as you can get.

Bond yields are rising because investors expect inflation to return and almost desire higher interest rates sooner rather than later.

Five-year inflation expectations have also more than doubled from last year’s low and are now at around their highest levels since 2013.

As hedges against inflation, consider BUYING the SPDR TIPS ETF (SPIP), the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and the iShares Cohen & Steers REIT ETF (ICF).

Mid-Term/Long-Term

Add Emerging Market Exposure- Period

Figure 4- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Sep. 1, 2020-Present

Since September, the SPDR S&P 500 ETF (SPY) has gained around 10.53%.

But if you compare that yield to that of my top emerging market picks for 2021, it has underperformed.

Only the iShares MSCI Russia ETF (ERUS) comes close with a return of 13.62% in that same timeframe.

The difference? Russia may be undervalued and have more than a 35% upside for its equities in the long-term.

Figure 5- Equities: Long-Term Return Expectations Developed Markets/Emerging Markets

But Russia is only one example of an emerging market with strong potential.

Consider this too.

Due to a weakening dollar, a surge in commodity prices combined with shifting demographics could send other emerging markets upwards long-term.

PWC also believes that emerging markets (E7) could grow around twice as fast as advanced economies (G7) on average in the coming decades.

For 2021, the following are my BUYs for emerging markets and why:

iShares MSCI Taiwan ETF (EWT)- Developing country, with stable fundamentals, diverse and modern hi-tech economy, regional upside without China’s same geopolitical risks.

iShares MSCI Thailand ETF (THD)- Bloomberg’s top emerging market pick for 2021 thanks to abundant reserves and a high potential for portfolio inflows. Undervalued compared to other ETFs.

iShares MSCI Russia Capped ETF (ERUS)- Bloomberg’s second choice for the top emerging market in 2021 thanks to robust external accounts, a robust fiscal profile, and an undervalued currency. Red-hot commodity market, growing hi-tech and software market, increasing personal incomes. Compared to many other developed and emerging markets,

VanEck Vectors Vietnam ETF Vietnam (VNM)-Turned itself into an economy with a stable credit rating, strong exports, and modest public debt relative to growth rates. PWC believes Vietnam could also be the fastest-growing economy globally. It could be a Top 20 economy by 2050.

iShares MSCI South Korea ETF (EWY)- South Korea has a booming economy, robust exports, and stable yet high growth potential. The ETF has been the top-performing emerging market ETF since March 23.

iShares MSCI Indonesia ETF (EIDO)- Largest economy in Southeast Asia with young demographics. The fourth most populous country in the world. It could be less risky than other emerging markets while simultaneously growing fast. It could also be a Top 5 economy by 2050.

iShares MSCI Chile ETF (ECH)- One of South America’s largest and most prosperous economies. An abundance of natural resources and minerals. World’s largest exporter of copper. Could boom thanks to electric vehicles and batteries because of lithium demand. It is the world’s largest lithium exporter and could have 25% of the world’s reserves.

iShares MSCI Peru ETF (EPU)- A smaller developing economy but has robust gold and copper reserves and rich mineral resources.

Let’s take a look at the top emerging market performers since the start of February.

Figure 6- SPY, EWT, ERUS, THD, VNM, EWY, EIDO, ECH, EPU comparison chart- Feb. 1-Present

While South Korea has been the biggest laggard since the start of February, Peru has been by far the biggest winner and the lone emerging market pick to exceed a 6% yield in that period.

In comparison, the S&P has gained about 2.75% since February 1.

So why Peru?

When you look at how much commodities have risen, especially “clean metals” and “battery metals” like copper, lithium, graphite, cobalt, and more, Peru’s outperformance should not be exactly shocking.

An optimistic outlook on the global economy reopening coupled with a surge in demand for sustainable energy and EVs sent copper to its best month in 5 years in February.

Since February 1, copper has popped by more than 19%.

Peru is a tiny country with a rapidly developing economy and has extensive mineral reserves. It has the largest silver reserves globally and the second-largest reserves in molybdenum, copper, and zinc in the world.

Outside of the aforementioned country-specific ETFs, you can also BUY the iShares MSCI Emerging Index Fund (EEM) for broad exposure to Emerging Markets.

Long-Term

I remain convinced that the economic recovery is going better than expected as the progress in administering the vaccines improves. But it’s a blessing and a curse if it goes “too well.”

Continue to pay attention to complacency, overvaluation, bond yields, and especially inflation.

Time will tell what happens with the market. But I will have a much better feeling for stocks in general in the second half of the year- especially if they cool down a bit more, as I hope.

I think we are overdue for another down week or two before entering a powerful buying opportunity for the second half of the year. We may be at the beginning of the end of the pandemic, and despite what could be a bumpy ride, 2021 should be a big year for stocks.

Summary

Is it possible to become increasingly optimistic while at the same type becoming increasingly cautious?

That’s how I feel right now.

I was hoping that as the vaccines became more widespread and COVID numbers improved, the tug-of-war between optimism and pessimism would subside.

But I was wrong. We’re just battling bond yields and inflation now.

The crash and subsequent record-setting recovery we saw in 2020 is a generational occurrence. I can’t see it happening again in 2021. But as I said in the intro, I think a correction is inevitable.

We’re too complacent right now, and there are signs that the “rational bubble” could pop- if it hasn’t already.

If there is a short-term downturn, though, take a breath, stay cool, and use it as a time to find buying opportunities. Do not get caught up in fear and most of all:

NEVER TRADE WITH EMOTIONS.

Consider this too. Since markets bottomed on March 23rd, ETFs tracking the indices have seen returns like this: Russell 2000 (IWM) up 125.11%. Nasdaq (QQQ) up 87.73%. S&P 500 (SPY) up 75.58%. Dow Jones (DIA) up 71.42%.

In the long-term, markets always move higher and focus on the future rather than the present.

To sum up all our calls, I have a SHORT-TERM BUY call for

• the Invesco QQQ ETF (QQQ)

I have HOLD calls for:

• The iShares Russell 2000 ETF (IWM)
• the SPDR S&P ETF (SPY), and
• the SPDR Dow Jones ETF (DIA)

I am more bullish for all of these ETFs for the second half of 2021 and the long-term.

I also recommend selling or hedging the US Dollar and gaining exposure into emerging markets for the mid-term and long-term.

I have BUY calls on:

• The iShares MSCI Emerging Index Fund (EEM),
• the iShares MSCI Taiwan ETF (EWT),
• the iShares MSCI Thailand ETF (THD),
• the iShares MSCI Russia ETF (ERUS),
• the VanEck Vectors Vietnam ETF Vietnam (VNM),
• the iShares MSCI South Korea ETF (EWY),
• the iShares MSCI Indonesia ETF (EIDO),
• the iShares MSCI Chile ETF (ECH),
• and the iShares MSCI Peru ETF (EPU)

Additionally, because I foresee inflation returning as early as mid to late 2021…

I also have BUY calls on:

• The SPDR TIPS ETF (SPIP),
• the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), and
• the iShares Cohen & Steers REIT ETF (ICF)

Thank you.

Matthew Levy, CFA
Stock Trading Strategist