This quick-glance market barometer is based on a model created by Mish Schneider of Market Gauge. It tracks six indices:
- Russell 2000 (IWM): represents the broader market with emphasis on smaller-cap businesses.
- Regional Banks (KRE): represents small banks that make up a significant portion of our local economy.
- Semiconductors (SMH): the chipmaker industry is an important leading indicator by virtue of the fact that its lead time for production–anticipating economic changes to determine production and all associated expenditures and sales–are at least a year ahead of schedule.
- Dow Jones Transportation Index (IYT): represents the transportation of goods across the country.
- Biotech (IBB): represents the more speculative end of investor sentiment; when investors are more optimistic about the economy, they tend toward more speculative investments.
- Retail (XRT): represents discretionary spending, which tends to pick up when investors feel they have extra money to spend.
This is an amazing chart. Notice how year to date the retail sector (XRT) has skyrocketed relative to all other sectors and industries. December retail sales were not entirely dismal but they were far from promising. As you know, retail represents discretionary spending. And with brick-and-mortar revenues declining, either due to lockdowns or dwindling sales, does this confidence in the industry tell us that online retail spending may compensate for its non-digitized counterparts? If share price reflected fundamental expectations, might the coming Q4 earnings season validate the industry as a whole?
Or, is the promise of extended fiscal stimulus and vaccine rollouts fueling optimism in a market that, to date, has no real economic grounding? In short, are we seeing irrational exuberance–a bubble? Regional banks (KRE), the Russell 2000 (IWM) and speculative biotech (IBB) are all aligned and trending downward. Semiconductors (SMH), a strong barometer of economic health leading all other indicators in decline second only to transportation (IYT) the shipper of “real goods” across the country’s regional economies. So, are we seeing a bubble, or an early sign that the economy is about to undergo a strong recovery?
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