A Technician’s Thoughts on the Market Heading Into 2021: Part 1

I would also look at the number of initial public offerings (IPOs) that year and the quality of them. Late in the cycle the riskiest names would come to market as the public couldn’t wait to get into the next “new thing,” anticipating riches in just the first day of trading. Sound a little familiar? Barron’s believes the IPO market will be bigger still in 2021. Probably. According to Renaissance Capital, Barron’s reports, the average IPO returned 75% — the best performance since the late 1990s.

I would also check on the number of business/finance books published that year and what the financial advisers (FAs) thought. Back in 2000, my teacher and mentor Ralph Acampora published his “Fourth Mega Market” book, which was supposed to carry us through 2011. The thinking was good but the timing was off. Perhaps we are in a Fifth Mega Market now. The February/March decline of this year reminded me of the summer plunge of 1987 — five years into the 1982-2000 secular bull market.

This was anecdotal information and it needed to be combined with other approaches, such as seasonal patterns and information from the Stock Trader’s Almanac on the so-called Presidential Cycle or a quick look at the Decennial Cycle and even what year it was in the Chinese calendar. I used other sources and I felt some of the panelists in the Barron’s Roundtable were sharper than others, such as Felix Zulauf, who has skills with the fundamentals and the charts, and for a brief period Paul Tudor Jones. I also checked in with some colleagues from the Market Technicians Association (now the Chartered Market Technicians Association).

Now, as we are about to close out 2020, forecasting is minute by minute in the world of Twitter and CNBC and Bloomberg TV. We look at the trends on a one-minute chart, we grab the most recent headline, and headlines replace actual research. Research starts from 2008 or maybe 2000. When I started in the business in 1973 research went back to World War II. No more. Maybe you will find someone today looking at interest rates since 1981. Maybe.

We are intrigued by the forecasts by Barton Biggs and others. We cannot wait for the January Barometer to give us its message like the groundhog in February. Don’t forget the Super Bowl “indicator” and the Santa Claus Rally. We want to know and follow purchases and sales of Warren Buffett, Stanley Druckenmiller, Paul Tudor Jones, Steve Cohen and tweets by Jeffrey Gundlach and gems of wisdom from his appearances on CNBC. We listen to warnings by James Grant and we struggle over every word from the Federal Reserve. The landscape in 2021 is likely to be trickier and uncharted, with regulatory challenges aimed at big tech companies with stocks that are too expensive, in my opinion.

The Greeks made it real simple — just visit an Oracle.

All right, all right, all right already. (apologies to Matthew McConaughey)

I have been cute and maybe even amusing, but what do I really think about 2021 and what stock ideas look attractive?

Remember the quote from John Kenneth Galbraith: “The function of economic forecasting is to make astrology respectable” — just like politics in New Jersey is supposed to make politics in New Orleans look respectable (if you live in New Jersey like I do you might find this funny). A technical analyst should keep in mind what happened to our late colleague Michael Metz, a talented technician for Oppenheimer who turned bearish too soon in a soaring bull market. He was ultimately correct but he was let go just before the top. Wall Street and Main Street prefer bulls over bears.

Back in 1978 there was a book published with the innocent title of Non Random Profits by Raymond Hanson Jr. and Robert K. Mann. I don’t think the book is available anywhere now. I will share their two basic rules to find stocks worthy of buying. They were looking to buy stocks as close as possible to the beginning of their markup phase and to reduce the element of risk to capital.

Rule one – a stock becomes a candidate for purchase if and only if its price stops going down for at least 11 calendar quarters.

Rule two – once a stock qualifies for purchase under the 11-quarter rule it should be bought at a price not to exceed the 25th percentile of the range of the base. The base line must be defined by at least two points before the beginning of the 11th quarter

They found that the average markup phase (rally) lasts about two-and-a-half years and applied a three-year time limit on their research. They found a number of things from looking at 690 stocks that fit rules one and two.

1- there are no losses.

2- only eight issues rose less than 50%

3- 91% rose 100% or more

4- 70% rose 200% or more

5- 30% rose 500% or more