Many of our 2021 forecasts, as part of our annual global market forecasts, are bullish. We believe stocks will do well, crypto will do well in 2021, some specific commodities will do well, and emerging markets will go up. However, what we see in our stock market leading indicator is certainly a concerning sign going into 2021: a parabolic rise! Any bull has to admit that a parabolic rise is not sustainable, regardless how much you like a specific market. We are getting concerned that a strong pullback is in the making, one that will create some good volatility in the first months of 2021.
The Russell 2000 is our leading indicator for stocks.
Some might argue that it’s ‘just’ the small cap index and we should be mixing up a leading indicator with a small cap group of stocks.
Reasonable argument, but if this index has been leading the way for stock markets for as long as we track these markets (which is more than a decade) than probably is delivering some good value as a leading indicator.
The weekly Russell 2000 chart has a few important levels: C, D, E as per below chart. They have provided support and resistance in the last decade.
Consequently, we expect them to continue to work as facilitators of support and resistance in the current decade.
Stocks were struggling in recent years to confirm a strong uptrend, and that’s what we see reflected in the weekly Russell 2000 chart as well. Level E particularly has been challenging … until very recently.
- What is great about this chart is that markets finally decisively move above their previous resistance, at ‘E’.
- What is not so great is that the recent rise is parabolic.
In other words, the ongoing uptrend is not sustainable, and it’s a matter of time until we see a good pullback. Sadly, the pullback after a parabolic rise can be expected to have the inverted shape of the leg higher. So we are concerned to see an inverted V-shaped pattern in a few months on below chart.
Yes, the former all-time highs around 1,700 points might hold. But an inverted V between 1700 and 2000 points is not a great experience for investors … unless they have a very solid method in place.
