The Best Quarter of 2021
By Monish Chhabra ǀ October 19, 2021
Statistically for a stock, an attractive setup is one where the price has hit the low point of a high-confidence band, and is turning up convincingly. There would then be plenty of room for the price to run up, at least to the middle, and perhaps even to the top of that band.
Under normal market conditions, different groups of stocks trade at different stages of their respective bands. Some are on the high, some in the middle, and some at the low.
It is rare to find many of them at the same position simultaneously, and behave in a similar manner.
That rare occurrence is what we see now.
We look below at five different groups, spanning a wide range of market sectors.
Steady Medical Devices
We start with the steady-growth low-volatility group of ‘medical devices’ stocks.
The following chart represents a group of about 70 of the largest medical devices companies. The blue graph shows the price. The green line shows a high-probability lower bound over the last 2 years.
What we see is that the medical devices sector has recently hit the low bound, which has typically been the level from where it bounces back.
So far, it is holding the trend in place, and the price seems to be turning back up.
Next, we look at a high-profile group of ‘mid-cap growth’ stocks.
In blue below, is the price graph that represents a group of about 70 medium-size companies in the US with strong growth characteristics. The green line shows a lower bound over the last 2 years. We also include the red line that shows a lower bound since the crash of March-2020.
The price recently hit the low-bound on both the green as well as the red line, and now seems to be turning up.
If the last two year of trends hold, these high-growth mid-cap companies look ready to run up.
Then we move to a group with very different complexion compared to those before - ‘small-cap value’ stocks.
The following blue graph represents the price of about 600 small-size companies in the US that show low valuations and high dividends. The green line is a statistical lower-bound over the last 2 years, and the red line is a lower-bound since the crash of March-2020.
This group of small-cap value stocks dipped below the low red bound, and has been tracking along it over the last few weeks. They didn't breach the green line by much. The trends are still alive.
These small-cap value stocks look like they want to break back above the low lines, though they are a bit behind in this journey, as compared to the other two groups we saw earlier; the high-growth mid-caps, or the steady-growth medical devices.
Next, we go beyond the company stocks, and look at precious metals. The blue graph below shows the price of ‘silver’. The green line represents the statistical lower-bound over the last two years.
Silver is showing something similar to the small-cap value companies; its price dipped below the lower bound, and has been trying lately to break back above it.
Lastly, we look at the sector that to many is the new-age equivalent of precious metals – cryptocurrencies.
In blue below, is the price graph of ‘bitcoin’. The green line is a statistical lower-bound over the last 2 years, and the red line is a lower-bound since the crash of March-2020.
Bitcoin dipped below both the green and the red lines over the last few months.
Recently, it has turned back up, and looks like back in its uptrend, even ahead in the curve as compared to the groups like medical devices or mid-cap growth.
Different Players At The Same Spot
Typically, sectors with such diverse characteristics - the steadiness of medical devices, the growth of high-profile mid-caps, the value of high-dividend small-caps, the durability of precious metals, and the promise of cryptocurrencies - they all don’t look and act the same way, at the same instance.
They are now.
Such systematic synchronization in positioning happens only around two occasions – before a major run up, or around a complete collapse.
There is a chance that all these groups would simultaneously break down their trends, fall under their lower bounds, and lead to a broad crash. The odds of this are less than 20%.
Greater than 80% probability suggests otherwise. At least a bunch of them are likely to keep their trends intact and run up from here. This could create a major lift across markets, over the next few months.
At its start, this is already the best-positioned quarter of 2021.
Never before in this year, were so many diverse sectors poised so attractively at the same time.
For how it ends, we would see if the odds play out. Now we let the market do its dance.
This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.