Here’s An Early Outlook On The 2021 Market

Last week, I wrote about VIX, the volatility indicator, and how it continues to provide a bullish signal for the stock market. I also looked at the volatility of VIX, using my Income Trader Volatility (ITV) indicator, which was also bullish for stocks.

This week, we’re seeing more of the same. The chart below shows VIX with a dashed line marking the August low. A break below that level could signal rapid gains in stocks are likely.

VIX spiked at the end of February as traders began worrying about the severity of the pandemic. Now, it appears positioned to drop back into the levels where it was for most of 2019. The SPDR S&P 500 ETF (NYSE: SPY) delivered a total return of more than 30% while VIX was in that trading range.

The 2021 Outlook

I’m not expecting 2021 to be a repeat of 2019. But there are reasons to be bullish.

Last week, I highlighted the bullish price pattern in SPY. One reason to expect that trend to continue is the action of the Federal Reserve.

The next chart shows the year-over-year change in MZM, a broad measure of the money supply. The Fed pushed money into the economy quickly in an effort to limit the economic effects of the pandemic. This pushed MZM growth to levels that weren’t seen since the high-inflation days of the 1980s.

Source: Federal Reserve

Economists believe that Fed policy tends to act slowly on the economy. Changes in policy can take six months or more to have an impact. That indicates there is a large amount of money in the economy likely to move to stocks.

Much of that money is likely to move into the stocks that are included in the NASDAQ 100 Index. This index tracks the largest stocks on NASDAQ, including Facebook, Amazon, Apple, Tesla, and other market leaders.

Invesco QQQ Trust (NASDAQ: QQQ) is an ETF that tracks this index. The next chart shows that QQQ broke out to a new high last week. That move coincides with the Profit Amplifier Momentum (PAM) indicator at the bottom of the chart.

PAM is specifically designed to change from bearish to bullish slowly in order to reduce whipsaw signals, which are quickly reversed. This focus on the longer-term trend means PAM is unlikely to turn exactly at a top or bottom but is likely to be on the right side of significant trends.

Action To Take

Based on the pattern, the price target for QQQ is about $333, about 8% above Friday’s close.

As I noted in my analysis of SPY last week, this analysis is based purely on technicals. There is no fundamental reason to expect QQQ to rally. But the technicals are clear, and I remain cautiously bullish for now.