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Weekly Memorandum 1/11/2021

Stocks are down a bit to start the week as their extended rally appears poised to pause. Previous issues stated that we are due for a high in short order, and we may have seen one in the near-term. One of the keys behind this notion is due to the exceedingly manic and euphoric sentiment from traders and investors. After a bull run like we've seen, it's imperative we humble ourselves before the market gods -- in other words, none of us are really that smart when +80% of the stocks on the NYSE are rallying.

There has been a bloodbath in cryptocurrencies over the weekend, as Bitcoin, Ethereum, and Litecoin are all down over 20% from their highs. This development was no surprise to subscribers to the Mercator Crypto Report, as the price objectives outlined in the December 2020 edition were satisfied, which saw our long exposure reduced significantly. The key now is for a higher-low to occur in order for the uptrend to sustain itself. The good news is that there is plenty of support on the downside in these markets, so that should be difficult to achieve.

We also saw various commodity markets close at multi-year highs again last week, namely Crude Oil, Corn, and Soybeans. This bodes well for the commodity sector overall, but in the short-term they do appear a bit extended and due for a reversion to the mean. The same holds true for the U.S. Dollar, but inversely. That is, the dollar has declined substantially in recent weeks, but appears poised for an upside reversion to the mean. This could lead to a short-term bid in Treasury prices, as investors seek safety from volatility.

It does appear that financial markets are entering a risk-off environment in the short-term, although we can't rule out one final blow-off top in equities until we close below meaningful support. After a run like we've witnessed, it's important not maintain as many as the gains as possible. Stay nimble. The next couple weeks could be very volatile.

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