Black Friday Selloff

 It means everything. It means nothing. I hate that type of explanation. Here, at Evolution, we won't do that. With that said, we think it is important to dig into two aspects. By doing that, when you finish reading this piece, you can draw a better conclusion with your own thinking.

Perception and Psychology

Perception: Your first thought might be centered on the new virus variant. We all know what lockdowns do to an economy. We also know labor has justified fears that contribute to supply shortages. Together, any new medical danger could spell a repeat of 2020. There is one other factor. The market melt-up has evaluations off the chart. The market could fall a long way, but it still could be in an uptrend. Contradictory as those sounds, it is true when you look at the charts. I will give you another example. It is the most important item that we all need every day. Of course, the Fed discounts it. What are you talking about, you might ask? 

Oil. The commodity took a huge hit with a $10 dollar decline on Friday. There could be two reasons behind the fall. One, President Biden, in coordination with other nations, have decided to use their reserve stash of oil to lower prices. Then, you add the thought of another lockdown and you get carnage. If you look at the (USO) Oil Fund, even with the huge decline, oil is still in an uptrend. It gets more positive for oil when you consider a report by JP Morgan. The investment firm used historical values and added inflation to those past prices. Their conclusion: oil should sell for $78 a-barrel. It is underpriced. We, at Evolution point out one opposing aspect. Every time oil spikes, a recession follows. So, even if JP Morgan is correct, the outlook for the economy does not.

Then, like we mentioned in last week's piece, seasonality. The big money will attempt another push. They may succeed in closing the gap from Friday's fall. It will take a lot of energy to accomplish, but the trend is on their side. Consider the transports. In early November, the index rose 1,000 points in one day. Crazy as those sounds, it actually touched 1,250 points higher on the same day before closing up. However, our call for a correction is looking better and better come January. This takes us to the second point.

Psychology. The market melt-up gathered many new retailers. Many decided to grab their profits on Friday. The real winner of this Black Friday event is the federal government. Taxes will have to be paid on the capital gains. Big money has a way around the government. They have options to balance their buys. By selling, they actually increased the value of their put options. When they make enough on the decline, they will be the ones pushing the market back up. The retailers could be sucked into a bear market trap. One way to view this coming price action is to look at the volume. We believe this is the market tell. You might want to second guess this strategy if one looked at the volume on Black Friday. You might ponder? It was a normal volume day, but do not overlook two points. One, the market only had a half day. Secondly, the day after Thanksgiving is a slow day as many big players take the day off. Now, if you realize these points and you look at the volume on Friday, it was large, very large.

The volume aspect tells you many things. One, within the thinking of many investors, they have doubts about the causes for the price increases. Some market players will call these people weak hands. Dear Reader, there are too many to be classified as day traders and not investors. The Schill's control the media. Avoid the noise. Then, there is the daunting danger in continuing inflation. We believe it is here and it will be with us for a period of time. The real danger with inflation is labor. If there are calls for pay increases, this could set off a spiral of labor unrest like in the 70s. If teachers want more, so do the janitors. If you want better trained police or social workers to assist, well taxes will rise to pay for it. Then, you need more money to make your ends meet. Can you see how this gets dangerous? Then, we have to add the lying, manipulating Federal Reserve to the equation. They have been shown to be behind the curve with inflation, but they are between a rock and a hard place. If they raise rates just one point, a ridiculous 1%, the market will crater. The debt on the federal balance sheet will explode after exploding with all the stimulus. This is scary stuff. If you are planning to purchase something special for Christmas, it better be gold. I can't wait to see how the fiat people attack gold with the other danger in cryptocurrency looming. In any event, warm those Thanksgiving leftovers and have a good week. Peace.