Quick Update

In an intraday special before the Christmas holiday (Dec. 23), markets shook off late-night comments from President Trump and broadly gained. The S&P 500 is looking to end a three-day losing streak.

News Recap

• At the time of publication, the Dow Jones rose 221 points or 0.74%, the S&P 500 rose 0.54%, and the Nasdaq gained 0.08%. The small-cap Russell 2000 once again outperformed and gained 0.95%.
• In a late-night video (Dec. 22), President Trump called the $900 billion stimulus package that was just passed an unsuitable “disgrace,” and asked to be sent a “suitable bill or else the next administration will have to deliver a COVID-19 relief package.” Congress has approved the stimulus bill, but it will not become official until the president signs off.
• In his video, President Trump demanded stimulus checks for Americans to be raised from $600 to $2,000 each.
• Despite Trump’s comments, markets largely shook them off and rose on positive jobless data. U.S. jobless claims totaled 803,000 during the week ending Dec. 19 and beat the estimated 880,000.
• Core durable goods and personal income both disappointed in November.
• Pfizer (PFE) and BioNTech (BNTX) announced a second deal with the U.S. government to supply another 100 million doses of their COVID-19 vaccine. This deal brings the total amount of vaccine doses to 200 million, which will be delivered by the end of July 2021. Pfizer rose 2% on the news.
• After concerns of a new strain of COVID-19 caused markets to briefly sell-off on Monday (Dec. 21), fears were eased on Wednesday after health experts said the vaccines in production would still be effective against it.
• Cyclical sectors most dependent on an economic recovery led the markets. Energy and financials each rose 3.2% and 1.9% at the time of publication respectively, while materials and industrials also gained. Oil giants Chevron and Exxon gained more than 2%, while Diamondback Energy jumped over 8% after announcing two acquisitions this week.
• Travel stocks sharply recovered on the easing of virus fears after selling off earlier in the week. United Airlines (UAL) and Delta (DAL) each gained more than 3%, while Carnival (CCL) and Norwegian (NCL) both jumped over 6%, and Royal Caribbean (RCL) gained 3.5%. Hotel stocks also rose, such as MGM Resorts (MGM) which gained 3%, and Las Vegas Sands (LVS) and Wynn Resorts (WYNN) which gained 1.7% and 2.8%, respectively.
• COVID-19 has now killed over 318,000 Americans (and counting). The CDC announced that this is now the deadliest year in American history as total deaths are expected to top 3 million for the first time. Deaths are also expected to jump 15% from the previous year. This would mark the largest single-year percentage leap since 1918 when WWI and fatalities from the Spanish Flu Pandemic caused deaths to rise an estimated 46%.

After the S&P experienced a three-day losing streak, and markets traded largely mixed the last few sessions, investors were given an early gift before Christmas. Yet while the general focus of both investors and analysts has appeared to be the long-term potential of 2021, specifically the second half of the year, there are certainly very concerning short-term headwinds.

I do not believe that Wednesday’s (Dec. 23) trading will be the short-term norm.

Inevitably, there will be a short-term tug of war between good news and bad news. I truly believe though that these moves are manic and based on sentiment. However, I also believe a lot of the short-term good news has been baked in, and a lot of the near-term headwinds have been ignored.

I also believe that investors will either be taking profits before the year’s end and rebalancing for 2021. I think the big moves upwards are over for the rest of 2020. We could be moving sideways or downwards in the near-term.

Another thing to consider here is that the markets have likely overheated. In my note after the market closed on Friday (Dec. 18), I mentioned that a correction and some consolidation could be very likely in the short-term on the way towards another strong rally in the second half of 2021. While it is hard to say with conviction as to WHEN we could see a correction, I believe that the S&P’s three-day losing streak could potentially be a preview of what’s to come between now and the end of Q1 2020.

There is optimistic potential, but the road towards normalcy will hit inevitable speed bumps.

I do believe though that a correction is healthy and could be a good thing. Corrections happen way more often than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are overdue for one because there has not been a correction since the lows of March. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

The mid-term and long-term optimism are very real, despite the near-term risks. The passage of the stimulus package only solidifies the robust vaccine-induced tailwinds entering 2021- specifically for small-cap value stocks.

In the short-term, there will be some optimistic and pessimistic days. On some days, such as Tuesday (Dec. 22), the “pandemic” market trend will happen - cyclical and COVID-19 recovery stocks lagging, and tech and “stay-at-home” stocks leading. On other days, a broad sell-off based on virus fears may occur as well. Additionally, there will also be days where there will be a broad market rally due to optimism and 2021 related euphoria. And finally, there will be days (and in my opinion, this will be most trading days), that will see markets trading largely mixed, sideways, and reflecting uncertainty.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Does the Dow Approach 31,000 or 29,000 Before Mid-2021?

After trading as low as around 29,650 at one point Monday (Dec. 21), the Dow has been firmly back above 30,000 all week. As of late though, this is an index that has largely traded sideways.

I do like that it appears to no longer be overheating in the short-term. But I have too many short-term questions as to whether or not the Dow can not only stay above 30,000 for more than a week at a time, but also exceed 30,300 and hit more all-time highs. At the very least, I do not think the Dow will hit any more all-time highs before the year is over, and in my opinion, it is just as likely for the Dow to approach 29,000 as it is to approach 31,000 in the early months of 2021. While I called a short-term pop if a stimulus passed, that did not happen.

With so much uncertainty and the RSI still firmly in hold territory, the call on the Dow stays a HOLD.

This is a very challenging time to make calls with conviction. But one thing I do believe is that if and when there is a drop in the index, it will not be strong and sharply relative to the gains since March, let alone November. I believe that we will be in a sideways holding pattern for the foreseeable future.

For an ETF that attempts to directly correlate with the performance of the Dow, the SPDR Dow Jones ETF (DIA) is a strong option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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The S&P 500 closed down for the third consecutive day (Dec. 22), despite Congress’s long-overdue approval of an economic stimulus package.

News Recap

• The Dow Jones declined 200.94 points, or 0.7%, to 30,015.51. The S&P 500 closed down for a third consecutive day and fell 0.2%. Reflecting a return to the “stay-at-home” tech trade, the Nasdaq gained 0.5% on the day (Dec. 22). The small-cap Russell 2000 index managed to outperform yet again, rising 1.01%.
• Congress finally voted on and approved a $900 billion stimulus package to aid struggling Americans. Attached to this bill was also a $1.4 trillion measure to fund the government through Sept. 30. President Trump is expected to sign the bill into law within the next few days.
• A mutant strain of COVID-19 discovered in the UK weighed on markets for a second consecutive day. While the vaccine(s) could still be effective on this strain, the strain appears to be more contagious than others. The discovery of this virus strain has caused stricter lockdown measures and travel restrictions worldwide.
• Travel stocks were the laggards of the day due to fears of the new strain of COVID-19. American Airlines (AAL) fell 3.9% and United (UAL) dropped 2.5%. Cruise lines all fell as well. Carnival (CCL) fell nearly 6%, Royal Caribbean (RCL) dropped nearly 3%, and Norwegian (NCL) plummeted 6.9%
• Apple (AAPL) led the Nasdaq higher as it jumped 2.9% due to investor excitement about their EV plans to challenge Tesla (TSLA) by 2024
• Mixed economic data came in on Tuesday (Dec. 22). The final reading on Q3’s GDP growth found that the US GDP grew 33.4% on an annualized basis, compared to the estimated 33.1%. On the other hand, US consumer confidence fell for the second month in a row and missed expectations - despite vaccine optimism.
• COVID-19 has now killed over 318,000 Americans (and counting). The CDC announced that this is now the deadliest year in American history as total deaths are expected to top 3 million for the first time. Deaths are also expected to jump 15% from the previous year. This would mark the largest single-year percentage leap since 1918, when WWI and fatalities from the Spanish Flu Pandemic caused deaths to rise an estimated 46%.

Markets have officially stumbled before Christmas and experienced a predictable tug-of-war between good news and bad news. While the general focus of both investors and analysts has appeared to be the long-term potential of 2021, there are some very concerning short-term headwinds.

Although there was some anticipation that a stimulus deal could send stocks higher in the near-term, investors may be simply taking profits before the year’s end and rebalancing for 2021. On the other hand, it is very possible that the stimulus package was “too little too late,” and is being overshadowed by a more contagious strain of COVID-19 discovered over the past weekend in the U.K.

While nobody predicted a renegade mutant virus weighing on market sentiment, short-term battles between optimism and pessimism were quite predictable.

According to a note released on Monday (Dec. 21) from Vital Knowledge’s Adam Crisafulli

“The market has been in a tug-of-war between the very grim near-term COVID backdrop and the increasingly hopeful medium/long-term outlook (driven by vaccines) – the latter set of forces are more powerful in aggregate, but on occasion, the market decides to focus on the former, and stocks suffer as a result.”

Meanwhile, the overwhelming majority of market strategists, including myself, are bullish on equities for 2021. It might just be a bit of a bumpy road getting there. I believe that a correction and some consolidation could be very likely in the short-term, on the way towards another strong rally in the second half of 2021. While it is hard to say with conviction WHEN we could see a correction, I believe that the market’s behavior as of late could be a potential preview of what’s to come between now and the end of Q1 2020. There is optimistic potential, but I believe a potential 5% pullback before the year’s end is possible, as well as a minimum 10% correction before the end of Q1 2020.

According to Jonathan Golub, Credit Suisse’s chief U.S. equity strategist, choppiness in the economy and markets in the coming months could be expected before a surge in consumer spending by mid-2021. Golub said, “I don’t think that there’s a smooth, easy straight-line story on this...I think for the next three or four months, the reopening process is going to be sloppy.”

I believe that the S&P’s three-day losing streak could be an ominous sign of what’s to come in the near-term. I do believe though that this is healthy and could be a good thing.

Before Monday’s (Dec. 21) session, I had warned that the market was flashing signs of over-optimism and euphoria. In its most recent survey, for example, the American Association of Individual Investors (AAII) found that 48.1% of investors identified as being bullish - well above the historical average of 38%.

A correction could be just what this market needs. Corrections also happen way more often than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are overdue for one because there has not been a correction since the lows of March. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

The mid-term and long-term optimism are very real, despite the near-term risks. The passage of the stimulus package only solidifies the robust vaccine-induced tailwinds entering 2021, specifically for small-cap value stocks.

In the short-term, there will be some optimistic and pessimistic days. On some days, such as Tuesday (Dec. 22), the “pandemic” market trend will happen - cyclical and COVID-19 recovery stocks lagging, and tech and “stay-at-home” stocks leading. On other days, a broad sell-off based on virus fears may occur as well. Additionally, there will also be days where there will be a broad market rally due to optimism and 2021 related euphoria. And finally, there will be days (and in my opinion, this will be most trading days), that will see markets trading largely mixed, sideways, and reflecting uncertainty.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

The premium analysis this morning will showcase a “Drivers and Divers” section that will break down some sectors that are in and out of favor. As a token of my appreciation for your patronage, I decided to give you a free sample of a “driver” and “diver” sector. Please do me a favor and let me know what you think of this segment! I’m always happy to hear from you.

Driving

Small-Caps (IWM)

The Russell 2000 small-cap index once again beat the larger-cap indices and gained 1.01% on Tuesday (Dec. 22). Despite the profit-taking and negative sentiment during Tuesday’s (Dec. 22) session, small-caps didn’t get the memo.

I do love small-cap stocks in the long-term and this small-cap rally is more encouraging than the “stay-at-home” stock rallies from April/May. This is a bullish sign for long-term economic recovery and shows that investors are optimistic that a vaccine will return life to relative normalcy by mid-2021.

I do have some concerns about overheating in the short-term though. As I mentioned before, I believe that the S&P’s losing streak is only a preview of what could come in the next 1-3 months.

According to the chart above for the Russell 2000 ETF (IWM), it becomes pretty evident that small-cap stocks have overheated in the short-term. Stocks won’t always go up, but the IWM’s trajectory since November has been essentially vertical. The ETF keeps hitting record highs while the RSI keeps overinflating way past overbought levels as the volume shows instability.

Since November, the Russell index has been on a run nothing short of astounding. Just look how the iShares Russell 2000 ETF (IWM) compares to the ETFs tracking the Dow, S&P, and Nasdaq in that time frame. Since November, the IWM has risen nearly 28% and has at least doubled the returns of the ETFs tracking the other major indices.

Although the Russell index is composed mostly of small-cap cyclical stocks dependent on the recovery of the broader economy and may be more adversely affected on “sell-the-news” kind of days, its hot streak since November has seemingly not cooled off as much as other indices and sectors.

But I believe this will eventually happen in the short-term, and I hope it does for a long-term buying opportunity.

In the short-term, small-cap stocks may have overheated and could experience the greatest volatility. SELL and take short-term profits if you can, but do not fully exit positions.

If there is a pullback, BUY for the long-term recovery.

Diving

US Dollar ($USD)

If the dollar rallies at all again soon, do not be fooled.

Ever since I called the dollar’s rally past the 91 level two Wednesdays ago (Dec. 9) a mirage, the dollar has declined by 1.25%.

I believed it to be “fool's gold” then and I believe any subsequent rally that could come will be “fool’s gold” too.

I still am calling out the dollar’s weakness after several weeks, despite its low levels. I expect the decline to continue as well thanks to a dovish Fed.

The world’s reserve currency is still trading below 90 and has not traded this low since April 2018.

Joe Manimbo, a senior analyst at Western Union Business Solutions, seemingly agrees with me as well and said that “the latest blow to the dollar came from the Fed, which vowed not to touch policy even if the outlook for the U.S. economy brightens as it now expects.”

Since hitting a nearly 3-year high on March 20th, the dollar has plunged nearly 13% while emerging markets and other currencies continue to strengthen.

On days when COVID-19 fears outweigh any other positive sentiments, dollar exposure might be good to have since it is a safe haven. But in my view, you can do a whole lot better than the US dollar for safety.

I have too many doubts on the effect of interest rates this low for this long, government stimulus, strengthening of emerging markets, and inflation to be remotely bullish on the dollar’s prospects over the next 1-3 years. Meanwhile, the US has $27 trillion of debt, and it’s not going down anytime soon.

Additionally, according to The Sevens Report, if the dollar falls below 89.13, this could potentially raise the prospect of a further 10.5% decline to the next support level of 79.78 reached in April 2014

After briefly rising above an oversold RSI of 30 last week, the dollar’s RSI is now at an alarmingly low 27.87. The dollar is also significantly trading below both its 50-day and 200-day moving averages.

While the dollar may have more room to fall, this MAY be a good opportunity to buy the world’s reserve currency at a discount as the RSI is oversold. But I just feel you can do a whole lot better than the USD right now.

I’m not a crypto guy either myself, but Bitcoin’s run compared to the dollar’s disastrous 2020 has to really make you think sometimes….

For now, where possible, HEDGE OR SELL USD exposure.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

• Read more

Quick Update

Dear readers, before we get into today’s news and stock analysis and because I’ve been receiving many questions from you, I’d like to first clarify what I mean by BUY, SELL, or HOLD. Here, I am largely referring to outperforming the S&P 500. When the conditions favor adding risk and buying the U.S. market overall, I will be issuing an "alert." I am not sure yet whether I will be moving to entry prices or target prices & stop losses, however, I have discussed this internally with the team at Sunshine Profits. In the current market environment, when fundamentals have essentially fallen to the wayside, I prefer to invest directionally rather than being married to certain levels in the market. In my view, trading with specific figures in mind can hurt long term returns if you do not let your winners run and cut your losers fast. I do update my calls daily, though, and any changes will be highlighted! Thank you again for being such great readers - I truly value your trust. Stay tuned for updates and let me know if you have any other questions!

Monday Intraday Update: In an intraday special bulletin due to the news, markets sharply declined due to fears of a new coronavirus strain. This outweighed what should have been a positive day from the stimulus package finally passing.

News Recap

• At the time of publication, the Dow Jones fell 380 points or 1.26%, the S&P 500 dropped 1.79%, and the Nasdaq lost 1.67%. The small-cap Russell 2000 index also fell 1.74%.
• A new, possibly more contagious strain of the coronavirus was discovered in the UK and sent stocks sharply downwards today.
• Due to the new strain of the virus, more severe lockdowns and travel restrictions across Europe were implemented.
• As a result of the stricter shutdown measures and travel fears, travel-related stocks and COVID-19 recovery stocks were by far the largest laggards in early trading. Norwegian (NCLH) and Royal Caribbean (RCL) cruise lines each fell more than 3%, while airlines such as American Airlines (AAL) slid 5.2%, and United Airlines (UAL) fell more than 4%.
• Hotel stocks were hurt as well such as Wynn Resorts (WYNN) and MGM (MGM) which both fell more than 4%.
• Tesla (TSLA) fell as much as 6% as it officially joined the S&P 500. Tesla has a 1.69% weighting in the index, the fifth largest. Tesla was added to the index in one fell swoop, marking the largest rebalancing of the S&P 500 in history.
• Meanwhile, Nike (NKE) hit a record high after posting strong earnings, while bank stocks surged after the Fed announced on Friday (Dec. 18) that it will allow the big banks to resume share buybacks in the first quarter of 2021. JPMorgan (JPM) shares jumped almost 3% on the news.
• Despite Monday’s losses, lawmakers finally reached an agreement on a $900 billion stimulus package. In this package, direct payments and jobless aid would be provided to struggling Americans. The announcement of the stimulus deal came after negotiations were finally resolved in rolling back the Federal Reserve’s emergency lending powers. According to Treasury Secretary Steven Mnuchin, the stimulus money will go out as soon as next week.
• The FDA officially approved Moderna’s (MRNA) vaccine for emergency use on Friday (Dec. 18) and began rolling the vaccine out on Monday (Dec. 21). Government officials plan to ship nearly 6 million doses of Moderna’s vaccine in addition to the 2.9 million Pfizer (PFE) doses already in distribution.

The general focus of both investors and analysts has appeared to be the long-term potential of 2021, specifically the second half of the year. Yet there are certainly very concerning short-term headwinds.

Inevitably, there will be a short-term tug of war between good news and bad news. The markets this morning perfectly illustrated that. Until this new coronavirus strain was discovered, the biggest factor weighing on the markets in the short-term were stimulus negotiations. COVID-19 concerns and economic shutdowns were largely baked in and overlooked. Once the stimulus package passed though, it wasn’t enough to outweigh fears of this new, allegedly more contagious virus strain that was discovered over the weekend. You truly can’t make these things up. 2020 has been something else.

Vital Knowledge’s Adam Crisafulli put it best in a note to clients:

“There was actually a lot of encouraging news this morning, although it’s being overshadowed (for now) by the gloomy headlines out of the U.K...The market has been in a tug-of-war between the very grim near-term COVID backdrop and the increasingly hopeful medium/long-term outlook (driven by vaccines) – the latter set of forces are more powerful in aggregate, but on occasion, the market decides to focus on the former, and stocks suffer as a result.”

Another thing to consider here is that the markets have likely overheated in the near-term. In my last note after the market closed on Friday (Dec. 18), I mentioned that a correction and some consolidation could be very likely in the short-term on the way towards another strong rally in the second half of 2021. While it is hard to say with conviction WHEN we could see a correction, I believe the market’s behavior today could potentially be a preview of what’s to come between now and the end of Q1 2020. We could see a potential 5% pullback before the year’s end. There is optimistic potential, but the road towards normalcy will hit inevitable speed bumps.

Before the sell-off on Monday (Dec. 21), I had been warning that the market was flashing signs of over-optimism and euphoria. In its most recent survey, for example, the American Association of Individual Investors (AAII) found that 48.1% of investors identified as being bullish - well above the historical average of 38%. With an overabundance of cocky, euphoric, and optimistic investors, the market becomes more vulnerable to selling pressure. Corrections are also way more common than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Because there has not been one since the lows of March, this is another reason why I believe we are due for one.

Despite these near-term risks, the overwhelming majority of market strategists, including myself, are bullish on equities for the second half of 2021. I almost hope for a pullback in the near-term so there can be buying opportunities for the long-term. In these times, I believe you need to have a balance of caution while looking past short-term pain and fear.

Although the economic recovery could stutter in the early half of the year, many analysts expect double-digit gains to continue in 2021. Strategists surveyed by CNBC, for example, expect an average 9.5% rise in 2021 for the S&P 500.

Additionally, according to Robert Dye, Comerica Bank Chief Economist:

“I am pretty bullish on the second half of next year, but the trouble is we have to get there...As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Has the Nasdaq Officially Overheated?

On Friday’s note (Dec. 18), I changed my short-term call on the Nasdaq to a SELL. While I did not say to fully exit positions, I said that now would be a good time to trim some profits before an eventual pullback. I guess all we needed was a mutant virus in England for that pullback to happen!

I said to pay close attention to the RSI. While an overbought RSI does not automatically mean a trend reversal, I called keeping a very close eye on this for the Nasdaq. I did not want to make that same mistake twice. The Nasdaq pulled back on December 9th after it exceeded an RSI of 70, and I did not call it a sell. This time though, I said if the Nasdaq ekes past 70, to consider selling. It passed 70 last week, and on Friday (Dec. 18), I said to monitor this.

Don’t ever let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself, especially in markets. I have many concerns about tech valuations and their astoundingly inflated levels. The recent IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this. I believe that more pullbacks along the lines of Wednesday, December 9th’s session and Monday’s (Dec. 21) session could and should inevitably come in the short-term.

With unstable volume to start the week on the horizon as Tesla officially joins the S&P 500, I am calling for some short-term volatility as well. I switched my short-term call from a HOLD to a SELL on Friday (Dec. 18), and I am sticking with that on Monday (Dec. 21).

Take profits and SELL- but do not fully exit.

While tech has overheated in the short-term, my optimism and bullish thoughts for 2021 have not changed. I hope tech pulls back closer to its 50-day moving average for some quality long-term buying opportunities.

Do not forget that tech can also be very helpful to own on pessimistic days because of all the “stay-at-home” names as well.

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is a good option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

• Read more

Quick Update

Dear readers, before we get into today’s news and stock analysis and because I’ve been receiving many questions from you, I’d like to first clarify what I mean by BUY, SELL, or HOLD. Here, I am largely referring to outperforming the S&P 500. When the conditions favor adding risk and buying the U.S. market overall, I will be issuing an "alert." I am not sure yet whether I will be moving to entry prices or target prices & stop losses, however, I have discussed this internally with the team at Sunshine Profits. In the current market environment, when fundamentals have essentially fallen to the wayside, I prefer to invest directionally rather than being married to certain levels in the market. In my view, trading with specific figures in mind can hurt long term returns if you do not let your winners run and cut your losers fast. I do update my calls daily, though, and any changes will be highlighted! Thank you again for being such great readers - I truly value your trust. Stay tuned for updates and let me know if you have any other questions!

Let’s begin Monday by reviewing what happened at the close of last week.

Volatile trading occurred on Friday (Dec. 18), with Congress struggling to close out a stimulus package, causing stocks to slip from record highs.

News Recap

• The Dow Jones fell 124.32 points, or 0.4%, to 30,179.05. At its session low, the index fell more than 270 points. The S&P 500 also dipped 0.4% and snapped a three-day winning streak. The Nasdaq fell only 0.1%, while the small-cap Russell 2000 fell 0.41%.
• While Congress claims to be on the brink of a $900 billion stimulus deal, it is working against time. In public, leaders are speaking optimistically that a deal will pass, however, there are last-minute partisan disputes on direct payments, small business loans, and a boost to unemployment insurance
• There was an unusually large amount of trading volume on Friday (Dec. 18) as Tesla (TSLA) was set to officially join the S&P 500 after the closing bell. Tesla is being added to the index in one fell swoop, marking the largest rebalancing of the S&P 500 in history. After surging 700% in 2020, from day 1, Tesla will be the seventh-largest company in the S&P in terms of market cap.
• The FDA officially approved Moderna’s vaccine for emergency use. Government officials plan to ship nearly 6 million doses of Moderna’s vaccine in addition to the 2.9 million Pfizer (PFE) doses already in distribution.
• Despite Friday’s (Dec. 18) losses, the indices closed out the week with mild gains. The Dow closed up 0.4%, the S&P 500 advanced 1.3%, and the NASDAQ closed up 3.1%. The small-cap Russell 2000 continued its strong run as well and gained 2.5% for the week.
• Meanwhile, the pandemic has reached its darkest days and is hitting unforeseen and unprecedented numbers. The U.S. shattered the previous record of daily deals on Wednesday (Dec. 16), recording over 3,600 deaths. As of Friday (Dec. 18), the country has also now surpassed 17 million confirmed cases, with death totals soaring past 300,000. California, Illinois, Pennsylvania, and Texas alone reported more than 1,000 deaths in the past week.

While the general focus between both investors and analysts appears to be on the long-term potential in 2021, there are certainly short-term concerns. Inevitably, there will be a short-term tug of war between good news and bad news. For now, though, the main catalyst is the stimulus package. If a stimulus package is passed before Christmas, the markets could benefit. If it doesn’t, markets will drop. Time is running short and we may be at a fork in the road.

According to Luke Tilley, chief economist at Wilmington Trust, another stimulus package was needed to keep the economic recovery from stalling before the mass distribution of a vaccine.

“With the continued rising cases and mass vaccinations still a ways out, we could see some further weakness in jobs and even a flattening where we’re not even adding jobs at all ... that’s absolutely a possibility for this next jobs report,” Tilley said. “And if we were to not get another stimulus package, you’re going to have 10 to 11 million people fall off the unemployment rolls right away, and that would hit spending as well.”

However, despite near-term risks, the overwhelming majority of market strategists are bullish on equities for 2021, especially for the second half of the year. While there may be some short-term worries, the consensus between market strategists is to look past the short-term pain and focus on the longer-term gains. Although the economic recovery could stutter in the early half of the year, the general focus is on the second half of the year when we could potentially return to normal. Many analysts expect double-digit gains to continue in 2021, with strategists in a CNBC survey expecting an average 9.5% rise in 2021 for the S&P 500.

Additionally, according to Robert Dye, Comerica Bank Chief Economist:

“I am pretty bullish on the second half of next year, but the trouble is we have to get there...As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

In the short-term, there will be some optimistic and pessimistic days. On some days, the broader “pandemic” market trend will happen, with cyclical and recovery stocks lagging, and tech and “stay-at-home” stocks leading. Sometimes a broad sell-off based on fear or overheating may occur as well. On other days, there will be a broad market rally due to optimism and 2021-related euphoria. Additionally, there will be days (and in my opinion this will be most trading days), when markets will trade largely mixed, sideways, and reflect uncertainty. But if we get an early Christmas present and a stimulus package passes, all bets are off. It could mean very good things for short-term market gains.

Despite the optimistic potential, the road towards normalcy will hit inevitable speed bumps. While it is truly hard to say with conviction that a short-term rally or bear market will come, I do believe that some consolidation and a correction could be possible in the short-term on the way towards another strong rally in the second half of 2021.

Outside of economic damages and an out-of-control virus, the market itself is flashing potential signs of over-optimism and euphoria. In its most recent survey, for example, the American Association of Individual Investors (AAII) found that 48.1% of investors identified as being bullish - well above the historical average of 38%. With an overabundance of cocky, euphoric, and optimistic investors, the market becomes more vulnerable to selling pressure. Corrections are very common though. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Because there has not been one since the lows of March, we could be due for one in the early part of 2021.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction in early 2021 is very possible, but I do not believe, with certainty, that a correction above ~20% leading to a bear market will happen.

Has the Nasdaq Officially Overheated?

Don’t ever let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself, especially in markets. I have many concerns about tech valuations and their astoundingly inflated levels. The recent IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this. I believe that more pullbacks along the lines of Wednesday, December 9th’s session could inevitably come in the short-term.

Pay close attention to the RSI. While an overbought RSI does not automatically mean a trend reversal, I called keeping a very close eye on this for the Nasdaq. The December 9th Nasdaq pullback, after it exceeded a 70 RSI, reflects that.

The RSI is now above 70. Monitor this. With unstable volume to start the week on the horizon, as Tesla officially joins the S&P 500, I am calling for some short-term volatility. I did not make a conviction call last week but I am not making that mistake again. Because the RSI is officially above 70, and because I foresee unstable volume thanks to Tesla, take profits and SELL some shares, but do not fully exit.

While tech has overheated, there is still some very real long-term optimism based on stimulus hopes and 2021’s potential.

Furthermore, on pessimistic days, having Nasdaq exposure is crucial because of the “stay-at-home” trade.

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is a good option.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

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Major averages hit both all-time intraday and closing highs on Thursday (Dec. 17), riding on vaccine optimism and hopes that a stimulus package could be passed in a matter of days.

News Recap

• The Dow Jones climbed 148.83 points, or 0.5%, to 30,303.37 for a record close. Both the S&P 500 and Nasdaq hit intraday and closing records as well and gained 0.6% and 0.8%, respectively. In typical fashion, the Russell 2000 small-cap index once again beat the other indices and gained 1.30%.
• Senate Majority Leader Mitch McConnell on Thursday (Dec. 17) said that a stimulus deal was closing in. Congress appears to be nearing a $900 million stimulus package that would include direct payments to individuals. However, the package would exclude the partisan issues of liability protections for businesses and aid to state and local governments.
• Despite the optimistic tone of the day, jobless claims disappointed for a second consecutive week. Jobless claims totaled 885,000 last week, hitting their highest levels since early September. This was also significantly worse than the expected 808,000.
• An FDA panel officially endorsed Moderna's (MRNA) COVID-19 vaccine. It could officially be cleared for emergency usage as early as Friday (Dec. 18), and be distributed as soon as after the weekend. Upon authorization, government officials plan to ship nearly 6 million doses of Moderna’s vaccine in addition to the 2.9 million Pfizer (PFE) doses already in distribution.
• Real estate, materials and health care were the best-performing sectors in the S&P 500, each gaining over 1%. Johnson & Johnson (JNJ) rose 2.6% to lead the Dow higher.
• Tesla (TSLA) gained 5.32% and will now officially join the S&P 500.
• We are in the darkest days of the pandemic. On average, the U.S. is recording at least 215,729 additional COVID-19 cases a day. More than 114,200 Americans are also now hospitalized, and over 3,400 new deaths were recorded. According to the CDC Director, Robert Redfield, US COVID-19 deaths are likely to exceed the 9/11 death toll for the next 60 days.

While sentiment has been positive over the last two trading sessions, there will still be a short-term tug of war between good news and bad news. It’s quite simple really - until a stimulus is passed and the virus is somewhat brought under control, there will be negative pressure on the markets. Even though a stimulus package passing appears to be imminent, time is running short and we may be at a fork in the road.

For now, though, hopes that a deal could pass through are sending stocks higher.

“Stimulus is still the main driver in the market right now until they get something done, and it does appear there is some motivation on that front to get something done,” said Dan Deming, managing director at KKM Financial, further stating that “the market’s benefiting from that (enthusiasm).”

Additionally, Luke Tilley, chief economist at Wilmington Trust, said that another stimulus package was needed to keep the economic recovery from stalling before the mass distribution of a vaccine.

“With the continued rising cases and mass vaccinations still a ways out, we could see some further weakness in jobs and even a flattening where we’re not even adding jobs at all ... that’s absolutely a possibility for this next jobs report,” Tilley said. “And if we were to not get another stimulus package, you’re going to have 10 to 11 million people fall off the unemployment rolls right away, and that would hit spending as well.”

The overwhelming majority of market strategists are bullish on equities for 2021 though, despite near-term risks. While there may be some semblance of a “Santa Claus Rally” occurring, the general consensus between market strategists is to look past the short-term pain and focus on the longer-term gains. The mid-term and long-term optimism is very real.

According to Robert Dye, Comerica Bank Chief Economist:

“I am pretty bullish on the second half of next year, but the trouble is we have to get there...As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

In the short-term, there will be some optimistic and pessimistic days. On some days, the broader “pandemic” market trend will happen, with cyclical and recovery stocks lagging, and tech and “stay-at-home” stocks leading. Sometimes a broad sell-off based on fear or overheating may occur as well. On other days, there will be a broad market rally due to optimism and 2021-related euphoria. Additionally, there will be days (and in my opinion this will be most trading days), when markets will trade largely mixed, sideways, and reflect uncertainty. But if we get an early Christmas present and a stimulus package passes, all bets are off. It could mean very good things for short-term market gains.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments though, it is truly hard to say with any degree of certainty that a correction will happen or more record high rallies will occur.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible, but it is hard to say with conviction that a big correction will happen.

The premium analysis this morning will showcase a “Drivers and Divers” section that will break down some sectors that are in and out of favor. As a token of my appreciation for your patronage, I decided to give you a free sample of a “driver” and “diver” sector. Please do me a favor and let me know what you think of this segment! I’m always happy to hear from you.

Driving

Small-Caps (IWM)

In typical fashion, the Russell 2000 small-cap index once again beat the other indices and gained 1.30% on Thursday (Dec. 17). I truly love small-cap stocks in the long-term and this small-cap rally is more encouraging than the “stay-at-home” stock rallies from April/May. This is a bullish sign for a long-term economic recovery and shows that investors are optimistic that a vaccine will return life to relatively normalcy in 2021.

I do have some concerns of overheating in the short-term however, especially with the headwinds that still exist. The Russell keeps outperforming no matter what the market sentiment of the day or week is. For example, although the week ended December 11th was an overall down week, the Russell 2000 STILL managed to outperform the larger indices and eek out another weekly gain of 1.02%. While it is remarkable, I do not see how this is sustainable in the short-term.

The performance of the Russell 2000 index since early November has been nothing short of staggering. Although the Russell index is composed mostly of small-cap value cyclical stocks dependent on the recovery of the broader economy, and may be more adversely affected on “sell-the-news” kind of days, its hot streak since November has not cooled off in the slightest.

Since the start of November, the Russell 2000 has skyrocketed and considerably outperformed the other major indices. The iShares Russell 2000 ETF (IWM), in comparison to the ETFs tracking the Dow (DIA), S&P (SPY), and Nasdaq (QQQ), has risen 28.62%. This is at least 13% higher than all of the other major indices. Since the start of December, the Russell ETF has also outperformed the other ETFs between 4%-5%.

However, when looking at the chart for the Russell 2000 ETF (IWM), it becomes pretty evident that small-cap stocks have overheated in the short-term. These are stocks that will experience more short-term volatility. Stocks don’t always go up but the Russell’s trajectory since November has been essentially vertical. The IWM ETF keeps hitting record highs while the RSI keeps overinflating way past overbought levels. I would SELL and trim profits for the short-term but do not fully exit these positions. A stimulus could be imminent and send these stocks soaring more. But if there is a pullback, BUY for the long-term recovery.

Diving

US Dollar ($USD)

The U.S. Dollar’s plunge continues to its lowest levels in years. I called the return to oversold levels this week despite the currency piercing the 91-level last Wednesday (Dec. 9). I knew it was “fool's gold” and not the sign of any sort of breakout. I have been calling the dollar’s weakness for weeks despite its low levels, and I expect the decline to continue.

For the first time since April 2018, the world’s reserve currency is now trading below 90.

Why did the dollar plunge so much on Thursday (Dec. 17)? You can thank the Fed! After the Federal Reserve’s dovish tone and reassurance on Wednesday (Dec. 16) that it won’t be soon tapering its bond purchases, bearish traders took this as a sign to continue selling the dollar.

“The latest blow to the dollar came from the Fed, which vowed not to touch policy even if the outlook for the U.S. economy brightens as it now expects,” said Joe Manimbo, senior analyst at Western Union Business Solutions.

After hitting a nearly 3-year high in March, the dollar has plunged in excess of 13%.

Meanwhile, other currencies continued strengthening on Thursday (Dec. 17), relative to the dollar:

• The euro rose 0.6% to $1.2270, hitting its highest level versus the dollar since April 2018. The euro is up more than 9% year to date.
• The dollar fell to a more-than-three-year low versus the Japanese yen and declined 0.4% to ¥103.07.
• The British pound was up 0.5% at $1.3575 - its highest since April 2018.
• Both the Australian dollar and the New Zealand dollar each gained 0.6% versus the US dollar.
• The US dollar was off 0.1% vs. the Canadian dollar.

After briefly rising above an oversold RSI of 30 last week, the dollar’s RSI is at an alarmingly low 22.96. The dollar is also significantly trading below both its 50-day and 200-day moving averages.

Many believe that the dollar could fall further too.

If the world returns to relative normalcy within the next year, investors may be more “risk-on” and less “risk-off,” meaning that the dollar’s value will decline further.

Additionally, because of all of the economic stimulus and seemingly imminent additional stimulus, the dollar’s value has declined and could have more room to fall. With a dovish Fed and record low-interest rates projected to remain this low for at least another two years, the dollar may not appreciate again for a very long time.

While the dollar may have more room to fall, this MAY be a good opportunity to buy the world’s reserve currency at a discount - at least for a quick short-term trade. The low RSI reflects this.

But I just have too many doubts on the effect of interest rates this low, government stimulus, strengthening of emerging markets, and inflation to be remotely bullish on the dollar’s prospects over the next 1-3 years.

For now, where possible, HEDGE OR SELL USD exposure.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist

• Read more