Stocks closed mixed on Thursday (Dec. 10) after a new report showed that new jobless claims resurged to their worst level in months, while COVID-19 cases climbed to record numbers, and stimulus gridlock continues.

News Recap

• The Dow Jones fell 69.55 or .23%, the S&P 500 fell 0.13%, and the Nasdaq rose 0.54%.
• For the week ended Dec. 5th, 853,000 new jobless claims were reported. This is the worst level since September, the first increase in 4 weeks, and well above the market estimates of 725,000.
• A U.S. FDA advisory panel voted 17 to 4 to approve Pfizer’s vaccine for emergency use. The full FDA approval could grant emergency use authorization of Pfizer’s vaccine as early as Friday.
• Stimulus talks continued to slog forward. While lawmakers plan to pass a one-week government funding extension through to Dec. 18, to buy more time to craft a stimulus deal before year’s end, there are still significant hurdles to cross. Democrats and Republicans apparently have found consensus in some areas such as PPP loans, but issues including state and local aid, liability protections, unemployment assistance and stimulus checks are still dividing Congress.
• After DoorDash (DASH) IPO’d on Tuesday, and surged, AirBnB (ABNB) followed suit and closed nearly 113% higher on Thursday.
• This has been the most lethal week yet for COVID-19 in the U.S. Thursday saw a record 229,000+ cases and over 3,100 deaths. The worst may not be over yet either. 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.

There is simply too much short-term uncertainty right now to predict what the next 1-3 months will be like. In the short-term, there will be optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days where there will be a broad sell-off or rotation into “stay-at-home” names. Thursday’s session, for example, was a reflection of pessimistic sentiment, and a rotation back into tech. Other days, such as Wednesday (Dec. 9), tech may sharply sell-off and lead the declines.

In the mid-term and long-term, however, 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 likely stabilize, while optimism and relief will permeate the markets. The FDA advisory committee’s approval of Pfizer’s vaccine for emergency usage is certainly a step in the right direction. We could be just days away from vaccinations finally happening in America. Stocks especially dependent on a rapid recovery and reopening such as small-caps should thrive.

Markets will continue to wrestle with the negative reality on the ground and optimism for a 2021 economic reopening. This is simply the lay of the land nowadays. More positive vaccine news seemingly trickles in by the day despite increasingly horrifying COVID-19 numbers, economic news, and political news.

Because of how much the markets have heated the last 6-7 weeks, a correction could be a welcome sign. While short-term downside pressure could certainly persist based on days where bad news outweighs good news, due to this “tug of war” between sentiments, any subsequent move downwards would likely be modest in comparison to the gains since the bottom in March and since the U.S. election at the start of November. The vaccine is simply the “injection” that the markets need right now. It is truly hard to say with conviction that another crash or bear market will come. If anything, the mixed sentiment could keep markets trading relatively sideways.

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 one “driver” and one “diver” sector. Do me a favor and let me know what you think of this segment! Always happy to hear from you.

Driving

Materials (XLB)

The materials sector, as represented by the XLB ETF (shown above), has been one of the largest beneficiaries of the vaccine rally. Vaccine news briefly sent the XLB ETF to its 2020 high in November. However, since then, the ETF has traded relatively sideways, and has slightly declined this week.

Cyclical sectors such as materials are set to be the biggest winners from an economic reopening in 2021. However, ever since peaking at $72.41 a share, the ETF’s volume has plummeted and stayed low. There are not enough strong fundamentals to justify calling this sector a BUY at this time.

I do like this ETF’s modest decline on Thursday (Dec. 10), and generally this week. But for me, it is not a large enough pullback for a convincing buy. I believe that the sector could pull back further or stay in a sideways pattern for the rest of the month. For the materials ETF to come back, exceed its 52-week high, and pierce that $72 resistance level, a stimulus package MUST pass ASAP, and a COVID-19 vaccine must be efficiently rolled out and scalable. If this happens and a near-term economic slowdown can be somewhat averted, then materials could benefit. But for now, my view is muddled.

For the time being, there is too much uncertainty to make a conviction call. Therefore, this is a HOLD for the short-term. However, I am considerably more bullish on materials in the long-term.

Diving

US Dollar ($USD)

Although the U.S. Dollar somewhat recovered earlier in the week and pierced the 91 level, it plunge again on Thursday. I have been calling this dollar weakness for weeks despite the low level and expect the decline to continue.

The world’s reserve currency is still hovering around its 2-year low and has plunged in excess of 12% since March. After briefly rising above an oversold RSI of 30, it has also returned right back towards that level. The dollar is also significantly trading below both its 50-day and 200-day moving averages, while emerging market indices and currencies continue to grossly outperform this perceived safe asset.

Further illustrating the dollar’s decline has been its performance relative to emerging markets. Just compare the performance of the iShares MSCI Emerging Market ETF (EEM) relative to the Invesco DB USD IDX Bullish ETF (UUP) since January. The difference continues to widen too.

Many believe that the dollar could fall further as well due to a multitude of headwinds.

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

Additionally, because of all of the economic stimulus combined with record low-interest rates, the dollar’s value has declined and could have more room to fall. Do not forget that the Fed plans on holding interest rates this low for at least another two years. For the dollar’s value, rates remaining this low for two years is an eternity.

As the world’s reserve currency, this plunge in value is concerning both in the short-term and mid-term for the US economy. A declining dollar means the strengthening of other foreign currencies- and this has already been happening. For example, the Australian dollar has now officially hit its highest level in 2 ½ years against the U.S. dollar. This may not be the end either.

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. The RSI at nearly 30 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.

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Matthew Levy, CFA
Stock Trading Strategist

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After the market rose to intraday highs on Wednesday (Dec 9), the indices pulled back and closed in the red - largely led by the tech sector.

News Recap

• The Dow closed 105 points lower for a loss of 0.35%, the S&P 500 fell 0.8%, and the Nasdaq dropped 1.9% for its worst day since Oct. 30. The tech-heavy index also snapped a four-day winning streak. The small-cap Russell 2000 also fell by 0.82%.
• Wednesday was a resumption of the rotation out of tech that we saw in early November. Tech led the declines, and in particular, chip stocks such as Lam Research (LRCX) which fell by nearly 3.5%.
• Other big 2020 winners fell sharply on Wednesday as well such as Tesla (TSLA) which fell nearly 7% and Netflix (NFLX) which fell 3.72%.
• Stocks reversed downwards after Senate Majority Leader Mitch McConnell told Politico that Republicans and Democrats were “still looking for a way forward” on stimulus negotiations.
• COVID-19 continues to worsen in the U.S, but Tuesday’s rollout of Pfizer’s vaccine in the U.K., has spurred optimism. However, there are some concerns about people with a history of allergic reactions receiving the vaccine.
• Meanwhile, the Food and Drug Administration (FDA) may be just days away from approving Pfizer’s vaccine.
• COVID-19 continues surging to uncontrolled and grim levels. For the first time since the start of the pandemic, the U.S. hit 3,000 deaths in one day.

We may have reached a crossroads in the market between mixed short-term sentiment, and mid-term and long-term optimism. In the short-term, there will be some optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days where investors rotate into tech and “stay-at-home” names. On other days, such as Wednesday, the markets may broadly decline, and be led by specific sectors. On Wednesday, for example, the leading laggard was tech - specifically high flying chip stocks.

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.

According to Ed Yardeni, president and chief investment strategist at Yardeni Research, “Renewed lockdown restrictions in response to the third wave of the pandemic are likely to weigh on the economy in coming months, but we don’t expect a double-dip…(but) the economy could be booming next spring if enough of us are inoculated against the virus.”

Other Wall Street strategists are bullish on 2021 as well. According to a JPMorgan note to clients released on Wednesday, a widely available vaccine will lift stocks to new highs in 2021.

“Equities are facing one of the best backdrops for sustained gains next year,” JPMorgan said. “We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”

JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain from Wednesday’s closing price.

On the other hand, for the rest of 2020, and maybe early on into 2021, markets will wrestle with the negative reality on the ground and optimism for an economic rebound.

Additionally, since election week, the rally has invoked concerns of overheating with bad fundamentals. Commerce Street Capital CEO, Dory Wiley, advised caution in this overheated market. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched.

“Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.

Amidst the current fears of a stall in economic recovery with further COVID-19-related shutdowns and no stimulus, it is very possible that short-term downside persists. However, if a stimulus deal passes before the end of the year, it could mean more market gains.

Due to this tug of war between sentiments, it is truly hard to say with conviction that another crash or bear market will come. If anything, the mixed sentiment will keep markets relatively sideways.

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.

Can the Dow Stay Above 30,000?

Since piercing the 30,000 level for a second time last Friday, and reaching record highs, the Dow Jones has largely traded sideways and hovered around the 30,000 level. There are some questions in the short-term as to whether or not the Dow can maintain this level. Outside of the Russell 2000, the Dow may be the index most vulnerable to news and sentiment.

Volume has also quietly declined this week as well, which poses doubts on how sustainable the 30,000 level is. Low volume, especially a declining trend in volume, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility.

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

On pessimistic “sell the news” kinds of days, the Dow may have more downside pressure than other indices. Many cyclical stocks that depend on a strong economic recovery trade on this index, and any change in sentiment can adversely affect their performances.

It is hard to say with certainty that a drop in the index will be strong and sharp relative to the gains since March - let alone November. But for now, as seen in the last week, I believe that we could be in a sideways holding pattern while investors digest all the news being thrown at them on a daily basis. 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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After opening the day in the red, markets reversed midday and hit fresh record highs as the UK began its vaccine rollout with doses of Pfizer and BioNTech’s offering.

News Recap

• The Dow Jones gained 104.09 points, or 0.4%, to close at 30,173.88 and hit an intraday record of 30,246.22. The S&P 500 rose 0.3% to 3,702.25 and closed over 3,700 for the first time ever. The Nasdaq also closed at a record and climbed 0.5% to 12,582.77. The Russell once again outperformed all the indices and closed 1.40% higher.
• Pfizer began to roll out its COVID-19 vaccine in the U.K. and boosted optimism of an economic reopening in 2021. The U.K. ordered enough vaccines for 20 million of its residents to start getting.
• The U.S. FDA said Pfizer’s vaccine provides some protection after the first dose, also adding that it found no safety concerns. It could be approved by the weekend.
• Pfizer (PFE) shares rose 3.3% on this news and reached their highest level in about two years. BioNTech (BNTX), which partnered with Pfizer on the vaccine, also rose 1.8%.
• Investors sharply monitored stimulus negotiations on Tuesday as well. At this point, legal immunity for businesses and aid for state and local governments are holding up the deal. However, Democrats and Republicans apparently have found consensus in some areas such as PPP loans.
• Republican and Democrat leaders said Monday that Congress is trying to extend government funding for an additional week to try and strike a deal on the new stimulus before the end of the year.
• More than 14.8 million coronavirus cases have been confirmed in the U.S., according to data from Johns Hopkins University. The U.S.’s seven-day-average daily infection rate is also at an all-time high.
• Several states and cities have reimposed stricter measures as a result of the spike in cases. New York Gov. Andrew Cuomo said Monday that New York City could lose indoor dining next week among other more severe restrictions if hospitals become overwhelmed.
• Dow Inc. (DOW), Johnson & Johnson (JNJ) and 3M (MMM) were among the Dow leaders, rising more than 1% each. Energy led the S&P 500 higher, popping more than 1.5%.

In the short-term, there will be optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days where there will be a broad sell-off or rotation into “stay-at-home” names. During other days like Tuesday’s session, there will be a broad rally due to optimistic catalysts.

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 likely stabilize, while optimism and relief will permeate the markets. In fact, CNBC personality Jim Cramer said that beating COVID-19 would feel like “the end of prohibition.” Stocks especially dependent on a rapid recovery and reopening such as small-caps should thrive.

Markets will continue to wrestle with the negative reality on the ground and optimism for a future economic reopening. More positive vaccine news seemingly trickles in by the day despite discouraging COVID-19 news, economic news, and political news. While short-term downside pressure could certainly persist based on days where bad news outweighs good news, due to this “tug of war” between sentiments, any subsequent move downwards would likely be modest in comparison to the gains since the bottom in March and since the U.S. election at the start of November. It is truly hard to say with conviction that another crash or bear market will come. If anything, the mixed sentiment could keep markets trading relatively sideways.

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. Dear readers, do me a favor and let me know what you think of this segment! It’s always a pleasure to hear from you.

Driving

Materials (XLB)

The materials sector, as represented by the XLB ETF, has been one of the largest beneficiaries of the vaccine rally. Investors have been so bullish on materials and any resulting vaccine prospect, that the XLB ETF briefly touched its 2020 high in November. However, since then, it has traded relatively sideways. Some things in this chart are concerning for me.

Cyclical sectors such as materials are set to be the biggest winners from an economic reopening in 2021. However, ever since peaking at $72.41 a share, the ETF’s volume has plummeted and has stayed very low. There are simply not enough strong fundamentals to justify calling this a BUY. I question the formidability of a short-term rally in materials. If anything, the sector could pull back somewhat, or stay in a sideways pattern. For the materials ETF to come back, exceed its 52-week high, and pierce that $72 resistance level, a COVID-19 vaccine must be proven to be safe and especially scalable. The 2021 economic outlook must also be positive. If this happens and a near-term economic slowdown can be somewhat averted, then materials could benefit.

But for the time being, there is too much uncertainty to make a conviction call. Therefore, this is a HOLD for the short-term. However, I am considerably more bullish on materials in the long-term.

Diving

US Dollar ($USD)

The world’s reserve currency, the US dollar, is still hovering around its two-year low, and has plunged in excess of 12% since March. Since the election alone, the dollar index has also declined approximately 4%. I have been calling this dollar weakness for weeks despite the low level and expect the decline to continue.

Further illustrating the dollar’s decline has been its performance relative to emerging markets. Just compare the performance of the iShares MSCI Emerging Market ETF (EEM) relative to the Invesco DB USD IDX Bullish ETF (UUP) since January.

Many believe that the dollar could fall further as well due to a multitude of headwinds.

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

Additionally, because of all of the economic stimulus combined with record low-interest rates, the dollar’s value has declined and could have more room to fall. Do not forget that the Fed plans on holding interest rates this low for at least another two years. For the dollar’s value, rates remaining this low for two years is an eternity.

As the world’s reserve currency, this plunge in value is concerning both in the short-term and mid-term for the US economy. A declining dollar means the strengthening of other foreign currencies- and this has already been happening. Since Nov. 2, the New Zealand dollar has surged 7%, the Australian dollar has climbed 5.5%, the Korean won has advanced 4%, and the Chinese yuan has risen 2.5% - and this may not be the end either.

The plunge of the dollar has been so severe that it is currently trading below both its 50-day and 200-day moving averages. Furthermore, its 200-day moving average is considerably higher than its 50-day, further illustrating the sharp decline.

While the dollar may have more room to fall, according to its RSI, it is comfortably in oversold territory. This MAY be a good opportunity to buy the world’s reserve currency at a discount. 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

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The Dow Jones and S&P 500 fell on Monday (Dec 7), while the NASDAQ booked another record close.

News Recap

• The Dow Jones snapped a four-day win streak and closed 148.47 points lower, or 0.5%, at 30,069.79. The S&P 500 also fell 0.2%, while the Nasdaq rose 0.5% to hit another record close of 12,519.95.
• Scorching hot value stocks lagged growth stocks on Monday amid uncertainty over the near-term economic outlook. The iShares Russell 1000 Value ETF (IWD) dipped 0.6%, and the iShares Russell 1000 Growth ETF (IWF) gained 0.4%.
• Intel was the worst-performing Dow stock and fell 3.4%, while energy was the worst-performing S&P 500 sector and slid 2.4%.
• Big Tech led the markets on Monday with Facebook rising 2.1%, and Apple gaining 1.2%.
• Tesla also surged 7.1% and hit an all-time high.
• The U.S. reported a record-high average number of cases over the past seven days of more than 196,200. This is 20% higher than the week-earlier period. The U.S. was also approaching a record-high number of daily Covid-related deaths. These increasing numbers have led some states and cities to re-impose shutdown measures to control the outbreak.
• Despite the surging COVID-19 numbers, lawmakers are still struggling to push through a stimulus package before the end of the year. However, there is apparent progress in pushing a stimulus bill through.

In the short-term, there will be optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days such as Monday where investors rotate into tech and “stay-at-home” names. On other days, like last Friday, the markets will broadly rise without any one specific catalyst. With this much uncertainty comes market unpredictability.

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.

According to Ed Yardeni, president and chief investment strategist at Yardeni Research, “Renewed lockdown restrictions in response to the third wave of the pandemic are likely to weigh on the economy in coming months, but we don’t expect a double-dip…(but) the economy could be booming next spring if enough of us are inoculated against the virus.”

For at least the rest of 2020, markets will wrestle with the negative reality on the ground and optimism for an economic rebound in 2021. Amidst the current fears of a stall in economic recovery with further COVID-19-related shutdowns and no stimulus, it is very possible that short-term downside persists. However, if a stimulus deal passes before the end of the year, it could mean more market gains.

Due to this tug of war between good news and bad news, any subsequent move downwards will likely be modest in comparison to the gains since the bottom in March and the gains since the start of November. It is truly hard to say with conviction that another crash or bear market will come. If anything, the mixed sentiment will keep markets relatively sideways.

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.

Tech’s Volume Has Declined and Valuations Have Heated...But the Rally May Not Be Over

Despite initially lagging behind cyclicals and value stocks during the vaccine rallies of early November, the NASDAQ has outperformed both the Dow and S&P for two consecutive weeks. The trend continued to start this week.

As long as people continue to stay-at-home and the pandemic rages, the “new normal” economy dictated by tech companies will continue. On pessimistic days, the market will react this way too with the NASDAQ outperforming the other indices.

However, according to the chart, there are some serious concerns of the index being overbought and the rally being sustainable. Tech valuations have now reached astoundingly inflated levels, and there are questions if it can go on this way.

Despite gaining 2.2% last week and reaching yet another record high on Monday, the NASDAQ’s volume has continued to decline. With valuations this high, it is quite concerning. Low volume, especially a sharp drop in volume like the NASDAQ has seen, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility. Therefore, the NASDAQ’s trending volume adds another layer of concern on top of already overinflated valuations.

Additionally, the RSI remains above the overbought 70 level. While an RSI in excess of 70 doesn’t automatically mean a trend reversal, it is something to be concerned about.

On pessimistic days, having NASDAQ exposure is certainly a good thing because of all the “stay-at-home” stocks that trade on the index. However, positive vaccine news always induces the risk of downward pressure on tech names- both on and off the NASDAQ.

It is very hard to say with conviction to sell your tech shares. However, all of the signs are pointing to an eventual sell-off and correction sooner rather than later. If anything, just tread lightly. For now, the NASDAQ gets a HOLD call. But if it keeps surging and hitting more record highs with a declining volume and an RSI as high as this, it will simply not be sustainable.

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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The markets closed the week at record highs and booked weekly gains for the fourth time in five weeks. This comes despite a disappointing U.S. jobs report.

News Recap

• The Dow Jones gained 248 points, or 0.83, the S&P 500 gained 0.9%, and the Nasdaq advanced 0.7%. All three indices posted both intraday and closing record highs. Meanwhile, the small-cap Russell 2000 also closed at a record high and once again led the markets with gains of 2.2%.
• The November jobs report grossly disappointed and came well short of estimates. The report stated that the U.S. added 245,000 jobs compared to the consensus estimate of 440,000.
• November’s unemployment rate matched expectations and fell to 6.7% from 6.9%.
• The US trade deficit widened to $63.1 billion in October from a revised $62.1 billion. Market expectations placed this number at $64.8 billion.
• New data was encouraging for US factory orders. New orders for US manufactured goods beat expectations and jumped 1% from a month earlier. This marks the 6th consecutive month of rising factory orders.
• As COVID-19 numbers continue to reach record highs in new infections, single-day deaths, and hospitalizations, a report from Thursday that Pfizer may have issues rolling its vaccine out was quite concerning. Judging by the markets’ performance on Friday, however, investors are not overly concerned.
• Stimulus talks continued for another day as Republicans and Democrats attempted to break a stalemate and pass a relief package before the end of the year.
• Chevron and Caterpillar each rose 3.9% and 4.3%, respectively, and led the Dow higher.
• Energy was the best-performing S&P 500 sector, gaining 5.4%.
• Friday’s jump led to the major indices booking their fourth weekly gain in five weeks. The Dow rose 1%, the S&P 500 gained 1.7%, and the Nasdaq rallied 2.2%. The Russell 2000 also gained over 2% this week.

In the short-term, there will be optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days where there will be a broad sell-off or rotation into “stay-at-home” names. On other days, like Friday, the markets will broadly rise without any one specific catalyst.

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 surely stabilize, and optimism and relief will permeate the markets. In fact, CNBC personality Jim Cramer said that beating COVID-19 would feel like “the end of prohibition.” Stocks especially dependent on a rapid recovery and reopening such as small-caps should thrive.

Markets will continue to wrestle with the negative reality on the ground and optimism for an economic rebound in 2021. While more positive vaccine news continues to trickle in day by day, there is still discouraging COVID-19 news, economic news, and geopolitical news to consider. Amidst the current fears of a double-dip recession with further COVID-19-related shutdowns and no stimulus, it is very possible that short-term downside persists. However, it’s encouraging that Democrats and Republicans are speaking again, and if a stimulus deal passes before the end of the year, it could mean more market gains.

Due to this tug of war between good news and bad, any subsequent move downwards will likely be modest in comparison to the gains since the bottom in March and since the start of November. It is truly hard to say with conviction that another crash or bear market will come. If anything, the constant wrestling match between sentiments will keep markets relatively sideways.

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 S&P, which has seen three record closing highs this week, has skyrocketed to unprecedented levels at a breakneck pace. However, there are a few indicators that show that the S&P could face some near-term volatility after this run, but again, it is hard to say with conviction there will be a major downturn.

The RSI of 67.96 keeps the S&P in a HOLD category. However, it is certainly higher than it was to start the week and continues creeping towards an overbought 70 level.

The volume has stayed relatively stable since Thanksgiving though. While the sharp decline in volume after November 9th was concerning, especially relative to its record closes, the stabilization is encouraging.

Low volume, especially a sharp drop in volume, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility. Therefore, this stabilization of volume adds some confidence in the volatility of the index.

Because of how far and fast the S&P 500 has risen, a further pullback from these elevated levels would not be a shock… but another surge based on good news would not be a shock either. Because of all of the uncertainty, a HOLD for the S&P is an appropriate call. For an ETF that attempts to directly correlate with the performance of the S&P, the SPDR S&P ETF (SPY) 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