For almost 3 months the major stock indices have traded sideways, consolidating the supercharged Fed and Government stimulus aided gains since March. With stocks nearing short term overbought levels within this range in early November, the vaccine miracle makers launched a trifecta of Covid cures. The equity buying binge began with Pfizer on November 9th, Moderna on the 13th and Astrazeneca on the 24th. With each announcement the stock market surged higher for a day and then fell back to pre news levels. Until the SP 500 Index spot price can close above 3650 we may have a classic Buy the Rumor, Sell the News environment. While we remain Bullish into next summer, we still favor a short term November peak and selloff during the normally strong first half of December. Any break above these vaccine news peaks at SP 3650 would increase the odds for a spirited Santa rally of another 5 to 10% before a notable pullback would begin.
Drilling down to the hourly charts for the past 3 weeks we can see these vaccine news related market shooting stars quickly faded each time. While unimportant to the very Bullish long term uptrend in equities, these prospective Covid cures define the key short term pivotal trading range for traders.
The 2020 Bull market is increasingly axiomatic with record high savings rates, record low borrowing costs, excess liquidity looking to invest and Central Banks and Governments around the world that will remain accommodative. Should economic conditions reverse lower, then proportionately more stimulus will be applied. Heads or Tails means buy and hold investors win. However, Investment Advisors and AAII small investors are the most Bullish they have been since the January 2018 peak in stock prices. This extreme optimism means less portfolio cash is left to invest, requiring increasingly exceptional news to keep money losing recovery stocks roaring higher. When investors are willing to Buy cruise ship stocks with no prospect of “any” revenues for 12 to 18 months, it’s easy to see how far past the Covid chasm stock buyers are willing to look. Instead of companies growing 30% a year with 200% stock gains this year, post vaccine buyers now prefer zero sales prospects for months to come with the assumption that pre-Covid revenue levels and more will return in the next year. The caveat emptor atmosphere near term comes from our key measures of overbought and oversold stock values related to momentum, volatility and sentiment warning of vulnerability over the next few weeks.
As the race for the Covid cure began this year, most medical experts said “if” a vaccine could even be found it would be late 2021 or late 2022 before it would be ready. The fact that 10’s of millions in the US and Europe will be inoculated before year end with a multiple choice of highly efficacious vaccines, is something investors and society deserves to celebrate. Investors just want clarity and while the next 3 to 6 months in the economy may be painfully uncertain, there is high confidence that monetary and fiscal authorities who own an unlimited digital printing press and are not afraid to use it until the economy is fully back to business as usual mode. Thus near term weakness in the stock market should be used to add shares to the portfolio with a gradual emphasis on deeply depressed market laggards that are certain to return close to their former glory as vaccines provide herd immunity in 2021. (Stocks such as Boeing, Wynn and Norwegian Cruise.)