Here’s something I don’t get to write very often: even though the markets look over-bought here, they looked poised to take out their all-time-highs this week.
Sure enough, major indexes are over-bought – statistically, I mean. But statistics schmatistics. This is 2020, where anything goes.
A quick look at the chart below will show that prices are way at the top of the ‘cloud’ (a technical measure of the last 21 trading days and the standard deviation of the period’s trading range). In typical circumstances this would suggest prices are temporarily too high and due for a pull-back. But did we mention 2020?
At times a shift in news or sentiment will create a shift in the market. It is a dislocation, but it also marks a potential trend-shift in market prices. When this occurs, it’s not uncommon to see ‘typical’ market measurements temporarily thrown out the window. And that’s what appears to be the set-up.
Last week’s announcement of a Covid vaccine was greeted by a lot of optimism in the markets. Meanwhile, on the other hand, the number of reported Covid cases is at an all-time high. The beauty of the markets is, it’s willing to strip away much of the politics from the data. And the rise in cases doesn’t seem to matter that much to the success of the economy (as long as cases don’t outstrip hospital capacity).
What does seem to matter is whether or not economies are allowed to remain open. If Covid cases lead to enough hospitalizations, new lock-downs could occur (such as the new lockdowns announced in Oregon beginning Wednesday, shutting down dine-in restaurants and restricting stores to partial capacity).
New shutdowns would likely be greeted by market pull-backs. But so far, the shutdowns appear to be mainly a West Coast deep-blue phenomenon. We shall see if the concept gains traction or not. The announcement of yet another vaccine today (this time from Moderna) shows promise and suggests a silver lining may yet be found for this pandemic.
For the week, look for the markets to open higher on Monday and likely set all-time highs for both the S&P 500 and the DJIA. The SPX is now ‘hunting’ for the 3800 level, perhaps before year’s end. For this week, the target appears to be 3675. It will take a drop below last week’s low of 3511 to break this trend.
A couple of other details worth noting:
The SPX, being more tech-heavy these days, may underperform the DJIA for the remainder of the year. Likewise, the NASDAQ may underperform the other indexes over the same time period. There has been significant price improvement in the Russell 2000 indicating money is beginning to shift in the economy. The ‘stay at home’ trade has been a very powerful trend for 2020. However, Big Tech in many respects is over-bought. It would not at all be surprising to see money begin to shift out of big tech toward other areas of the economy if vaccines shift the trade from stay-at-home to back to the ‘old normal.’ If this shift happens, it would create a headwind for both the S&P 500 and the NASDAQ given their overweighting to tech.
As always, do your own homework. This is just a blog, not a recommendation. But if you’ve been reading this for a while, you know how that works.
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