Markets Recover Monday's Losses, Continue November Rally Into December

U.S. stocks recovered Monday’s losses and kicked off December with more gains. The rallies we saw in November continued on to start the final month of 2020 - a year which has been quite trying and difficult.

News Recap

• The Dow Jones, which jumped as high as 400 points to hit a new intraday high, closed up 185.28 points, or 0.6%, to 29,823.92. The S&P 500 notched a record closing high and also rose 1.1%, while the Nasdaq gained 1.3% and also closed at a record high.
• Sentiment was boosted after lawmakers revealed on Tuesday a $908 billion stimulus plan that includes over $200 billion in Paycheck Protection Program small business loans.
• Additional vaccine news helped spur the markets as well, after Pfizer and BioNTech applied to the European Medicines Agency for conditional marketing authorization of their coronavirus vaccine . This could potentially put the vaccine to full use in Europe before the end of 2020.
• Electric-car maker Tesla (TSLA) gained 2.7% after S&P announced that the stock would be added to the S&P 500 index on Dec. 21 in a single step, despite the company’s large size. Apple (AAPL) also rose 3% along with Intel (INTC) to lead the Dow higher. Communications and financials led the S&P 500, rising at least 1.9% each.
• Zoom Video (ZM) was the laggard of the day and fell 15.3% despite reporting better-than-expected earnings for the third quarter.
• Markets picked up where they left off in November. The Dow rallied 11.8% in November, posting its best one-month performance since January 1987. The S&P 500 and Nasdaq also rose 10.8% and 11.8%, respectively, for their strongest monthly gains since April. After November’s gain and Tuesday’s rally, the S&P 500 is now up 13.8% for 2020.
• Value stocks and small-caps led last month’s rally since these are stocks largely reliant on an economic comeback. The vaccine news of the last several weeks buoyed the sentiment. The iShares Russell 1000 Value ETF (IWD) rallied 13.4% for the month, and outperformed its growth counterpart, the iShares Russell 1000 Growth ETF (IWF), by more than 3%. The small-cap Russell 2000 also had its best month ever and rose more than 18%.
• However, not all is well. Both Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin spoke before Congress on Tuesday, with Powell stating that the economic outlook for the U.S. was “extraordinarily uncertain,” and that the surge in COVID-19 cases “could prove challenging for the next few months.” Powell further said that a full economic recovery is unlikely until people feel safe and confident.
• Additionally, according to data compiled by Johns Hopkins University, more than 13 million COVID-19 cases have been confirmed in the U.S. along with over 266,000 deaths . Shutdown and emergency measures continue to be reimposed worldwide and in the U.S. Most recently, New York Gov. Andrew Cuomo’s announced that the state was reimplementing emergency hospital measures.
• ISM data also showed that U.S. factory growth slowed in November. Although figures pointed to expansion in the overall economy for the seventh month in a row, according to the ISM Manufacturing report, the PMI for the US fell to 57.5 in November from a two year high of 59.3 in October. Figures came in slightly lower than market forecasts of 58.

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.

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

It is a simple fact - 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 a short-term downside persists. However, Tuesday’s stimulus update offered some kind of hope. 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 bottoms 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.

In Tuesday’s S&P chart, there are a few indicators that show that the S&P could face some near-term volatility. However, again, it is hard to say with conviction that it will be something major - especially compared to its gains since March. The RSI of 64.86 keeps the S&P in a HOLD category, and it has ticked up somewhat since Tuesday. Be very wary if the RSI exceeds the overbought level of 70 - because it’s approaching.

The S&P’s sharp decline in volume since November 9 is what is more alarming. Especially the fact that it declined on Tuesday - despite the index’s move to a record closing high.

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, any drop in volume coinciding with a sharp rally puts some serious doubt on the sustainability of the up-trend and short-term outlook.

We’re in the early recovery phase of the cycle following the COVID-19 recession, but this rapid rebound is under pressure. 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.

Today’s premium analysis will showcase a “Drivers and Divers” section which will break down some sectors that are in and out of favor.

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Matthew Levy, CFA

Stock Trading Strategist

Sunshine Profits: Effective Investment through Diligence & Care

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All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits' employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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