The Vaccine Rally Could Be Running Out Of Steam

Commenting on today’s trading Gorilla Trades strategist Ken Berman said:

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Q3 2020 hedge fund letters, conferences and more

The Vaccine Rally Is Fading Away

Despite today’s new all-time highs the late-day weakness among cyclicals could mean that the first leg of the vaccine rally could be running out of steam. While stocks started the session in a positive fashion, the leaders of the vaccine rally faded towards the end of the session in the face of the mostly positive news flow, and that warrants caution for bulls, at least from a short-term perspective.

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The key sectors all finished the day in the green, but while the morning session was clearly dominated by bulls the afternoon was more of a mixed bag. Cyclical issues pulled back slightly following a strong start to the day, while tech stocks and communication services got stronger as the day progressed. The Dow and the S&P 500 finished at its session-low due to this intraday divergence, but financials, energy stocks, and materials still gained the most compared to yesterday’s close while defensive issues, in general, lagged the broader market.

Even though we got even more positive vaccine-related news today, the short-term outlook remains uncertain, and it’s still early to say that the autumn wave has already peaked. Hospitalizations hit yet another all-time high in the U.S. and while infections are down compared to last week, we have to wait a few days to understand the impact of the holiday weekend om the numbers. The European situation continues to improve, and since the domestic outbreaks have been lagging the European ones, the U.S. picture could also turn brighter soon.

Powell And Mnuchin Testify

Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin testified today in Washington concerning the central bank’s and the government’s response to the COVID crisis. Mr. Powell once again stressed the importance of the Fed’s broad lending programs due to the uncertainties, while Mr. Mnuchin was more upbeat regarding the economic outlook, pointing to the shutdowns as the main risk factors. The Treasury Secretary advocated more “targeted” fiscal support for the hardest-hit industries, and this divide will likely be decisive in the coming stimulus talks.

Investors are in for another crucial day of economic releases and all eyes will be on the ADP payrolls number ahead of Friday’s government jobs report. The payrolls are expected to increase by 433,000, but in light of the recent jump in the number of new jobless claims, we can’t rule out a weaker figure. The Fed’s Beige Book and weekly crude oil inventories will also be out tomorrow with the Eurozone unemployment rate and Producer Price Index (PPI) highlighting the overnight session.

The Volatility Index (VIX) closed at its lowest level since the beginning of the pandemic yesterday, almost dipping below the widely-watched 20 level on a closing basis. The promise of the quick and efficient distribution of the vaccines and the stimulus-related hopes kept volatility in check today, despite the slight economic deterioration and the coming days could see the start of a new era for the VIX. The index’s 200-day moving average could soon turn lower for the first time since February, and that could help in extending the technical breakout in the major indices.

Tesla Continues To Defy Gravity

Tesla (TSLA, +2.7%) continues to defy gravity thanks to the slew of positive catalysts, and the past few weeks were nothing short of spectacular for the electric car maker. Since the first confirmation that Tesla will be joining the S&P 500 later this month, the stock is up by a whopping 50%, but despite another bullish announcement yesterday afternoon, it failed to hit another all-time high today. With its short interest now being only at 6%, the short-covering pressure on the stock might be easing, and in light of its overbought momentum indicators, Tesla could soon be taking another breather. Stay tuned!

Headlines

  • The S&P 500 and the Nasdaq hit new all-time highs today as December kicked off with a bullish session on Wall Street
  • While a $900 billion bipartisan stimulus package was put forward today, a deal still looks elusive
  • Stay-at-home star Zoom (ZM, -15.1%) reported positive earnings but the stock still got smacked lower as the firm’s growth is expected to slow in 2021
  • Pfizer (PFE, 2.8%) and Biontech (BNTX, -8%) filed for the emergency approval of their COVID vaccine candidate in Europe
  • The dollar hit an almost three-year high against the euro as the global economic outlook continues to improve

Market Wrap

Index G/L Current level Year-to- date 50-day 200-day
Dow 185 29,824 4.4% 28,386 26,211
Nasdaq 156 12,355 37.0% 11,527 10,082
S&P 500 41 3,662 13.2% 3,460 3,154
Russell 2000 16 1,836 9.9% 1,639 1,457

Advancing issues outnumbered decliners by a 7-to-3 ratio on the NYSE today, with 77 stocks hitting new 52-week highs and 2 stocks hitting new 52-week lows, while volume was well above average.

Price Action Gauge ******** (reading for 12/01: 78)

Price action remains bullish on Wall Street, but “under-the-hood”, a few warning signs popped up this week, as the leaders of the rally are showing weakness, meaning that an orderly pullback could be ahead.

Oversold/Overbought Gauge ******** (reading for 12/01: 26 Color: green)

The major indices are still in overbought territory according to the most reliable momentum measures, but stocks might extend their breakout, as the indicators are still not showing extreme readings.

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