This past week was full of major market-moving events: the election, Pfizer’s vaccine announcement, Payrolls, and FOMC. We thought it would be helpful to share our recent market environment context update from Mark Boucher after the close on Monday, November 9 to help you understand the current environment. We thought we might also share some high-quality stock opportunities that we see right now.
Market Environment Context
News of a 90% effective coronavirus vaccine sent markets into a massive rotation away from lockdown and work-at-home beneficiaries towards cyclical recovery plays and oversold value such as energy names. Zoom, the poster child for work-at-home beneficiaries, fell -17.37% in a gap below its 50-day simple moving average support while beaten-up Norwegian Cruise Line Holdings soared +26.75% on the news. It was reminiscent of September 2019 when the strongest got killed and the weakest soared. The market narrative has anticipated a prolonged coronavirus battle – but the narrative changed overnight.
Most of the indexes had signal days down where they opened near the high and then spent the rest of the day dropping with the close near the low of the day. The S&P tried to breakout over its prior all-time high (ATH) but closed back below. The Nasdaq also ran into resistance earlier in Asian trade at its own former ATH. The Russell closed (barely) at a new ATH as small-caps rose +3.62% in hopes that many on-the-ropes small businesses may be able to survive.
Still, the S&P close was higher than the prior day’s close (see the chart below of SPY). This often signals at least a temporary inflection point – and the S&P had a high volume signal day down. That’s not a very strong technical sign for the near-term which was confirmed by the Nasdaq with an even more negative outside day down on high volume (see COMPQ chart below). Thus, the S&P and Nasdaq may take some time to break through their ATH resistance levels.
Figure 1 – A High Volume signal day down back into and a High Volume outside day down back into for the S&P and Nasdaq was not very positive action in these major averages following vaccine news. Courtesy of: StockCharts.com
On the same day that the Nasdaq registered a distribution down day, however, the broad NYSE had an 82.9% up-volume day. That is a very rare combination indeed.
Energy was a big winner on Monday, with XLE +14.28% on an elephant volume gap up over 50DMA and prior bounce resistance. Beaten-up airlines ETF JETS exploded up +16.11% above its respective 200DMA. Meanwhile, pure growth-momentum was hard hit, with the IBD50 down -6.63% on a High Volume outside day down back into and back below the 50DMA that led to a breakdown in relative strength. 10 of the IBD50 fell more than 10% on the day. See the chart below.
Figure 2 – Ouch! A High Volume outside day down back into and back below the 50DMA for the IBD50 on Monday, Nov. 9 as tech and former lockdown beneficiaries gave up lots of ground. Courtesy of: StockCharts.com
Market Analysis and Model Directions
The first phase of reaction to the realization that the coronavirus was set to become a global pandemic was panic and overreaction on the downside, which ended on 3/23/20. The next phase was hope and anticipation of a recovery getting underway. Considering the latest short-term shifts in market backdrop, let’s summarize where we are on various timeframes and where traders of different strategies should be to make it very clear.
97.8% of short-term sector models were positive on Monday, November 9th with 4.4% overbought and 4.4% oversold. 55.6% of intermediate-term sector models were positive on Monday with 0% negative. On Tuesday, November 3rd we got a second 80% up-volume day on the NYSE and we waited for post- election confirmation which we got on Wednesday, November 4th following the election creating a buy signal.
Long-term (Bull/Bear Market Cycle): The trend is unclear. The last major signal was bear market, but the current intermediate-term strong and dominant buy signal could also turn into something more if it continues. Watch for intermediate-term signal down or major signals in either direction ahead.
Intermediate-term (weeks to months): The Intermediate-term trading trend is up but within the context of a potentially ongoing bear market long-term, so we must watch for intermediate-term sell signals and should try to focus on periods of short-term and intermediate-term alignment for highest probability trades. A high volume close under 2950 would turn our intermediate-term models down, and we may get a signal before that if downside volume and breadth grow markedly.
Short-term (days to weeks): The short-term trend turned positive on November 4th. Short-term traders phase back to normal sized positions on long trades.
Individual Stock Analysis
Not surprisingly, the weakest groups in the market were lockdown plays such as online retail, streaming video, video games, air freight, home furnishings, and consumer electronics. We had so many outside days down and days back into the range on high volume it is difficult to count. Leadership turned from clearly positive to clearly negative in this violent rotation. We had 4 stocks upgraded on the day and 31 downgraded. Focus on what is working and move out of what isn’t here for now. It was a clean-out day for short-term traders on the long side.
Will work-from-home and social-distancing stocks, which were leaders, now become substantial and consistent laggards? Some are asking: Are there any cyclicals still holding up well to this violent rotation on our Top EPS/RS at reasonable value lists? In terms of groups, ARKQ Industrial Innovation has a cyclical element, while BOTZ is a robotics cyclical play that did well and COPX is a cyclical play still up on Monday as was materials ETF XLB, as well.
Lockdown-related plays like NLS, ZM, ETSY, LOGI, SHOP, AAWW, BJ, CCS, NTDOY, ATSG, PGR, MHO, PFSI, DG, CHTR are facing a setback at least so avoid them for now.
New potential bases are forming in Enterprise Software, Semiconductors and Internets and Health Care with symbols like DDOG, NVDA, NVCR, AMD, DOYU, BRP. Some runners like BL, IPHI are technology-oriented and took hits today but this could simply be due to part of new base building. If so, they’ll need to breakout on high volume thrust breakout, gap or lap breakout of sound bases to warrant investment ahead.
Recent breakouts LRCX, ENSG, and TTEC were all up on the day so their themes don’t seem interrupted and these are among the best near-term prospects. Runaways continue in PRSC, DAR, MATX, TSM, MYRG, PJT. And FORM has major resistance at 49.71 to monitor, with FORM and DAR continuing nicely higher and still in strong technical form after today. Insurance like WTRE, and GSHD are holding up ok thus far. Watch for a final corrective low confirmed by re-weakening of the dollar in precious metals miners like GFI, BTG, KGC, AUY. SBSW, GOLD, AEM, SA. Biden themes like IIPR and clean energy are holding up but watch out for court rulings that could impact election expectations this week. We will watch for other cyclical plays after this week so markets have time to sort-out new winners and losers ahead.
Fiscal policy announcements, election developments, BREXIT, coronavirus news, increases or decreases in US- Sino tensions, and Growth shifts are top watching points ahead.
Investors still need to keep up their watch-lists on both the long and short side of the market in this environment.
It is unlikely but not impossible that we’ll get an intermediate-term sell signal that will return us to the short-side if we get a continued downside follow-thru of substance ahead.
Realize that volatility remains high. There could still be some news developments regarding coronavirus and election developments (legal battle before the electoral college official decision on Dec 16th) resulting in some wild price swings. If recent corrective lows can hold up until the election is decided, and a winter relapse of COVID-19 cases doesn’t lead to broad-based lock-downs again, a second phase of the bull run could develop. The strongest seasonal period of the year for the market runs from October 27th through January 18th.
Great opportunities are being built so hang in there to benefit from not getting killed in action that confounds bulls and bears alike– that’s how you compound outperformance.