Strong Monday Reversal
The stock market reversed course on Monday after having a terrible week. This was an oversold rally. We had a continuation of last Friday in that the tech stocks underperformed and small caps did well. A difference was energy rather than banks had a huge upswing.
Investors are betting on a cyclical recovery even though COVID-19 is ravaging the Midwest. That’s because there is renewed optimism on a vaccine. President Trump has already indicated he will pass a a major stimulus that boosts growth in 2021. And some think Biden and the Dems will also pass a strong stimulus if they win.
There will likely be a stimulus either way. It’s amazing how sentiment on a vaccine swings based on no news. Let’s wait until the 3rd week of November before we make any decisions. There are a ton of vaccines being tested, so even if Pfizer’s (PFE) doesn’t work, there will be more. Just because there are 11 vaccines in phase 3 trials and 14 in phase 2 trials doesn’t mean we will get one, but it increases the odds.
Details Of Monday’s Action
S&P 500 was up 1.23% as it was led by energy. Early on Monday morning, oil prices crashed. At one point, WTI was at $34 which meant it was down about 18% in less than 10 days. Since then, it reversed, putting it almost at $37. As you can see from the chart below, energy rose 3.7% on this oil price reversal.
Energy stocks have underperformed the market more than any sector going back to 1928. It is deserving of much more than just this 3.7% gain. Look for these sized gains to occur often in the next year.
ExxonMobil (XOM) rose 4.2%, putting it up 7.7% from its bottom on Wednesday. Oil services ETF called OIH was up 5.6%, putting it up 11.4% in the past 3 days. While the banks didn't outperform, they did do well considering the decline in the 10 year yield. 10 year yield fell 2.2 basis points to 85.7 and the regional banks index was up 2.8%. That explains why the Russell 2000 was up 1.96%.
On the other hand, the secular growth tech stocks underperformed mightily just like they did in October. Cloud index was down 1.1% which is pretty big underperformance. Zoom (ZM) stock was down 1.7% which probably shocked some tech investors because COVID-19 cases are exploding. The market sees a vaccine coming.
A week ago, we all noticed how stocks were falling in spite of the vaccine coming, making it seem like the market couldn’t even wait another 3-4 weeks to see the results. Suddenly, the market is looking patient again.
Zoom is down 20.3% since October 19th. The Nasdaq 100 only was up 22 basis points. It’s only up 2.2% from its September 23rd bottom. That’s compared to the small cap value index which is up 10.5%.
Two hot stocks that remain on fire are Nio (NIO) and Snap. (SNAP), Nio was up 9% on Monday, putting it up 54% in the past month. Snap was up 3.6%, putting it up 48.1% in the past month.
October Review
October was a bad month for the stock market as the S&P 500 fell 2.77%. It almost went negative on the year. As you can see from the table below, the tech sector fell 5.2% as it was the laggard. Financials only fell 1.1% as they enjoyed the rise in long yields. They have much further to rise if the vaccine data is positive.
Energy sector fell 4.7% as oil had its worst month since March. It is nearing a bottom. Utilities rallied 2.2% on Monday and 5% last month. They seem overbought considering the coming decline in uncertainty as the election ends and the economy reopens. Yields will rise, providing utilities with unwelcomed competition.
(Click on image to enlarge)
Conservative Prior To Election
While we might not know who wins the election on Tuesday night, that doesn’t mean it will be a long drawn out battle. It might just end up taking a few days to count the ballots in the swing states. That doesn’t mean stocks will crash. Investors have prepared for the election enough so that there shouldn’t be selling after the result. In fact, there should be buying.
As you can see from the chart below, about 1/3rd of investors with at least $1 million in assets stated they increased cash and added protection. Unless adjusting counts as buying banks and energy and selling tech because the economy will reopen in 2021, many didn’t adjust their allocation.
COVID-19 Worsens
The overall market doesn’t care that much about COVID-19. Only the firms most impacted by the virus such as movie theaters, office furniture firms, and cruise ships are seeing their stocks fall. That’s because they will be in trouble if COVID-19 lasts another few months.
The worst stocks are the ones with debt issues. Of course, there is also the possibility that even when COVID-19 goes away people will work from home more often and go to the movies less. Those 2 negative catalysts combined have caused firms like AMC to become penny stocks.
It appears that COVID-19 may be with us through the winter. Even if this wave peaks in the end of November like we expect, there will be more economic restrictions. There is intense fear the winter will be more deadly than the spring which ironically will slow the spread. The table above shows the spike in cases in Europe in the past week.
In America, there were 1.33 million tests on Monday. There were 82,895 new cases. Clearly, cases are less of a problem than in the summer and the spring because hospitalizations are still below the prior 2 peaks. That being said, they rose to 48,470 on Monday which isn’t something to be happy about.
We can expect cases to peak in mid-November and hospitalizations to peak about 1 week later. 7 day average of deaths is 824 which is still significantly below the summer peak.
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