Time To Take A Break?

Time To Take A Break? image

The State of the Market

Stocks have danced merrily higher throughout November as traders have celebrated the idea that highly effective vaccines look to be just a few months away. Cutting to the chase, this means that investors have ignored the bad news about the surge in COVID cases, hospitalizations, and deaths, and instead have been busy looking ahead to a return to some form of normalcy - sooner rather than later.

The returns of the major indices have been historic and the areas of the market that had been hurt the most by the COVID pandemic have caught a consistent bid. For example, the laggards (i.e. smallcaps, midcaps, cyclicals, and value) have enjoyed an explosive reversion to the mean.

To be sure, the move makes sense as scientific experts have indicated that the vaccine can be expected to be widely distributed by Q2 of next year. As I've been opining of late, the key here is that this expectation falls within the time frame that Ms. Market tends to look ahead to.

However, in the stock market, too much of a good thing (as in a strong rally that nearly everyone embraces) can become a bad thing from a short-term perspective. And while this particular form of market analysis tends to be more art than science as rallies can and often do last far longer than one can imagine, it does appear that the rally might need to take a break here at some point.

In short, the news that matters has all been good lately and just about everybody on the planet can now recite the bull case - as well as why it is likely to continue to dominate. But as Ned Davis is famous for saying, "beware of the crowd at extremes." And to be sure, we've got one of those extremes on our hands at the present time.

Below are Exhibits A, B, C, and D in my argument. See what you think.

First up is CNN's Fear/Greed Index...

Source: The DailyShot

Next is Scotiabank's Panic/Euphoria Indicator...

Source: The DailyShot

Then there is the Put/Call ratio, which is at a multi-year low...

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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