Markets Fall As Senate Debates Higher Stimulus Checks

Quick Update

As a quick update to kick off today’s article, I would like to summarize my correct calls and what I profited on since beginning to publish these Driver & Diver updates. While nobody can predict the future, here are the major calls I am most proud of since producing these letters: 1) hedging or selling the U.S. Dollar; 2) selling energy; 3) switching my short-term call on small-caps from HOLD to SELL.

Ever since beginning these Driver & Diver updates on December 9th, I have made SELL calls for the U.S. Dollar and energy. My call on the U.S. dollar was based on the Fed’s policies, the effect of interest rates this low for this long, government stimulus, strengthening of emerging markets, and inflation. I also said that any minor rally the dollar would experience would be fool’s good. Since the dollar briefly pierced the 91-level on December 9th, it has fallen over 1%. Despite the dollar experiencing another mini-rally and nearly piercing the 91-level again on December 22, I remained steadfast in my bearish outlook of the dollar. Since the open on December 23rd, the U.S. Dollar has declined another 0.75%. I believed the dollar could drop back below 90 before the new year, and now here we are.

Since the first Driver & Diver, I also said that energy is unpredictable and volatile, and has consistently pulled back in 2020 after experiencing a hot streak. Since December 10th, the Energy Select Sector SPDR Fund (XLE) has declined over 9.5%.

I also switched my call on small-caps, specifically the Russell 2000, to a short-term SELL from a HOLD on December 16th. Although the iShares Russell 2000 ETF (IWM) is largely flat since I switched my call, by any measurement, the index has overheated. In this week alone, the IWM has underperformed ETFs tracking the larger indices and has declined by nearly 3%. While I am still bullish on small-caps in the long run and maintain my STRONG BUY call on the Russell for the long-term, it is contingent on a pullback. I believe that pullback may have begun.

Stocks fell on Tuesday (Dec. 29) after the major indices all hit record highs on Monday (Dec. 28). Investors monitored the Senate’s talks on higher stimulus checks.

News Recap

  • The Dow Jones snapped a 3-day winning streak and declined 68.30 points lower, or 0.2%, to close at 30,335.67. At its session high, the Dow was up more than 100 points. The S&P 500 also snapped a 3-day winning streak and declined 0.2%, and the Nasdaq fell 0.4%. The small-cap Russell 2000 index continued its decline this week and fell 1.92%.
  • The Democrat-led House voted late Monday to increase stimulus payments to $2,000 from $600. Although Senate Majority Leader Mitch McConnell blocked fast-tracking unanimous Senate approval on Tuesday (Dec. 29), many GOP Senators have expressed support for the stimulus increase. Time will tell what happens.
  • Apple (AAPL) and Home Depot (HD) fell more than 1% each to lead the Dow lower.
  • Intel (INTC) shares rose nearly 5% due to news of exploring “strategic alternatives.” Intel shares have lost nearly 18% this year, and the chipmaker has lost significant market share to many other semiconductor competitors.
  • Amidst fears of a COVID-19 “surge on top of a surge” after the Christmas holiday, more than 2.1 million people in the U.S. have now been vaccinated. However, the U.S. is likely to fall far short of its goal to vaccinate 20 million people by the end of the year. Meanwhile, the U.S. has averaged at least 184,000 new infections per day.
  • The U.K. became the first country to approve a COVID-19 vaccine by AstraZeneca and Oxford. This is the third emergency-use approval vaccine, but is not yet approved in the U.S.
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