2020 is the year of Black Swans. A global pandemic, economic lockdown, record unemployment, negative crude oil prices. And yet, the Nasdaq 100 is actually up for the year. The bad news counts for nothing, for now.
New leaders have emerged.
The gold miners ETF, GDX broke out from a 7-year base and so far the breakout is looking sustainable. If the reflation thesis is correct, gold and gold miners will be in play for many months to come.
The biotech ETF, IBB broke out from a 6-year long base. Biotech stocks have been on fire ever since and are starting to dominate the Momentum 50 list.
In the scope of three months, markets have experienced a range of moves that typically happen in a decade. The velocity of movement has been breath-taking. The sentiment went from “I can’t believe that the market has gone down so much so fast. This is just the flu. There’s something wrong” to “I can’t believe the market has gone up so much so fast. This is one in a 100-years health and economic crisis. There’s something wrong”.
Financial markets constantly try to discount events that haven’t happened yet. Sometimes, they are great predictors of what’s to come. Other times, they are terribly wrong. The price action is currently projecting that everything might be back to normal a year from now. It seems counter-intuitive, but the facts are the facts.
The digital economy stocks were thriving and the old-economy stocks were under pressure for a decade. The current health and economic challenge will only accelerate those trends.
The major stock indexes are already 20-30% above their momentum lows from late March and I am already receiving numerous requests from people asking if we are in the midst of a V-shaped recovery and what should they be buying. The fear of missing out is in the air. If past bear markets are a good indicator, chasing 20-30% rallies after steep selloffs is not smart from a risk-to-potential reward perspective.
While it is true that we are starting to see more long setups – right now, mainly in gold, biotech, telecom-related and data centers REITs, we should not ignore the fact that SPY and QQQ are very close to major potential technical resistance. The wild-card in the whole equation is the Fed, which has now backstopped the entire credit market and is buying Treasuries, Munis, corporate bonds, including junk-rated bonds. Without a doubt, this is basically a bailout of the financial sector. So don’t get too bullish or too bearish. Remain nimble and active because this market continues to provide incredible trading opportunities. Moves that used to happen once a quarter in individual stocks (when they report earnings) are now occurring on a daily basis. It’s a great trading market.