Here are the best-performing sectors last week – energy, cleantech, cannabis, biotech, small caps, semis, large-cap tech. A wide variety of winners. We are in the sweet spot where the markets are simultaneously trying to discount the impact of a working COVID vaccine and the new social distancing restrictions around the world. As a result, almost everything is going up, except gold and the U.S. Dollar.
There’s a hint of hubris in the market. It is not only the electric vehicle stocks that have gone wild. Some recent IPOs in the software and equipment space have defied gravity too- PLTR, SNOW, U, CRSR, etc. Many SPACs have also been on the move. It’s a bit frothy. And yet, there are still plenty of long setups. I expect any corrections to be shallow and take the form of sector rotation.
Anything related to electric vehicles went crazy. Quite a few EV stocks actually doubled in a week. Solar and other clean energy stocks also showed notable relative strength. Some names that belong to that industry: TSLA, NIO, XPEV, LI, HCAC, GMHI, AYRO, GP, BLNK, SBE, FUV, KXIN, WKHS, KNDI, etc. There’s definitely an element of hubris and exuberance which depending on your perspective and time frame of operation can be good or bad.
When the news about the first effective COVID vaccine hit two weeks ago, anything related to software and work from home was hit hard. Last week, those same so-called social distancing stocks had a major bounce after more states and cities adopted stricter measures to fight the COVID spread. I expect more rotations between the old and the new economy stocks for the rest of the year.
Cryptocurrencies continue to make new highs while gold and silver are sleeping for the most part. The reason is not only the proverbial weakness in the U.S. Dollar. The surge in crypto has turned into a momentum move. When it comes to momentum, the major catalyst is price and FOMO.
In other words, while the main indexes are consolidating their recent gains, the bull market continues with full force. Capital is not leaving the market; it is merely rotating between sectors.
The week started with a 7% gap in the small-cap index Russell 2000. This is an extremely rare event even for the deepest and scariest bear markets. This time, the gap was to new all-time highs. Pfizer and BioNTech announced that their COVID vaccine is 90% effective and it is ready to ship in December. The market didn’t waste any time and decided to discount quicker than expected economic recovery. The sectors that were hit the hardest in 2020 gained the most – restaurants, hotels, airlines, anything related to leisure, financials, energy. In the meantime, the stocks that had one of their best years in 2020 due to social distancing and working from home were obliterated to the tune of 20-30% in a week.
Later in the week small caps were faded before they bounced again on Friday. QQQ managed to recover some of its losses in the middle of the week but overall underperformed and lost about 1%. Something tells me we will see more short-term rotations between Small Caps and QQQ for the rest of the year as more companies come up with their vaccines and the market wonders if the normalization of the economy will come sooner rather than later.
If the normalization of the economy means higher interest rates then many of the richly valued software names might be in trouble. There are no signs of that yet. In the meantime, stocks are rising around the world so it pays to remain long.