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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.
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