Momentum Monday – Some Signs of Fear in the Market

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Financial markets shoot first and ask questions later. It’s in their nature. They constantly strive to be forward-looking and don’t waste time discounting any potential threat or an opportunity; often they get way too excited or way too fearful and overshoot. Here are the four narratives ranked in terms of current impact on price action:

  1. COVID – the recent rise in new Covid cases around the world has become the major theme in the market. The so-called reopening plays have been in a downfall for several weeks now. Vaccine makers (MRNA, BNTX), big tech (AMZN, AAPL, GOOGL, MSFT, FB, etc.), Covid test stocks (QDEL, TMO, HOLX), have been showing notable relative strength. Even the VIX is starting to perk up.
  2. Stimulus and infrastructure bills – everyone knows that the government is one scary Covid headline away from announcing another set of stimulus. This is why we haven’t really seen any significant pullback in the major indexes. Yes, market breadth has been weakening and many breakouts have not been recently following through but the dip buyers are waiting impatiently around the corner. This doesn’t mean you should be complacent and not take your losses if you are not hedged. It’s just a reminder that it’s probably not a good idea to turn overly bearish and think that stocks are about to crash. A 5-10% pullback is more likely to create a buying opportunity.
  3. Inflation – The Fed keeps saying it’s transitory and yet, every time there’s an inflation report, it comes way above expectations. Inflation fears may not matter now too much but make no mistake, the second the market sniffs out that Covid is leaving, it’ll become front page news again and we might see another rotation – selling software and buying basic materials. We are not there now. 
  4. Earnings – the latest earnings season has just begun. All major banks crushed estimates and yet their stocks went lower. There’s no better indicator of sentiment than the market reaction to earnings results. The mood hasn’t been very enthusiastic so far. Let see Big Tech reports will change the current cautious perceptions. 

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