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Vaccine stocks (MRNA and BNTX) are still lingering near all-time highs. Masks (HON, APT, LAKE) and testing stocks (HOLX, TMO, ABT, QDEL, DGX) are perking up. Airlines, cruise ship stocks are under pressure. In other words, the market is still worried about COVID. New cases have risen 10 fold in the past two weeks (from a low base). The question is if there will be a jump in hospitalizations and deaths and if there will be further restrictions. Covid is likely to remain in the headlines for the foreseeable future. I don’t think it will bring a substantial market pullback. The markets rarely correct for the same reason twice, especially back to back. If there’s a correction, it’ll likely take the form of sector rotation – either back in tech stocks or in small caps because of further stimulus.

Speaking of stimulus, Congress is close to passing an infrastructure bill. I don’t know how much of it is already discounted but steel and other industrial metal stocks have been perking up in expectations and many are looking constructively – CLF, X, AA, FCX, XME, etc. There was talk that the infrastructure bill might include spending on clean energy which explains the recent strength in solar, EV, charging stations, etc. – PBW, TAN, BLNK, CHPT, TSLA, etc.

Looking at all major sector and industry ETFs, the semiconductor ETFs – SMH and SOXX, are currently looking the most attractive on the long side. Both are setting up for a potential breakout.

In the meantime, earnings season is still in full effect. Big Tech has already reported. All of them – AAPL, AMZN, FB, GOOGL, MSFT, had around a 10% rally ahead of their earnings as the market was anticipating record numbers. The market was correct. Most of the big ones pulled back after their earnings report. A classic example of buy the rumor, sell the news.

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The latest COVID-scare selloff lasted a hot minute. There was no panic selling. The market went through this before last year and had a playbook. Instead of blindly selling everything, it allocated money to stocks likely to benefit from the recent surge in COVID cases and restrictions around the world – vaccines (MRNA, BNTX, NVAX), tests (QDEL, HOLX, TMO), online retail (SHOP, AMZN, MELI, EBAY, CHWY, GLBE, ETSY), cybersecurity (ZS, CRWD, PANW, NET), fast food deliveries (DPZ, PZZA, MCD, WING), remote work (UPWK, FVRR, EXPI), software in general (TEAM, BILL, AVLR, MSFT), advertising and social media (SNAP, TWTR, PINS, FB, GOOGL, TTD, IPG, MGNI), Online payments (SQ, PYPL, V, MA, AAPL), home renovation (FND, HD), etc.

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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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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.