The two big catalysts in the past couple of months that have defined everything in the stocks market are:
The U.S. election results – clean energy stocks accelerated their ascent since then. Cannabis stocks gapped up and have been clear leaders. Semiconductors and biotech have also been extremely strong post the elections for their own unpolitical reasons. The odds are that those sectors will continue to lead in 2021 but that doesn’t mean chase them when they are up multiple days in a row. Wait for proper setups that create better risk/reward entry points – pullbacks to rising 20 day moving average or a range contraction.
The announcement of a working COVID vaccine – after Pfizer and Moderna revealed their vaccines, retailers, financials, and energy gapped up and have been among the leaders since then. Basically, they are the reasons the small-cap ETFs have done so well. Russel 2000 (IWM) doubled in 9 months since its March 2020 lows. To see a move of this magnitude, you have to go back all the way to 2009 when it took IIWM 14 months to double from its lows. Nothing goes up with such veracity in such a short period of time without having reactions along the way. Don’t be surprised to see 10-20% pullbacks in the indexes in 2021, but overall I expect those pullbacks (corrections) to be buying opportunities.
In the meantime, mega-cap stocks and many software stocks have pulled back or just moved sideways consolidating their gains from the first half of the year. I expected some of them to have strong pre-earnings rallies (AMZN, NFLX) considering their reports in the previous quarter but so far I have been wrong on that. The new earnings season officially starts next week with NFLX and a bunch of financials. After that, we have the big tech and everyone else.
The Senate flipped blue. The market was somehow expecting that as solar, EVs, batteries, other clean energy, cannabis, infrastructure, and Chinese stocks have been rallying ahead of that. Most of them continued higher after the election results. Many are extended for new swing entries and are likely to offer better opportunities when they pull back or consolidate sideways for a few days/weeks.
Inflation expectations continue to rise. Interest rates jumped which boosted financials. Saudi Arabia cut oil output which sent energy stocks higher. Quite a few momentum stocks that took a dive late last year, bounced towards the end of the week. In other worlds, the bull market is still strong and going.
Mega-caps underperformed last week while the rest of the market has been strong. This has been a sign of risk-seeking as of late as capital hasn’t left the market but rotated into smaller caps.
While the main stock indexes have been making new highs in December, the percentage of stocks trading above their 20-day moving average has decreased from 85% to 55%. This might be just the healthy reset or the beginning of a normal 10% pullback – they are a lot more frequently than most think. SPY has one in October and one in September of last year when the percentage of stocks trading above their 20-day moving average dropped to 15%.
Bull markets correct through sector rotation. We have seen so many examples. A significant number of momentum stocks are currently in a pullback mode. There is a reason so many breakouts have not been following through lately. In the meantime, the so-called recovery stocks and ETFs are shining – breaking out or setting up:
The market is clearly betting on the COVID vaccines working and things getting back to some resemblance of normal. The markets constantly try to price events that haven’t happened yet. Sometimes, they are right and predict the future; sometimes; they are terribly wrong but the bank doesn’t care if you made your money riding trends that were not justified by fundamentals.
Another big catalyst we need to be paying attention to right now is the next earnings season which starts in a couple of weeks. The period right before a new earnings season is typically bullish. We have already started seeing some of the mega-cap stocks like AMZN and NFLX to wake up from a 3-month slumber and have potentially started their pre-earnings rally. This is common among stocks that had big earnings surprises in the previous earnings season. Speculators are always trying to front-run another potential strong report and we often see 10-20% rallies ahead of the earnings releases.