A Reopening Rotation Rally is underway since last Monday when Pfizer announced a promising vaccine candidate which sent value stocks – energy, emerging markets, banks, and many small caps and oversold economically-sensitive plays – into FOMO chases while technology, work-from-home and growth plays sat it out. Then just this Monday, Moderna announced another promising vaccine. Stocks rallied again. But not as much…
Since then bonds have faded the yield pop but that may be attributed in part to a JPM note that Fed will move ahead with a “WAM extension” at the December meeting – which is when Fed could announce it will extend the maturity of its $80 billion monthly purchases of US Treasurys.
SC’s Englander: Covid rise could see FOMC action before Dec 15-16 mtg. If FOMC move: Treasury purchases to rise to $120b/month (from $80b); add targeted measures to encourage credit provision to biz Expect yields to lower end of 0.5% to 1.0% range. @EddBolingbroke
Regardless of this impending Treasury supply (think: liquidity) and yield pop suppression (think: lower rates for longer), the Reopening Reflation Rally is gaining big supporters that it will continue well into 2021…
- Goldman out saying the US dollar will decline 6% over the next 12 months, to further support the global economic recovery theme.
- Bank of America out with their Global Fund Manager Survey highlighting Value and Cyclicals – even naming their Top #3 2021 Fave Long … Oil !!
- Morgan Stanley out saying the Gold Party is Over now that a vaccine (or two or three) are in sight and cyclicals will take their place.
- Kolanovic of JPM writes Market Nirvana $4500 $SPX “within sight”.
Not In A Straight Line
As I have shown clients in my live trading room, I am expecting volatility to emerge again in about two weeks – judging from my read of my Stock-Bond-Volatility analysis. I am not expecting a big downdraft until after this Friday’s monthly options expiration, at which point I will be looking for distribution of volume (from my key indicator) as well as topping/reversal patterns in key intermarket charts.
In addition, I outlined some commodity/gold relationships to clients this week – in Gold Lacks A Short-Term Catalyst – that do not support the recent ‘reflation thesis’ as they do not really show any real signs of inflation. Regardless, we have a Reopening Reflation Rally in play NOW and a potential for an Oil shock (see below). But there is one chart that has me thinking markets could have a sudden burst of Vol at the least, an intermediate-term top at most in December.
NYA on a weekly time-frame is very overbought as judged by MACD (bottom panel) and I suspect a few weeks will be enough to form a reversal pattern (at the yellow arrow):
Until then, I see more of a case of tech unwind through profit-taking as these markets are priced for *perfection* to further support the value rotation theme as markets expect a perfect vaccine roll out… That, and heavily shorted hedge fund stocks can create short squeezes that force the growth-to-value rotation trade. Here are just a few and a few I own:
In the back of my mind I am also eyeing year-end (December 21) when TSLA gets officially added to SPY and how that can cause some ‘disruptions’ (i.e. selling) – not to mention continued Covid spikes (read: deaths), election contention (read: Trump’s refusal to leave office) and general end-of-year tax selling (before Biden takes office and hikes personal and corporate tax rates).
Buffett made the point if a very large company were to be added to the S&P 500 it could be extremely disruptive. “If you shorted the companies after inclusion into the index you would be surprised at the (good) returns.” $TSLA 🤷♀️😉 https://t.co/N2HCXTdZVR
— Samantha LaDuc (@SamanthaLaDuc) November 16, 2020
Short Covering Can Cause Trend Reversals
I have been saying and writing for months that Q4 would be when the Growth-to-Value rotation trade takes place in earnest. I just didn’t think it would happen all-at-once last Sunday when Pfizer announced a potential vaccine for Covid. Nonetheless, the rotation is on and has caused large short covering. Short covering does not a trend reversal make, but it can be the start of a trend reversal…
Now that we have lots of open gaps higher in value plays and big macro sponsorship and strong cumulative intraday volume and bullish price action across the oversold sectors in this rotation space, is there potential we might slow or reverse anytime soon? Some expect when yields reverse lower and bonds bounce – despite Fed intervention. Here’s my chart read on that – not yet.
Another Tell: Copper continues to rise as Gold Miners stagnate and fall. The 10 yr has tended to rise and fall with this COPX:GDX ratio, so I will be watching how TNX handles this key level (.50). Above likely means ‘the rotation rolls on’; below is ‘be careful not to get rolled over’.
Basically, the Growth to Value rotation is in play I suspect until this SPHB:SPHQ ratio tags the June high (yellow arrow) – where the reflation trade collapsed last time – at least for a decent pullback to allow folks in if they missed the current ramp.
In the meantime… these key rotation sectors have been explosively bullish – right into resistance:
Big Picture, the commodities index CRB has much work to get back ‘in-trend’ after decades of under-performance, but the current bounce in the energy complex has surely helped give oil bulls hope along with the potential vaccines. Still, I suspect there are some levels of resistance that need to be overcome to embolden more to rotate into ‘value’ for more than a trade, and as such this is a key chart and area I will be watching for a break-up or break-down in the coming months:
Oil Shock Risk
There is some reason to be both bullish oil and energy reflation trades if geopolitical conflicts pick up into year-end (read: Iran). As Bob MacMinn (my guest captain last week) has warned, “geopolitical risk premium on oil is cheap.” If my intermarket read on XLE:SPX ratio crosses above the purple line (purple arrow), we have confirmation.
But rarely is an Oil Risk Event going to give much notice. Kinda like the vaccine shock to the short value, long tech trade that experienced a 10 sigma deviation move last Monday.