Markets bounced hard in the second half of last week. It’s almost hard to believe how fast things are changing in the current landscape. Although there are so very many reasons to be cautious, if not flat out bearish, the market is just pulling its ears back and making its way higher despite the conditions of the world around it. Thus, given the strong footing the market ended on last week, and of course the charts, we think that we’ll likely see new highs in the week ahead.
The weather in the northern parts of South Africa is likely to be a little wild in the week ahead. We just hope that the hurricane that has made landfall in Mozambique does not cause large scale damage. Spending the week indoors, sadly, is nothing new thanks to lockdown. Now we just have to hope that the coal stays dry so that we don’t have electricity disruptions. These are strange times to be living in to be sure. At least we have markets to look at and keep us busy while a hurricane and a virus rage outside.
Very often it’s better to not listen to the news, or the hype of all the mad things happening in the world around us. Most of the time, it’s better to just sit down and focus on the things that we can measure. So to a large extend we try to do that this week, although we must admit the the blue wave in the U.S. is probably the primary driver behind the strength we saw last week. It’s very likely going to be the source of a whole lot more strength in the week ahead.
The ‘tech call option whale’ that’s been doing a lot of this buying has now been identified as SoftBank. We also had news that Tesla will not be included in the S&P500 index. Perhaps the Nasdaq melt-up might have finally come to an end?
Over the last few weeks the tone of the Weekly game plan and the trade ideas coming out of the International outlook blogs have become somewhat more bearish. Whether or not we are completely missing the mark here is still to be seen, however we are becoming more and more concerned about the sustainability of the current developed market (particularly U.S.) rally.
Building on some of the thoughts we shared in our blog post last week (U.S. commentary), we want to start off the weekly game plan by urging caution. We need to remain ‘trend followers’ and keep dancing while the music is playing, but we must acknowledge the possibility that the carpet can be swept out from under us at any minute. Most importantly, we need to be ready to jump when the carpet is pulled so that we don’t fall flat on our faces… but also not spend the entire party just jumping up and down in the middle of where everyone else is trying to have a good time. It is best then to keep a flexible ‘everything is temporary’ mindset, and be open and ready to change our views when presented with evidence contrary to what we might think we know.
We’re not going to get into too much detail here today. The world is looking forward to a COVID-19 vaccine and we think that markets will likely continue to respond positively. On the home front, it seems that most of the lockdown restrictions are being lifted as well, which will likely positively boost selected sectors and stocks in the week ahead.
There does not seem to be too many good setups around at this stage, and the only relatively attractive setups are slightly longer-term in nature. That is, on a swing trading basis were trades are taken for a number of weeks, rather than just a few days or hours. A catalyst might come in the form of Trump signing an executive order to provide further coronavirus relief directly to US households.
During the last week we started seeing some signs of distress in the Nasdaq, with some heavyweights beginning to show a little bit of weakness. Our strategists put up two posts on the current outlook on the Nasdaq on the International Outlook blog, which showed some key support levels being tested and broken. With those in mind we are slightly more cautious this week.
One of the things that we’ve been thinking about over the last few weeks is; the past. We find ourselves wondering how similar this current situation is to the one back in 2009/10. Could the monetary stimulus just refuel the rally and keep the market (first) and the world economy (second) pushing higher and harder? Possibly, yes.