The market has grinded marginally higher since my last post and is making new all time highs. There's been a massive rotation in the "value" sectors, namely, energy and financials while big cap tech has lagged. Obviously, this is the reverse of what had been going on the past several months and years for that matter. This rotation smells like a dead cat bounce with the possibility to last longer simply because energy and financials were so hated and hard hit, but that hatred has quickly turned to embracement. I remember quite well the beginnings of the last major value cycle from 2000-2008. It started in a stealth-like manner and back then the energy sector was the main driving force of that move powered by a thirst for energy from emerging markets, China in particular. This time around the structural outlook is negative given the alternative energy transformation and ESG mandates. And what about financials, the other major value component? That sector too looks to be in structural decline with fintech banking and low rates eating away at them, but again, they could still have room to run.
And let's discuss the main catalyst for this rotation into value and for the market's buoyancy overall - the vaccine news. First of all, it would appear that the vaccines from Pfizer and Moderna are effective, but the word "appear" is the operative word. We don't know how effective they will be until after they are used en masse. The market would also appear to be assuming that the rollout of this vaccine is going to be smooth and that there will be high embracement of this vaccine by the masses. Maybe all this optimism will turn out to be justified but with expectations so elevated it would seem that the market is vulnerable to just the slightest of setbacks in the vaccine rollout and I'm guessing there's got to be at least a couple.
Sentiment is very stretched on pretty much every front, and other "sentiment watchers" like me have been quick to notice this and have been frustrated in making bearish calls as the market simply keeps grinding higher. That's not uncommon. Intermediate term tops are typically harder to time than bottoms in a bull market and when you have the market making all time highs, that typically results in sticky momentum. However, we're now at the point where the market has a running of fumes feel to it. This weekend Cramer wrote an article titled "To all you Robin Hoodies I salute you!" which basically congratulates these newbie traders for their optimism in airline and cruise stocks even though they are oblivious to the massive stock dilution in these sectors (much like banks during the financial crisis). This is the type of article you see near a top. On a personal anecdote, I was chatting with a friend of mine who was so excited to talk about his trading success. He told me how he can't wait for the next trading day to start. I know that feeling well and when I got it, it almost always led to getting humbled shortly after unless I managed to come to my senses in time. So, the danger signs are there.
There is one more potential positive catalyst in the short term and that is stimulus. There was recently some talk about potential positive developments and should further developments happen that could add more gas to the fire in the short term, but if you look at things objectively, any gains from here appear highly likely to be given back and then some in the next month or 2 unless we are going to enter a blow-off move similar to say Jan-March 2000 in the NASDAQ. That's certainly a possibility but that's not something worth betting on as those sorts of moves are rare. The blow-off phase to a bull market happens when there's widespread optimism by the masses in general, whereby the sky is blue and everyone is truly all in. I don't think that's going to happen until covid is gone for good or at least mitigated significantly via the vaccine or simply running its course.
It should be also noted that the last time we saw value and junk stocks take center stage like this was early June which led to a ST peak in the market and the relative out performance of those sectors. That move too was triggered by vaccine hopes This time around the hopes are more justified, but at this point it would seem that the market is jumping the gun. That's obviously just my opinion which could end up being dead wrong.
So bottom line here is that I would only be sticking with high conviction names at this point and be looking to takes chips off the table. The risk to doing this is that you would miss out on a possible blow off move to the upside but that's a piggish thing to bet on.
