Big Win!
Posted on Sunday, November 15th, 2020
Final Score – ND 45 – BC31! Phew! We are and have been huge Notre Dame fans for over 40 years! There have been lots of ups and downs but 2020 has been a very enjoyable year watching the Irish. It also means that this Thanksgiving I won’t be hearing it from my BC cousins – which is bittersweet. Quite frankly, we would rather be with them and hear the banter. It was a long week in the market but got longer late in the week. One of us in the house is struggling with allergies. Could this be Covid? He has been isolated and tested. We will know more when the tests come back. Fingers crossed.
While the hugely positive vaccine news on Monday was welcome we can’t help think that this was a sell on the news event. The old saw on Wall Street is to buy on the rumor and sell on the news. As you know we have been of the position that markets are higher due to loose monetary policy from the Fed and now larger than normal spending from Congress. A Biden White House combined with a Republican Senate has investor’s nervous that a fiscal package may not be forthcoming or, more likely, at least a bit smaller than if Trump had won or Dems had taken the Senate. A lack of or smaller stimulus has to throttle back expectations for the economy. The vaccine news also means that government support may be drawing down for the economy as it is no longer needed quite as much. 2021 could see the fastest fiscal contraction in US history after 2020’s fastest expansion. That will not be good for stocks.
One of Reilly’s Rules is that the smart money in the market operates in the last 30 minutes of the day while the emotional players play in the first hour reacting to overnight news. The Bloomberg Smart Money Indicator shows these money flows. Bloomberg’s Smart Money Flow indicator has diverged sharply from the S&P 500 since late August. While the market appeared to break out of its recent range we are wary that the gains may be short lived. Next week is a big test that the bulls hope to pass.
The real story this week was the rotation out of tech stocks and into value and cyclical stocks. This is how Stan Druckenmiller hedge fund manager and investing legend put it. Makes sense to me.
“You’ve had a bunch of equities benefitting greatly from work from home,” Druckenmiller said. “A lot of money has rotated into them. They are overvalued.”
“But then you’ve got a whole other sector of the market that has struggled mightily because of Covid,” he said. “They’re selling at under-value relative to, say, a three-to-five-year outlook. So the rotation into that would seem entirely rational.”
The vaccine news drove the S&P to 3645. It sure was tempting to chase the market but things just didn’t feel right. There is an old saw from the Street that says Buy on the rumor – Sell on the news. This seemed more like a sell on the news event but the fact that the market roared back on Friday made the decision to chase or not chase the market that much more difficult. Markets have a way of making things difficult. It’s important to note that the range is still intact and perhaps a bit better defined as we sharpen up our pencil. 3250 is support and 3600 is resistance. While valuations are historically high Bear markets do not begin after the market holds its level for months as it has since July.
The questions for next week are twofold. Are we still stuck in a range for stock prices as judged by the S&P 500? If not – is the best place to be techs or small cap/value? Next week is the key. We added some last week for our most aggressive and underweight clients. If markets can hold their gains or move higher then momentum will be on the side of the bulls.
Stay safe.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.