Up & Down Action
The stock market is back to trading like a micro-cap biotech stock as it exploded on positive early news on Moderna’s vaccine and then sold off the next day. It seems to be a trend. Whenever good news about a drug such as remdesivir comes out, the stock market explodes and then declines the next day. This seems like algorithmic trading is moving markets.
It’s somewhat ridiculous to buy stocks with reckless abandon when there are only early signs of positive results. Many teams are working on treatments and vaccines. It’s almost impossible for none of them to show positive results. A few likely won’t work out which might send stocks lower.
There is outright fraud going on with some companies claiming their drug is a magic cure when there is no science to back it up. This situation creates opportunity and adds risk. It creates opportunity because stocks will sell off more than they should. It adds risk because stocks are trading off medical news. One could be investing in an industrial stock which could fall 5% on news of a drug trial as if it is a biotech stock. This is a weird situation for investors.
Extreme Positive Reaction
On Monday, the stock market had a sharp rally in which the S&P 500 was up 3.15% which was 0.49% above the previous bear market high. Nearly 1,900 stocks ticked up at the open. That’s the highest in 10 years and potentially of all time. State economies reopening without the number of new cases spiking and the increase in testing are causing stocks to move higher.
That bullishness stems from the notion that we won’t need to wait for a vaccine in a year or more before the economy mostly goes back to normal. However, if we don’t need to wait for a vaccine, why would the market spike on vaccine hopes? It’s fair to rally if there is actual news on a drug or vaccine, but this is only early information. Plus, the stock market is already up a lot. These arguments are probably why stocks sold off on Tuesday.
As you can see from the chart above, the stocks that did the best this year, underperformed on Monday, while the stocks that did the worst outperformed. COVID-19-hit stocks rallied significantly. Many of them have high short interest. Instead of randomly buying these firms, some are picking the companies with the strongest balance sheets that will survive even a bad scenario. Companies that can withstand a shutdown for a few more quarters have still sold off sharply. They present medium risk and high potential upside.
One Of The Best Runs Ever
As you can see from the chart below, in the past 40 days the S&P 500 has had one of its best runs ever. That’s why several called for a stabilization period of about a month. Worst case scenario was taken off the table, but it won’t be smooth sailing from now until the recovery.
We still have the election, a potential trade war, the reopenings, and the mess that is the recovery. Just because we think the economy will recover doesn’t mean it will be simple given the multitude of small businesses that have already gone bust.
When the market rallies too much, it begins to price in a smooth recovery which is naive given the uncertainty on how the recovery will go. How many people who lost their job will get it back when businesses reopen? It’s also possible there is a 2nd wave of COVID-19.
On the other side, when stocks fall significantly near the low end of the range, you have to think of the stimulus the federal government and Fed are putting into the system.
Plus, the number of COVID-19 cases is falling. As you can see from the chart below, the 7 day moving average of the number of new COVID-19 cases in New York (the hardest hit state) is falling. NYC will reopen in a couple weeks. Investors can see the bull and the bear side of the market. Personally, I stay even-keeled because bulls and the bears both make good points. And, I like to find the bargains in deep selloffs because stocks will end up higher in the long run.
Tuesday’s Action Reviewed
Chartists were nervous after the May 11th high wasn’t higher than the prior peak. Now that the May 18th peak was higher, they are satisfied. In my opinion, these are very small differences. We can’t get excited about a high that’s 0.49% above the previous one. And, the market could sell off on good news about openings because it anticipated this. Buy the rumor sell the news.
We could see the biggest hit stocks like the airlines rally while the tech stocks decline. That’s a net negative for the market because of the market cap of these firms. In the next few months, we will likely be looking at a higher market. But the next rally won’t be nearly as steep as the one from late March to early April.
On Tuesday, the S&P 500 declined 1.05% which put it 2.7% above the April 14th high. The market has certainly gotten somewhere recently. It took until the end of the day on Tuesday for the market to realize the hype about the Moderna drug was over the top.
S&P 500 fell 1.4% in the last 70 minutes of trading. Extremely volatile OIH energy services ETF fell 5.1%. Small cap Russell 2000 index fell 1.95%. Tech stocks went back to outperforming after they were weak on Monday as the Nasdaq fell just 0.54%.
Shopify was only up slightly until Facebook announced a partnership with the firm, sending its stock up 2.07%. Facebook was up 1.73%. Once again, everyone in the tech sector wins for now.