November 23, 2020
The market remains focused on vaccine headlines for a third consecutive week. And reports discussing the potential for inoculations to begin next month could continue pulling attention away from rising US infections and hospitalizations. Post-Thanksgiving new case counts and hospitalizations will be watched closely and worsening trends could pressure local governments to restrict mobility further. This could create a cautious near-term tone, while year-end rebalancing may also present a headwind for equities as pension funds tend to rebalance back to the 60/40 mix on a quarterly basis. We expressed some near-term caution on November 12, when weekly equity sentiment reached bullish extremes at 55.84. It backed off to what we consider ‘elevated’ levels of 44.35 last week and we’d welcome any further scaling back. The near-term technical backdrop for the SPX remains favorable and we stay bullishly biased at levels above ~3400 as long as there’s no signs of internal market dislocation. Corrections of >10% are usually preceded by several days of sector/cross-market dispersion and/or decelerating price trend momentum. We don’t see any of that at the moment. The risk/reward for equities remains favorable with a full reopening in the spring leading to improved global PMIs, gently rising bond yields and a narrowing in the value/growth performance gap. While we haven’t seen this in more than 12 years, the scenario would also mean that actual earnings growth from cyclical/value stocks would catch up to growth stocks. And the greatest beneficiary would likely by banks that currently trade at trough levels of price/tangible book value.