D&D Note (5.26.2020) ~ Rotation Into Value From Growth Propels Rally, But Back To Normal? Or Short Squeeze? ~
There are more questions than answers from todays rally. We saw a rotation into Value stocks (like airlines and cruise lines) out of Growth stocks (like Netflix and Zoom).
A big question today is how much of the rally was a short squeeze on traders shorting value stocks and being forced to buy them. Options buying does look to support short covering.
We’ve traded now above the 200 day moving average and essentially pricing back to “pre-pandemic normals.” But are we actually through all the pain economically? Doubtful.
To sustain an actual breakout markets need to continue to trade over the 200 day moving average on a closing basis and have a test back down with bounce off of 3000 on the S&P 500 to create confirmation.
Old resistance level is around 3023 on the S&P 500. The intraday high today was 3021.72.
D&D remains 50% invested with a cash hoard of 50%. At this point we are keeping our current holdings long and not buying or selling until there is more clarity in the direction of this market. If we get price discovery in any individual holding we will take advantage.
Another question is the geopolitical tensions between the U.S. and China. Did those just go away magically today? Answer is no, markets have just decided to ignore those temporarily. That is until the last half hour of cash trading when possible sanctions on China over Hong Kong hit the newswire causing markets to pair gains.
The possible Chinese sanctions on officials and firms caused the S&P 500 to fall back below 3000 and the 200 day moving average and close on the lows of the day.
DOW up 2.17%
S&P 500 up 1.23% (2991.77)
NASDAQ up 0.17%
VIX up 0.36% to 28.26.
Oil up 2.50% to $34.08 a barrel.
While there is great optimism following the Memorial Day weekend there are also fears of further contagion. Problem is it will be 14 days until we know the Coronavirus effect of the large crowds that gathered together without physical distancing and without masks over the weekend.
Brazil’s Covid-19 death toll is projecting to rise 5x by August. Currently the country has the highest death rate and the death toll could jump to 125,000 by early August.
Global Virus cases: 5.54 million+
Global Virus deaths: 347,836+
US Virus cases: 1.66 million+
US Virus deaths: 98,636 million+
~ Dave James / Principal Trader and Market Strategist