Published July 24, 2020
We have mentioned recently the need for the stock market to expand its participation if the rally was to continue. Over the past couple of weeks this appears to be happening. See below a variety of sectors outside the usual FANGMA* tech/consumer complex that have been showing strength. This rotation is what fuels longer-term stock market rallies.
The preferred bullish rally pattern is:
- Investors bid up certain sectors. Those sectors become relatively expensive.
- Money rotates into cheaper sectors that now look more attractive. Those sectors gets bid up.
The process repeats upward and onward.
Here is a series of sectors/markets outside the FANGMA that are showing either new or renewed strength. First, we look outside the U.S. and find that those markets have resumed their uptrend. This week’s substantial and historic economic package from the European Union adds further fuel to the upward trend in these markets.
Looking at sectors within U.S. stocks, we see fresh breakouts in Materials, Healthcare, and Retailers.
We also find new strength in Consumer Staples and Housing.
We noted last week that record-low inventories of homes for sale coupled with ultra-low (and falling) interest rates are stoking a surge in demand for lumber and housing construction. This move in housing supports small and mid-cap stock indexes, which have been weaker than their large-cap brethren seemingly forever. If the small/mid-cap indexes can put together a sustained uptrend, the broader stock market will be on much better footing. We will see how these sectors fare during the current earnings season and as we roll into the occasionally treacherous August/September time-frame.
*FANGMA = Facebook, Amazon, Netflix, Google, Microsoft, Apple
Investors were encouraged Monday by positive corona-virus vaccine news from The Oxford University/AstraZeneca trials. The rally was led by a huge +2.5% gain from the Nasdaq, offsetting weakness elsewhere. The S&P 500 rose +0.8%. The script reversed Tuesday when a deal on economic stimulus in Europe boosted shares of cyclical companies while the tech/consumer darlings largely ran in place. Welcome earnings from Lockheed Martin (LMT) and Coca-Cola (KO) also provided support. Stocks added +0.6% Wednesday when Pfizer (PFE) received a $2B commitment from the U.S. Government for their corona virus vaccine candidate. Stocks tumbled -1.2% Thursday in an afternoon selloff fueled by a tick upward in jobless claims and a sell-the-news response to Microsoft’s (MSFT) earnings report. Some market analysts expressed concern that the new corona virus relief package in Congress will reduce or perhaps even eliminate the jobless benefit. It is believed that $600 benefit in the initial pandemic relief package supported higher levels of consumer spending. Friday saw a continuation of the selling with another -0.6% dip. A -15% loss in Intel (INTC) shares added pressure as did an increase in geopolitical scuffles between China and the U.S.
For the week, the S&P 500 ticked lower by -0.26% while the Nasdaq 100 (QQQ) slipped -1.49%. The small-cap Russell 2000 (IWM) gave back -0.35%.
Warm wishes and until next week.