In the spirit of the Holiday, we selected Sheryl Crowâ€™s rendition of â€œMerry Christmas Babyâ€ to embody the sentiment of the Stock Market this week. The salient lyrics are as follows:
I said, merry, merry, merry, merry Christmas, baby
You sure did treat me nice, yes, you did
Thereâ€™s no question the markets have â€œtreated us niceâ€ in 2020, so now we look forward to how we can continue the streak in 2021.
On Tuesday I was on Fox Business discussing the â€œYear of the Retail Investor.â€ In the segment, I covered some key points on how retail investors have succeeded in 2020 and what to watch out for in 2021:
Santa has been good to us throughout the month of December, but the technical definition of a â€œSanta Claus Rallyâ€ starts on Christmas Eve and ends on the second trading day of 2021.
Ryan Detrich of LPL Financial put out some useful stats to give us an idea of what we might expect:
So while December has been nice, there may still be some gas left in the tank (if past is any prologue):
Detrick also points out that going back to the mid-1990s,
â€œthere have been only six times Santa failed to show in December, and in those instances January also brought a move lower five times,” and the full year had a solid gain only once â€” in 2016, but a miniâ€“bear market early in that year.
So we want to see Santa work his magic, not only for the end of the year but for what it might signal moving forward:
History doesnâ€™t repeat but it does rhymeâ€¦
Consistent with our rotation thesis â€“ which we have been emphasizing since late Spring and Summer in our weekly notes:
Bret Arends posted the following chart on MarketWatch:
The nascent rotation from Large Cap Growth (FAANGM+) to small cap value (banks and energy) is just beginning. We are in a new (post-recession) business cycle.
This is also consistent with our view that commodities/oil will have a multi-year boom cycle (along with emerging markets) that may rival 2001-2007.
Managers in the Bank of America Global Fund Manager Survey this month began to shift along these lines for the first time in years:
Sentiment Follows a Roadmap
On October I put out this roadmap of sentiment to explain the despondency in sentiment on Wells Fargo (NYSE:WFC) and how it would eventually turn around:
As it relates to Wells Fargo â€“ based on the sideways consolidation we have experienced the last couple of weeks â€“ it looks like we may now be leaving the â€œdenialâ€ phase and on our way to the â€œreturning confidenceâ€ phase. If the roadmap continues along normal tendencies, it may be a quicker ride than anticipated:
Always remember, â€œopinion follows trend.â€ No one wanted Wells Fargo a few weeks ago. Now that itâ€™s up ~45% in six weeks, more and more people are talking financials. Here are three articles from Monday alone:
- Wells Fargo set to be freed from AML consent order (American Banker)
- Banks Can Buy Back Stocks Again. Wall Street Is Cheering. (Barronâ€™s)
- Bank Stocks Are Going to Be Higher Next Year, Expert Says (Barronâ€™s)
In the mid $40s â€œreturning confidenceâ€ is when everyone will be talking the â€œturnaround storyâ€ (with Charlie Scharf) and that should be the next region where we consolidate sideways for a while. But until then, letâ€™s enjoy the ride.
Now on to the shorter term view for the general market:
In this weekâ€™s AAII Sentiment Survey result, bullish percent flat-lined at 43.57% from 43.43% last week. Bearish percent dropped to 21.99% from 26.29% last week. We are still at an extreme in sentiment for retail investors.
Just as with last week â€“ while this is still an extreme in short-term sentiment and should be heeded in the short term â€“ it is important to note in the chart below, that while similar levels presaged a short-term top in early 2018, they occurred near the beginning of a longer-term uptrend at the end of 2016-2017 (right after the last presidential election).
We noted the similarities between the pre-election stock-market in 2016 versus 2020 in our Nov. 2 note. It has played out exactly according to script ever since, which is why I am inclined to give this extreme level in sentiment the same benefit of the doubt as in late 2016. Just like then, most managers were off-sides and flat-footed going into the election and had to panic into the market to play catch up before year-end.
The CNN â€œFear and Greedâ€ Index dropped again from 69 last week to 57 this week. This is a relatively neutral read. You can learn how this indicator is calculated and how it works here.
And finally, this week the NAAIM (National Association of Active Investment Managers Index) came down a nudge to 101.47% this week from 106.74% equity exposure last week. As we said before the election, managers would have to chase into year end â€“ and they are now doing just that. As you can see over the past five years, this level of â€œextremeâ€ warrants caution but is not always indicative of a top.
Our message for this week:
Our view has stayed consistent:
While the (short-term) â€œeasy moneyâ€ has been made in the general indices (since the March lows), I think the easy money is just getting started in â€œleft for deadâ€ sectors/stocks. I believe Banks, Defense Stocks and pockets of Energy will be as good â€“ if not â€œorders of magnitudeâ€ better (in coming quarters) â€“ than buying the general market in late March.
While many worry that institutional managers â€“ and retail investors alike â€“ are overly confident, it just may be the case that weâ€™ll get the anticipated correction when everyone has forgotten about the â€œeuphoriaâ€ narrative. Sometimes confidence is just what the doctor ordered at the beginning of a new cycle. This chart by J.C. Parets speaks exactly to the point we have been making in the last two notes:
While everyoneâ€™s looking for now, I think the odds favor a first-quarter pullback â€“ after most managers have given up on a correction and followed the chase. Only when everyoneâ€™s in can they open the trap doorâ€¦
That said, if you take a few steps back (like we covered two weeks ago), it may be too cute to try to play it â€“ considering we have just started a new business cycle. There were fierce corrections in 2010 and 2011 after the huge move off the March 2009 lows.
It did not pay to play the short-term moves in 2010 and 2011 â€“ as you may very well have missed out on a decade long run. That long cycle ended with the 2019 yield curve inversion, and the 2020 ~35% correction plus first-half recession (two quarters of negative GDP growth). The recession ended with positive GDP growth in Q3 2020 (33.4% annualized) and began the new business cycle.
Weâ€™ll be using any weakness that potentially comes our way in the first quarter to add more value/cyclical names to hold for the next three to five years.
Disclosure: I am/we are long WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: www.hedgefundtips.com/…