We all knew it was coming - or at least we should have. Industries that struggled throughout the pandemic and restrictions would come back to life once positive vaccine news hit and we could see the light at the end of the tunnel. But let me caution you first. They haven't all come back. After doing hours and hours of post-vaccine news research, here are 3 takeaways as we look to the balance of 2021.
My Pandemic Index Remains Vulnerable to Selling
During the height of the pandemic and lockdowns, I produced a "Pandemic Index" that was an equal-weighted index of 10 of the worst industry groups. It included airlines ($DJUSAR), recreational services ($DJUSRQ), and aerospace ($DJUSAS), to name a few. While we started to see relative strength in this index after the positive vaccine news hit, that relative strength has faded once again as traders realize that many companies in these industries may be facing a paradigm that lasts well beyond the end of this pandemic. Here's the current chart of my Pandemic Index, relative to the benchmark S&P 500:
The worst of the pandemic stocks saw strength in the second half of May into early June. Their second significant boost came with the Pfizer (PFE) vaccine news in November. The vertical blue-dotted line marks that PFE news and you can see that the Pandemic Index, relative to the S&P 500, shot higher. In other words, we saw leadership from these stocks. But once that initial relative strength wore off (vertical red-dotted line), the S&P 500 pushed higher, but leadership came from other areas, not from the industries in my Pandemic Index.
Energy is the Big Winner
The strength in energy (XLE) has been real if you look at sector performance since the Friday, November 6th low. That was just before the vaccine news hit on Monday, November 9th. I did an analysis of sector performance to show how sectors performed initially from the vaccine news. If you recall, PFE announced their positive vaccine news on Monday, November 9th. Moderna (MRNA) announced more positive vaccine news on Monday, November 16th. So when I did my analysis, I looked at the initial reaction to these two major news events by calculating the percentage gain in each sector ETF from the Friday, November 6th close through the Monday, November 16th close.
My second calculation was from that November 16th close through the Friday, January 15th close. The idea here was to visualize the market's "knee-jerk" reaction, followed by a period of sanity. I believe the 2+ months of market action gives us more of a sense as to how Wall Street is digesting all this information. Here is the Excel spreadsheet that highlights sector performance under both time frames:
For context, consider that the S&P 500's percentage gains for those two periods above are 3.35% and 3.90%, respectively. The reaction from November 6th to November 16th is just about what I would have expected. There was a big catch up in beaten-down sectors. But the action from November 16th to January 15th is very interesting. Probably the most important Wall Street reaction that I glean from the above data is that the only three groups to lose ground are defensive sectors. The reason this is important is that Wall Street continues to bet on areas outside of safety. That confirms nearly every other bullish signal I'm seeing. If Wall Street was saying, "all the good news is built in and 2021 will be a period of consolidation or selling", then we'd see rotation INTO those defensive groups, not OUT of them. I believe this is very important.
Another key result here was the crazy strength that we've seen in energy (XLE). First, let me say that it was warranted, because I'm seeing a GLOBAL bull market, not just one in the U.S. As international economies strengthen, the demand for crude oil ($WTIC) will continue to rise. We're already seeing it in as the WTIC has risen from $37.14 per barrel at the close on November 6th to $52.42 per barrel on the Friday, January 15th close. Remember when crude briefly moved negative back in April, essentially paying others to store it? Yeah, those days are over.
There are two reasons I do still remain skeptical of energy, however, in 2021. First, if that we've no doubt seen a major "dead cat relative bounce". Energy was soooo beaten-up on a relative basis that it was going to bounce at some point, but determining the exact moment was difficult. Look at this XLE:$SPX weekly chart of the past two years:
The relative weekly PPO hasn't even turned positive yet, though I think it's likely to do so. I believe this ratio has a chance to reach the June relative high. I doubt we clear it.
Two things came together simultaneously for energy (aka, the perfect storm). First, the positive vaccine news hit, but, just as important, we also saw a major drop in the U.S. Dollar Index ($USD). At the early-January low, the USD had fallen from 104 in March to 89 several days ago. Since early-November, the USD had fallen from 94 to 89. A falling dollar index typically results in relative strength for materials (XLB) and energy (XLE). We've seen money absolutely pour into energy for these two reasons. I am of the opinion that the dollar has begun to strengthen and it won't stop anytime soon. I'll be discussing why during a special webinar later today, which is open to the public.
Today's 4:30pm ET Event Open to Public
I will be hosting an event later today, "Sneak Preview - Q4 Earnings" for anyone who'd like to attend. I'll be previewing a number of upcoming earnings reports, in addition to discussing key sector and industry groups to watch due to the vaccine-related rotation taking place. I also plan to discuss how all of these new developments will impact our approach to "drafting" ETFs for our next Model ETF Portfolio, which will be announced on Tuesday, January 19th. Our current Model ETF Portfolio, selected on October 19, 2020, has gained more than 15%, while the S&P 500 has gained less than 10%. I'll discuss themes and strategies that I'll be considering in developing our next Model ETF Portfolio. If this all sounds interesting, you can join me by clicking on the following room link (the room will be open by 4:00pm ET):
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