The S&P 500 exploded higher at the open on Monday after a vaccine candidate tested 90% effective in preventing the COVID infection. That’s the home run we need to end this pandemic and get life back to normal. Investors were justifiably excited by this development and sent stocks sharply higher.
Unfortunately, the enthusiasm didn’t carry over to the close and stocks finished well under their opening highs yesterday. As exciting as this vaccine is, there is still a gigantic chasm between yesterday's news and when a large percentage of the country will be vaccinated.
While almost all recent developments turned out far less bad than initially feared and we are steadily moving to a better place, the biggest hurdle for stocks is their huge runup in valuations. Prices are well above their pre-COVID levels despite this fairly dramatic economic contraction and an earnings recession. Everything is pointed in the right direction, but stocks have already priced that in and then some.
I like this bull market. I like the direction the economy is headed. I truly believe the worst days are long behind us. That said, stocks have a tendency to get ahead of themselves and Monday’s price-action was absolutely dreadful.
The fact we couldn’t hold this huge breakout to fresh highs on outstanding news is deeply troubling. I still like where the world is headed over the medium and long-term, but we should be ready for a near-term stepback in stock prices. Investors clearly told us yesterday they are not comfortable buying stocks at these levels and the only thing that will cure that is time.
Whether that means a bigger pullback to support or a longer sideways grind near current levels has yet to be decided, but either way, we should temper our expectations for a while. The levels are definitely a better place to be taking profits than adding new money. The bull market is still alive and well, we just need prices to pull back and rest a little bit over the near-term. Two-steps forward, one-step back.
An aggressive trader can short further weakness today, Tuesday, but this is still a bull market and that means taking short profits quickly and often. On the other side, any dip is a buying opportunity, just be smart about your entries. Start small, wait for the bounce, keep a nearby stop, and only add to a trade that’s working. If the first bounce doesn’t work, get out and try again next time.
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