Morning Comment: Can Banks & Small-caps Finally Outperform?

The domestic futures and the overseas markets are all trading substantially higher this morning...on the news that Notre Dame finally won an important football game...and the excitement surrounding this week’s Masters Golf tournament. Okay, okay...the fact that PFE announced that their Covid-19 vaccine prevents more than 90% of infections in their latest study just might be having an impact as well. However, it has been since the Lou Holtz era that Notre Dame won a close game against a top-ranked we still think the news from the sports world is having the biggest impact. Besides, just because the vaccine could save tens of thousands of lives, that’s still not as exciting as the thought that Tiger Woods will be defending his Green Jacket this week.

All kidding aside, the news out of PFE is obviously fabulous, but it is very interesting to note that the futures are telling us that this year’s year-end rally is going to involve some different groups and individual stocks than it had in the past. We’re not just talking about a move away from the stay-at-home stocks and into some of the groups that were hit hardest by the pandemic (like travel and leisure). We’re also talking about stocks like the bank group...and many tech names that are not in the FAANG group.

Of course, many of those non-FAANG tech stocks did quite well before the pandemic...and after the market bottomed in March. However, some of the names in the chip sector (as wall as other tech names) are breaking out to new highs...while most of the FAANG names are still well below their old highs (despite their strong gains last week). Therefore, this news is going to push a lot more money from the momentum based strategies (that have become SO prevalent now-a-days) into these “other” tech names...than it has over the past two years. In other words, the stocks we highlighted in our weekend piece...that are breaking to new highs (like MU, AMD, TSM, TXN, NVDA, etc.)...are likely to outperform the FAANG names between now and the end of the year.

We’d also note that that the KBE bank ETF is trading above the key $35 resistance level that also highlighted in our weekend note (and other notes in recent weeks). On top of this, the yield on the 10yr note has moved above the 0.9% level that has stopped the rise in long-term rates twice this year. That yield now stands at 0.92%, so it still has to rise further to confirm a change in trend in the 10yr yield (it will probably have reach 1.0%), but today’s announcement out of PFE is the kind of news that raises the odds that long-term interest rates are headed higher for the rest of this year and into next year. Given how VERY highly correlated the bank stocks have been to long-term rates for many, many months, this should FINALLY give the banks a chance to outperform for an extended period of time...for the first time in over three years!

What we’re saying this morning is that this new-news will obviously makes are call for a year-end rally in the broad indices an even better one. However, we ALSO believe that investors will be able to maximize their profits...with prudent stock picking (and group picking) as we move through the rest of the year. (You’ll notice that we keep talking about the potential for the stock market through the end of this year and maybe into early next year...but we are not talking about a great full year in 2021. We still think it will be a tougher year than people realize...for the reasons we have touched-on in recent weeks.).......Anyway, we just think that those investors who look at many of the stocks (and several of the groups) that did NOT necessarily lead the market higher in 2019 (and coming out of the March lows) are going to do better than those who just buy the broad indices.

For the charts on the tech stocks we just highlighted...and on the KBE (and stocks like JPM)...please refer to our “Weekly Top 10” piece from this past weekend. Instead of publishing those charts again this morning, we want to highlight the Russell 2000. The futures on the Russell are trading a whopping 7% higher this morning!!!! If the cash market opens where the futures are trading right now, it will take this small-cap index above its all-time highs! If (repeat, IF) any breakout in the Russell holds...and sees more upside’s going to be a very important development!!!

We have to remember...while the S&P and Nasdaq were making a series of “higher-highs” in 2019 and 2020, the Russell 2000 remained below its 2018 highs! That’s right, even with its strong rally in Q4 of 2019 and into early 2020, the Russell never broke above its 2018 highs! Therefore, if it can finally break above those record highs from over two years ago in a compelling way, it’s going be VERY bullish for the small-cap area of the U.S. market. More importantly, it’s going to attract a lot more momentum money than it has over the past 12-18 months. (The Russell chart is below. We have added a line for what it will look like if it opens where the futures are indicating that it will open this morning. So it is not a chart that ends with Friday’s close. It includes today’s assumed further rally.)

We’ll have more on this scenario in the days and weeks ahead, but we definitely wanted to take a few minutes this morning to highlight that as investors look at other areas...outside of the mega-cap tech sector...if this rally has legs into the end of the year, the small cap area should be one that investors look to add to positions.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Nov 09, 2020 — 9:11 AM
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