The positive news on a vaccine out of Moderna yesterday fueled another nice rally in the stock market...as the DJIA, S&P 500, Russell 2000 and the Nasdaq all rallied strongly. (No, the Nasdaq did not rally as much as the others, but it was still up 0.8%.) The breadth was quite good...at more than 5 to 1 on both the S&P 500 and the NYSE Composite Index. Also, the market closed on its highs for the day...with 10 out of the 11 S&P groups closed in positive territory. (The healthcare group closed very slightly in negative territory.) Finally, the “Dow Theory” followers were quite happy...as the DJIA and the DJ Transportation Index both closed at record all-time highs!
Not everything was bullish, however. The composite volume was a whopping 42% lower than last Friday (when Pfizer made its own announcement), so the enthusiasm was not quite as strong during yesterday’s advance. (Actually, the lower volume probably had more to do with the lower level of activity from the quant funds...who got clobbered a week ago. Either way, lower volume is not what you want to see.)
More importantly, we’d also note that the lack of movement in the “other markets” (fixed income, currency markets) that we highlighted in the morning yesterday...continued throughout the day. Therefore, they are some signs that the rally might actually be running out of steam on a very short-term basis. (Of course, that’s a lot easier to say now that the S&P futures are trading 20 points lower this morning...but it’s something we’ve been thinking could/should take place for a couple of days.)
We certainly do not want to sound like we’re looking for a significant decline right now. We’re just saying that several signs from yesterday’s broad action within all of the markets are saying that the market is likely due for a breather......Besides, we’re only 11 trading days into November...and yet the S&P 500 index is already up 11% month-to-date!!! Therefore a pull-back (or at least a “breather”) this week should be considered normal and healthy.
In fact, we would argue that a pause in the rally at some point in the next week will allow the market to advance even more as we move into the end of the year...than it will the market continues to rise in a straight line. (“People like to use the phrase, “The market needs to digest its gains for a while.” That might sound an old fashioned saying, but history tells us that it IS a good one. It IS just like eating. When you eat at a steady pace...and take your time...you can eat more. The same is true for the stock market. A steady rise with a few “rests” along the way allows a rally to last longer and go higher.)
Switching gears a bit, there has been a lot of debate in recent months about whether we’re finally going to see a pickup in inflation once we get past the global healthcare crisis. We’ve seen/heard a lot about the increase in economic growth in China...and certain commodities are moving higher as crude oil is trying to push higher...and “Dr. Copper” has moved to its highest level since 2018. In other words, there is definitely some evidence that a pick-up in inflation could indeed take place over the coming months. With this in mind, we thought we’d highlight the chart on the CRB Commodity index this morning.
After rallying strongly off of its spring lows...and throughout the summer...the CRB leveled off in the two months following Labor Day. Given its 44% rally off the spring lows, it had become quite overbought, so it was no surprise has taken a breather recently. The CRB actually did test its early September highs later that month and then again in October, but it failed to break above that level. Instead, it got caught in a sideways range. However, over the past few trading days, this key commodity index IS breaking slightly above those highs from recent months. It is only a very slight move to higher-highs so far, so we don’t want to call it a compelling move yet. However, if it can rally further as we move through the rest of the year, it’s going to be positive for commodities.
We do need to point out that the CRB is still well below its multi-year trend line from 2014 (and even further below its trend-line from the 2011 highs), so it’s going to have to rally quite a bit more before we can call a major long-term change in trend. HOWEVER, it won’t take much more upside movement to say that it’s seeing an intermediate-term break-out. If (repeat, IF) that takes place, it’s going to have an important impact on commodity related stocks going into the end of the year...and into next year. A bigger whiff of inflation should also have an impact on long-term interest rates going forward...which, in turn, should have an impact on several different interest rate sensitive groups going forward as well.
Therefore, we’re going to be watching the commodity space very closely over the next couple of weeks. We readily admit that some key commodities are still stuck in ranges. Even though crude oil is up nicely, it’s still well within the range it has been in for many months. So we don’t want to get ahead of ourselves. However, if the commodity space does see any further upside momentum as we move past Thanksgiving, it’s going to have an important impact on many different areas of the global markets.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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