“There are decades where nothing happens; and there are weeks where decades happen.”Vladimir Ilyich Lenin

Investors welcomed the third week in November with a smile as the first 10 days of the month saw the S&P rise by 9.6%. A good “year” in two weeks. It’s common knowledge in the investment world that the financial markets do not like uncertainty. Whether it be a political risk or the alarming trajectory of COVID-19, the equity market has rallied in the midst of it all. Entering this week the S&P 500 posted its best eight-day period since April. Every major index except the NASDAQ Composite made a new all-time high as well. There is no need to feel dismayed that technology didn’t participate, the NASDAQ has already posted 42 new highs in 2020. Someone reading that would assume the financial world was humming along this year, but we all know that wasn’t the case at all. In fact, the exact opposite occurred. A total and complete lockdown of the economy was part of the narrative.

We’ve discussed the myriad of reasons why the markets have been so resilient. Savvy Investors understand what occurred, while the naysayers continue to go mumbling under their breath about a “delirious” stock market. One group “understands” the other doesn’t.

The recent strength left many indicators suggesting in the short term the rally may be overdone. For example, the percentage of bullish investors in the AAII survey posted its largest week-over-week gain since 2010 and rose to the highest level (55.8) since January 2018. Other technical measures confirmed the short term exuberance.

There are still hurdles to deal with, and they are obvious. Let’s review them to make the naysayers feel more comfortable as they watch the indices rally. While we may receive more than one successful COVID-19 vaccine, political developments and a worsening of the pandemic may cause volatility in the near term. President Biden could be the first Democratic president with a Republican Senate and Democratic House since 1884, and his party’s majority in the House is likely to be the tightest since the 1940s. This scenario is viewed optimistically, assuming legislators seek compromise rather than no-action gridlock.

With a new administration comes transition plans. Change in policy, and maybe just as important, a change in key players that can help or hinder the economy is part of that transition. So all eyes will be focused on President-elect Biden’s policy priorities for any move that could be deemed market negative.

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Until the Senate is determined, the battle over the size and scope of the Phase 4 stimulus will continue. The gap between Senate Majority Leader McConnell ($500 billion) and House Majority Leader Pelosi ($2.2 trillion) remains wide, and it is increasingly likely that a deal will not be reached until 2021.

Perhaps at some point, a targeted package will be needed, but so far that has been a “political” issue. The data during this rebound has clearly shown the consensus view that stimulus is a must has been wrong. And it’s been wrong for months now. It was a talking point and an argument that came with an agenda. Unfortunately, it swayed many investors into making the wrong decision when it came to the equity market. They “thought” the stock market could not advance without more fiscal support. No need to take my word on how wrong that view was. The stock market just confirmed that.

With markets at new highs, knee-jerk reactions will be more commonplace. These cooling-off periods are a welcome pause that helps to eliminate excess. Of course, the BIG wild card that remains is the resurgence of COVID-19 making “officials” attempt to impose more severe lockdowns. From a stock market point of view, we have already been there and have already seen how parts of the economy never missed a beat. While it will be a psychological issue if we start to hear these types of restrictions being announced, “Individual” stock selection will be “key”. However there will be those that are inclined to start adding protection by hedging and/or selling stocks to be overweight cash.

Savvy Investors already know where to look for their opportunities and “value”.

OVERBOUGHT!! That is where just about every index, sector, country, and region of the global stock market began the trading week. However, this week has kicked off looking very similar to last week as the major indices continued their rallies on news of positive data related to a COVID vaccine. Last week it was Pfizer (NYSE:PFE), but on Monday morning it was Moderna (NASDAQ:MRNA). In a déjà vu-like session to November 9th, all of the major indices (except Nasdaq Composite) once again set new highs on the day. Healthcare was the only laggard as all of the other sectors posted gains. Energy continued to outperform with the Energy ETF (NYSEARCA:XLE) gaining 6%. Banks, Industrials, and Semiconductors were all up 2+% as well. The rally is broadening out. As of November 16th, only 18 stocks in the S&P 500 were down for the month.

The 11% gain in the S&P for November ran into some profit-taking on turnaround Tuesday as the major large-cap indices reversed some of Monday’s gains. The S&P, Dow 30, and the NASDAQ posted losses of less than 1%, while the Dow Transports and the Russell 2000 posted small gains. There was across-the-board sector weakness with only Energy and large-cap Biotechs (NYSEARCA:XBI) posting gains.

Stocks finally succumbed to the overbought conditions on Wednesday. Equities had traded higher for most of the morning before tipping into the red in the afternoon with losses accelerating into the close. The S&P 500 finished the day at the lows with a 1.1% loss. Breadth was weak with every sector turning lower. However, there was no staying power in the selling pressure and the consolidation process began, then continued until the end of the week.

The Small caps as measured by the Russell 2000 ETF (NYSEARCA:IWM) set another new all-time high by posting a 2% gain for the week. The Dow transports did the same with a 1% gain. S&P 500, Dow 30, and the Nasdaq composite were all flat on the week as the equity market took a well-deserved breather.

The vaccine news was the defining factor for global equity markets, just like it was responsible for forging new highs in the U.S. indices. Many of the Emerging Markets and the Eurozone remain far from 52-week highs. However, European equities broadly went from the lowest levels since mid-May to the highest levels of the post-pandemic period over the last couple of weeks.

Sweden, Japan, New Zealand, Taiwan, Korea, and India are close to new 52-week highs or recently hit them this week. Valuation remains most compelling in China, which trades at a huge discount to the rest of the world.

Economy

The -4.2 point November Empire State Manufacturing Index dropped to 6.3 from 10.5 in October and 17.0 in September left the measure just above the 3.7 August reading and well below the 17.2 figure in July that marked a 20-month high.

Philly Fed index dropped -6 points to 26.3 in November. The slide is a little smaller than analysts projected and only partly erases the 17.3 point bounce to 32.3 in October. Also, it is a 6th straight month in expansion after contracting from March through May and hitting a 40-year low of -56.6 in April. The index started the year at 17.0 and was at 8.4 a year ago. The components were mixed.

The Kansas City Fed 10th District’s headline reading matched expectations with a 2 point decline to 11. Similar to the Philly Fed report, expectations for six months in the future were also slightly lower this month.

Index of leading indicators rose 0.7% in October to 108.2 after rising 0.7% to 107.5 in September. It’s a 6th straight monthly increase as the index has bounced from the three months of declines (February through April) that saw a 96.9 print in April that was the lowest since September 2014. The record high was achieved in July 2019 at 112. The diffusion index rose to 80.0 from 70.0. Seven of the 10 components made positive contributions, led by ISM new orders (0.25%) and jobless claims (0.20%). Two were unchanged, consumer expectations and building permits. Nondefense capital goods orders ex-aircraft made the only negative contribution.

Industrial production bounced 1.0% in October, more than recovering the -0.4% drop in September. That saw capacity utilization rise to 72.8% from 72.0% previously. Factory production increased 1.0% from the 0.1% gain and is a 6th straight monthly gain

October retail sales edged up 0.3% and were up 0.2% excluding autos. September sales climbed 1.6%, and the “core” was 1.2% higher. It’s a 6th straight month of gains. August sales were revised sharply higher to 1.4% (was 0.6%) on the headline and 1.5% (was 0.5%) ex-autos for a better than expected result. Sales excluding autos, gas, and building materials were up only 0.1% after surging 1.2% in September and 1.4% previously.

Index of leading indicators rose 0.7% in October to 108.2 after rising 0.7% to 107.5 in September. It’s a 6th straight monthly increase as the index has bounced from the three months of declines (February through April) that saw a 96.9 print in April that was the lowest since September 2014. The record high was achieved in July 2019 at 112. The diffusion index rose to 80.0 from 70.0. Seven of the 10 components made positive contributions, led by ISM new orders (0.25%) and jobless claims (0.20%). Two were unchanged – consumer expectations and building permits. Nondefense capital goods orders ex-aircraft made the only negative contribution.

Bespoke Investment Group:

“Last week saw initial jobless claims come in at a new pandemic low of 709K which was closing the gap on the pre-pandemic record of 695K from October of 1982. Not only was that reading revised higher by 2K to 711K, but this week’s print rose to 742K missing expectations of a further decline down to 705K.”

“That is the first time that claims have risen week over week since the week of October 9th. Granted, this week’s increase is not that significant as it is only at the highest level since two weeks ago (10/30), and it is still 15K below that week’s revised reading of 757K.”

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Housing numbers continue to be absolutely stellar.

NAHB housing market index surged another 5 points to 90 in November, a third straight monthly record high, after rising 2 points to 85 in October. It was at 71 a year ago. The index dropped to a low of 30 in April, but that’s well off the all-time nadir of 8 in January 2009. The current single-family sales index jumped 6 points to 96 from 90 and was at 36 in April.

Permits and Starts for October beat expectations handily.

Housing starts climb 4.9% to 1.53 million in October, stronger than expected, after bouncing a hefty 6.3% to 1.45 million in September. This is the best since January’s 1.61 million, a 13-year high before they crashed -26.4% to a five-year low of 0.93 M in April. Starts of the single-family homes were up another 6.4% to 1.17 M following the 8.4% jump to 1.1 M previously and have been on the increase since April.

Existing home sales rose another 4.3% to a 6.85 million rate in October, after surging 9.9% to 6.57 Million in September. It’s a fifth monthly gain and is the highest since November 2005. Single-family sales climbed 4.1% to 6.12 M following September’s 9.9% jump to 5.8 M. Condo/coop sales increased 5.8% to 0.73 M following the 9.5% gain to 0.69 M. The month’s supply fell to 2.5, another new record low from the prior 2.7, with the single-family supply at 2.4 from 2.5, also a record low. All regions posted monthly gains in sales. The median sales price rose to $313,000, also a new peak, from $311,400.

Lawrence Yun, NAR’s chief economist:

“Considering that we remain in a period of stubbornly high unemployment relative to pre-pandemic levels, the housing sector has performed remarkably well this year. While coronavirus-induced shutdowns hindered virtually all markets, Yun says the housing industry has mounted an impressive rebound.

“The surge in sales in recent months has now offset the spring market losses. With news that a COVID-19 vaccine will soon be available, and with mortgage rates projected to hover around 3% in 2021, I expect the market’s growth to continue into 2021.”

Yun forecasts existing-home sales to rise by 10% to 6 million in 2021.

The median existing-home price for all housing types in October was $313,000, up 15.5% from October 2019 ($271,100), as prices increased in every region. October’s national price increase marks 104 straight months of year-over-year gains.

Total housing inventory at the end of October totaled 1.4 million units, down 2.7% from September and down 19.8% from one year ago (1.7 million). Unsold inventory sits at an all-time low 2.5-month supply at the current sales pace, down from 2.7 months in September and down from the 3.9-month figure recorded in October 2019.

Earnings Observations

The largest retailer Walmart (WMT) brought earnings season to a close this week with revenues 1.7% above forecasts and EPS 13.6% above forecasts. Comparative sales ex-gas ran at 6.4% “year over year” almost twice the 3.8% estimate, as e-commerce sales rose 79% YoY. Comps at Sam’s Club were also impressive, +11% YoY. Target (TGT) followed that with similarly strong results.

All good signs that the consumer is faring well.

In the long run, the stock market is all about earnings. And earnings have been coming in much better than expected. I have made it a point for weeks to say that corporate earnings would be better than most expected and that has been the case.

I expect that trend to continue, estimates are too low. Fundamentally, a very strong Q3 earnings season has continued the upward trend in S&P 500 earnings estimates. Now we start to see many analysts play the “catch up” game. The three-month average of upward earnings revisions for companies in the S&P 500 is now at an all-time high.

Analysts should be playing catch up. The handwriting has been on the wall since the first week of this earnings season. 16.5% of companies have raised guidance, the best for this cohort since the mid-2000s, reversing the huge drop in guidance raises associated with the start of the COVID pandemic.

The U.S. dollar has broken below support and sits at a 29-month low. Assuming the dollar fails to move back above that prior support level, confirming the breakdown, a weaker dollar means more attractive prices for U.S. goods.

Source: Bespoke

As a result, that could bode well for companies with more international revenue exposure. If the USD becomes a tailwind for multinationals, that adds more ammunition to the argument that earnings estimates are too low.

Instead of speaking to EPS “Beats,” let’s reverse the tables and talk about EPS “Misses”.

Source: Bespoke

We can expect earnings to remain strong and perhaps get stronger. My message has been crystal clear. Despite all of the roadblocks induced by the “virus”, corporate America has remained flexible. It has adapted, and many sectors of the economy have not only survived but also flourished. This earnings season is one reason why the S&P 500 has rallied from its October low of ~3,234 to its current price of ~3,550+ for a 10+% gain since October 30th while setting a new all-time high.

The Political Scene

The beat goes on. Senate Minority Leader Chuck Schumer said that Senate Majority Leader Mitch McConnell has agreed to continue talks with Democrats over a potential new COVID-19 aid package as cases still surge across the nation.

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The Fed

As per the original legislative agreement, Treasury Secretary Steve Mnuchin has decided to allow several of the Fed’s emergency lending programs to expire on Dec. 31. It is widely understood that Mnuchin or a new Treasury secretary from the Biden administration could revive the emergency lending programs under a new agreement with the Fed. The unused funding will be brought back and reappropriated to where it is needed. Like everything else these days, this became a “political talking point”, but the market shrugged it off for what it actually is. There is nothing more to see here.

Fedspeak

Vice-Chair Richard Clarida gave a noteworthy speech on the economic outlook which brought a notable tone of optimism to the recent land of Fedspeak. While Clarida notes a “deep hole” for the economy with “more fiscal and monetary support likely needed,” he also observes an “initially robust” recovery and “more conviction to my 2021 baseline outlook.”

Clarida flagged “enormous pent-up savings” and the possibilities of vaccines for next year as key sources of optimism for the outlook

Mr. Clarida is quite correct about the savings backdrop. As shown below, at over 14%, the savings rate implies a huge upside for consumer spending as it normalizes relative to incomes that have held up pretty well.

Source: Bespoke

The 10-year Treasury traded in a narrow range closing the week at 0.83 which is where it closed two weeks ago.

Source: U.S. Dept. Of The Treasury

There is no problem with the yield curve today. The 2-10 spread was 30 basis points at the start of 2020; it tightened somewhat from last week’s level standing at 67 basis points today.

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Sentiment

The American Association of Individual Investors’ weekly survey recently posted its highest bullish sentiment reading (55%) since January 2018, and some contrarians started to get nervous. While bullish sentiment remains at the high end of the past several year’s ranges, there was a significant moderation as only 44.3% report as bullish. That 11.5 percentage point turnaround was the largest drop in bullish sentiment since January 30th.

When I see week after week of the bullish sentiment readings above 50% in concert with other indicators, I will sit up and take notice. Until then I view any temporary surge as a blip on the radar screen. In my view, the majority of investors remain extremely nervous.

As is seasonally normal for this time of year, crude oil inventories saw another build this week as inventories including SPR rose 0.36 million barrels. Analysts had expected a build of 1.6 million barrels. Higher domestic production played into this as it rose from 10.5 million barrels/day to 10.9 million barrels/day this week, the highest level since the week of October 23rd.

The changes in the products were much more dramatic. Gasoline inventories rose by 2.6 mm bbls; the largest build since May and much higher than estimates of a 0.8 million barrel build. That occurred as gasoline demand fell to its lowest level since mid-June, partly due to seasonality.

The commodity closed the trading week at $42.17, increasing $2.02, putting the price of WTI back to where it was in mid-October.

The Technical Picture

When we zoom out and expand our viewpoint, we note that the S&P 500 has put in a series of six higher lows since May. All in the process of eventually making a new high at 3,626. As it turned out, each one was a buying opportunity. That, of course, is easy to say in hindsight but each week all were reminded how following a primary trend does increase the chances of success. Not once did this rebound trend fail. The latter is why Savvy Investors have done well in a very challenging year.

Plenty of analysts like to pick those low points to roll out the “Armageddon” publications and that was especially true this year with the pandemic hanging over our heads. Every call to sell, hedge, and lighten up on equities at the points depicted on the chart above turned out to be incorrect.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

The Bears are talking about how COVID-19 can mutate and cite all of the roadblocks for the distribution of the vaccine. They concentrate on surging COVID cases, note that lockdowns are coming, and tell us there is no stimulus to keep the lights on in the U.S. economy.

The opposing viewpoint says we have been here before, and there is a light at the end of the tunnel. One group has been right and is celebrating across the board highs in the major indices, and the other is horribly wrong with their market assessments.

Those waiting for stimulus because in their minds the economy and the market simply couldn’t move forward without it have outsmarted themselves. They operated with blinders on. I viewed the “lack of stimulus lows” in September and October as tantrums. Since those emotional outbursts, the S&P has rallied 11%. The final leg of that rally occurred in November on the back of more positives. Positives that some knew were coming.

Earlier in the article, I showed the trend that has been in place since May. While many were concentrating on virus commentary and explaining how the economy was in deep trouble, I decided to concentrate on the series of higher lows that the S&P 500 had established in this rebound. That was the message from the stock market telling ALL investors to pay attention. Certain segments of the economy were flourishing. There was a “V” rebound taking place in the economic data, and eventually, the positives like a vaccine would trump all of the negatives. If anyone wants to take that as delirious market action, be my guest.

2020 should be proof enough that the investment situation must be taken in small steps while never losing sight of the long-term trend. That message has been brought to the attention of investors here all year. At the beginning of the year, if I had told you that a global pandemic would completely alter life as we know it, kill over a million people, disrupt businesses across the world for several months, and send the U.S.’s unemployment rate to its highest level since the Great Depression, would you continue to own your equity holdings?

I doubt anyone would have forecast that the S&P 500 would have recorded 24 all-time highs while the NASDAQ composite recorded 43 all-time highs in the same time frame. Would you have thought the recovery from such an event would be this swift and strong to have the S&P setting its last new high in November?

If a market participant followed the market’s message and the advice of avoiding making rash decisions, they easily side-stepped the fatal mistakes that have made many market analysts and pundits look foolish.

Both the NYSE Common Stock and NASDAQ Advance-Decline lines hit their first new all-time highs since January. Such breakouts confirm the new highs in the major indices. The phrase “Global Economy” doesn’t just apply to when things are going bad. At the moment, astute investors are witnessing a synchronized global rally. If you want to fight new market highs in many of the major stock indices around the globe, you won’t be in business for much longer.

In a BULL market, the upside offers “surprise”, and the downside offers “disappointment”. Each investor has the opportunity to decide what backdrop they are investing in and what direction they will take with the markets at these levels.

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

Members of the Savvy Investor Marketplace service get straight forward advice. The message has been unwavering. Stay focused and stay with what is working. Discard the “noise”.

It’s clear as to what has been working;

The DOW 30, DOW Transports, Russell 2000, and the S&P 500 just forged new highs.

Now ask yourself a simple question:

“Why am I not participating in this type of information?

It’s time for my year-end review. My HIGH conviction selections for 2021 will be released soon. Graduate to the next level, please consider joining the service that is led by someone that knows how the stock market works.

Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.

This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.

IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.

Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.

The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.

Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.