November 18, 2020 – Sentiment and Stocks After a Big Rally
Sentiment has been one of our most frequent topics in these emails. Nearly every time we have written we felt as though most investors were skeptical of market strength, or even fully bearish. Now we find ourselves in a potentially different situation. Many measures of stock sentiment, such as the chart below, which shows the number of bulls minus bears, are elevated.
The past two weeks have brought a great deal of clarity on the election outcome and two important COVID vaccine data points. This has caused money to pour into equities and shoot stocks higher. In the short-term, this is a little concerning. However, much more important are the intermediate to longer-term views, which remain positive for numerous reasons. The recent breadth thrusts by stocks are historically bullish, the Fed is still accommodative and we have a potential end in sight to COVID sometime next year.
Over the next several months, we also have positive seasonality for stocks, but with investor sentiment stretched the market is not positioned if unexpected negative news were to arrive.
November 11, 2020 – Don’t Fear Strength
We know that some investors had been waiting for volatility to decrease and better clarity on the election outcome. However, with clarity comes a higher price to pay in stocks. The market has surged since a couple of days before the election and now those same investors are left wondering if stocks are too high.
With the rally on Monday, more than 70% of stocks traded to a new 20-day high. This is only the 10th time since 1957 that stocks have done this. Below we see data when stocks similarly surged. Returns looking out 6-12 months tend to be well above average.
Source: Strategas Research
There are, of course, many moving parts investors are factoring into stock prices every day. Even more now than most periods. The recent stock price strength does not mean volatility is gone, or we can’t have another correction. However, if history is any guide there may eventually be more gains to be made.
Source: Greg Towner, CFA, CMT