A Tale of Two MarketsJuly 21st 2020
By: Spencer Israel
For traders and investors of U.S. stocks, the past few months have made it clear that there are two kinds of markets fighting to coexist simultaneously.
The first market is one where a COVID-19 vaccine on the horizon. Call it the hope trade. The other market is one where states will be forced to go back into shutdowns and a vaccine seems oh so far in the distance. Call it the Phase 2 trade.
Whichever outcome seems most likely will determine the sentiment for that day. When the hope trade is on, the “reopening stocks” like airlines, travel companies, and retailers all lead the market higher. When the Phase 2 trade is on, money will rotate into safety trades like utilities and gold as the market falls.
Take what happened last week for example.
On Monday morning, Pfizer and BioNTech jointly announced that two of their COVID-19 vaccine candidates had received the heralded Fast Track Designation by the FDA based on positive data, and that follow up trials would begin later this month.
That news kick started the major indexes, with the Nasdaq 100 (the market’s leading index of late) rising higher by as much as 2% on Monday (it’s the high of the week). Optimism! Until…
…That very afternoon, when California Governor Gavin Newsome ordered the re-closing of all bars and restaurants to cease dine-in service. By Tuesday morning, the major indexes had fallen to what would end up being their lows of the week.
Fast forward to Wednesday morning, when the market was greeted by positive vaccine headlines from both AstraZeneca and Moderna, a one-two punch that caused the S&P 500 to promptly rise to its high of the week by mid-morning. However, some of those gains were given back on Thursday as rumors swirled of a potential statewide shutdown in Texas (though Governor Greg Abbott later said that wouldn’t happen).
These constant whipsaws between hope and fear have repeated ad nauseam, and will likely continue to do so until we actually get an FDA-approved vaccine. Until then, every sliver of good news to come out of the leading COVID vaccine trials will generate buying pressure, and every time a state goes backward in its reopening efforts, sellers will take control.
In other words, one of the many ways to get through this market may be to follow one of the great trading clichés of all time: buy the dip and sell the rip.
The author is long Pfizer in his retirement accounts.
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