Mini Correction Over
A correction is a smaller version of a bear market. The mini correction was even smaller than that. It was a 3 day decline that totaled less than 1%. It’s now over as the S&P 500 rallied 0.75% on Monday. It was a great day for stocks.
Even though the Dallas Fed’s general manufacturing activity index and the Chicago Fed’s national activity index were both negative. Economic data didn’t turn the market around. But it’s been understood for a few weeks now that bad data in Q4 won’t phase stocks.
Geopolitics Drives Stocks Higher
There were a few positive geopolitical news items which helped boost stocks. One of the most important was that pro-democracy candidates in Hong Kong won control over 17 of the region’s 18 district councils. This was with record voter turnout. That caused the Hang Seng to rise 1.5%. There was also good news on the trade war front.
China is raising penalties for violating intellectual property rights. China is also considering lowering the thresholds for intellectual property theft. That’s exactly what President Trump wants. It signals the 2 sides are closer to making a deal than previous reports indicated. Global Times (China’s state-run newspaper) said the 2 sides are “close” to making a deal.
Finally, America’s national security advisor stated phase 1 of the trade deal could happen by the end of the year. We keep hearing reports go back and forth on whether there will be a deal soon or not. The truth will be revealed in about 2.5 weeks. A next round of tariffs on China go into effect on December 15th. That’s the soft deadline.
Politicians don’t care much about deadlines. So I can see it being moved back a few days or weeks if the 2 sides are close, but don’t have a deal finalized. We don’t have many details on what phase 1 of the deal really means. Even though stocks have recently rallied, I don’t think many investors are optimistic about what’s in it. If people are expecting to be let down, will they really be let down when it doesn’t show much?
Small Caps Rally Hard
Obviously, with the S&P 500 hitting a record high, the market is overbought again. If the economy improves soon and there is a trade deal, it deserves to be. As of Friday, the S&P 500’s daily sentiment index in percentage of bulls was at 76%. I’m guessing it got above 80% on Monday.
Nasdaq was at 79% and the VIX’s was at 15%. VIX is extremely low and has been low for a while. On Monday, the Nasdaq rose 1.32% and the VIX fell 0.47 to 11.87. It has been below 15 for 31 straight trading sessions. It was below 15 for 66 straight days before the 20% correction in Q4 2018.
There’s no magic that says stocks will fall sharply if the VIX stays below 15 for another 35 sessions. It’s very low now and has been low for a while. I don’t expect it to stay below 15 for the rest of the year. That would likely lead to euphoria. Even with stocks rallying, the CNN fear and greed index only rose 1 point to 70 which is greed.
This index is far from perfect as it has the market volatility index showing neutral even though the VIX is very low. It shows this because the VIX isn’t that low compared to its 50 day moving average. That’s because it has been below 15 for most of those days.
As you can see from the chart below, the Russell 2000 rose sharply on Monday to a new 2019 high. It’s still not at its record high though. A 2.07% rise in the Russell 2000 put it 7.3% away from its record high. The chart below is slightly off because it was done intraday. Many thought Russell 2000 would hit a record high when the Fed funds futures market started pricing in a rate hike. So there’s still a 64.4% chance of a cut next year.
Dem Primary Update
The rally was led by healthcare and tech as they increased 1.07% and 1.43%. Only loser was utilities which fell 0.37%. There haven’t been any new Democratic polls recently because of the debate as expected. I think there will be new ones in a couple of days. The market has spoken already as PredictIt sees Biden with a 24% chance of winning.
Warren is at 21%. Her momentum has faded quickly. If she falls further in the polls, Sanders will gain ground. I don’t think the market sees him having a real chance of winning. His odds seem to usually lag his solid poll numbers. Michael Bloomberg entered the race on Sunday. He won’t qualify for the December debate and he won’t compete in the 4 early states. However, he has spent $37 million on TV ads. That’s the biggest ad buy so far by any of the candidates. He has a lot of money to burn, but I can’t see him getting out of the mid single digits in the polls.
Cybertruck Gets A Lot Of Attention
Elon Musk announced on his Twitter that Cybertruck has 200,000 pre-orders. That’s not a huge deal because they were only $100. That’s unlike the Model Y which costs $2,500 to pre-order. Clearly, Musk wanted to generate attention and make people think the Cybertruck’s unique design was well received. I’m not saying it wasn’t.
Many people love it and many people hate it. Tesla’s stock rose 0.99% on Monday, showing us investors weren’t impressed. It underperformed the Nasdaq.
Conclusion
Small caps exploded on Monday. Stocks loved the idea of a trade deal and pro-democracy politicians winning the Hong Kong elections.
Healthcare stocks have been driving the market higher as the XLV ETF is up 12.81% since October 8th. If Biden gains in the polls, this sector can rally further. I don’t think the VIX will stay this suppressed for much longer.
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