Vlad's Best Stock-ing Stuffer

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Bullish tailwinds returned this week as Wall Street took a more positive view on the pandemic burning out here, as has been the case in South Africa. There is a nascent but growing sense that this might be the third and final wave of Covid-19. Warmer temperatures across much of the nation are also helping to keep holiday spirits upbeat and hopeful. True to form, the Santa Claus rally was on full display this week. 

The constant narrative is where is money to go if not in stocks? Cash has a negative return when factoring in inflation. Fundstradt’s Tom Lee has coined an acronym that is catching on – T.I.N.A – There Is No Alternative. And my all accords, short of another black swan event, he’s right. Central banks continue to pump tens of billions of QE into the global money supply even as the Fed and Bank of England wind down their programs. But until then, the liquidity spigot is still wide open. 

It will be very interesting to see if inflation for December remains as elevated as in November. Bidding wars for homes and skilled workers has been a big part of the inflation equation, along with food and energy. Still, without more easy money from the Fed and the prospect of higher short-term rates in the offing, it stands to reason some of the fire under the CPI and PPI data might not burn so hot going forward. 

In any event, bullish optimism has returned this past week, but the move higher was on light volume, especially for SPY, which calls into question whether the rally won’t submit to some back and fill next week. When trading is thin during holidays, markets can and will make exaggerated moves in both directions. Thankfully, this week was higher.

TRADING LANDSCAPE  

As much as it would be so easy to state the market is going to trade up, a good deal of the price action leading up to this week’s light volume rally was geared toward large rotation into more defensive sectors. Before this week, there were strong capital flows into consumer staples, REITs, healthcare, and utilities – a very counterintuitive trade considering all the inflation narrative.

Big money, at least a portion of it, is convinced the Fed will overreact, pulling the punch bowl too rapidly and raising rates when in fact, the economy could start to cool heading into the summer months. It’s just too early to tell, but this was one notable reaction leading into this week’s considerably more positive tone and was supported by high volume. This all has to play out in the weeks ahead but is totally noteworthy.

The $SPY continued to trade higher and closed up 1.0% at $470, within 1% of the all-time high. The value/reflationary stocks traded higher and closed up 0.6% within 1% of the all-time high—the technology-led rally, up 1.2% and right above the 5- day moving average.