In New Orleans, it’s common to hear the phrase, “laissez les bons temps rouler.” That’s Cajun French for “Let the good times roll.”
If brokerage accounts could talk, they’d likely be saying that right now. Stocks are at all-time highs and the COVID-19 news keeps getting better. There are multiple vaccines showing potential. Once we get through a rough winter, spring looks full of promise.
Maybe this time next year, we’ll be maskless. Let’s hope so. Wall Street is very encouraged by the promise of better times. Sectors that were ravaged due to the lockdowns are now the highest fliers. Many “value” stocks have new life…
A decent gauge for them is the Russell 2000 Index. It’s full of small companies and has a month-to-date performance of ~+20%. Times are good.
As we close out 2020, I think there’s likely a bit more gas left in the market’s tank. This will then be followed by a much-needed cool-off period.
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I’ll worry about the hangover once the party is over.
Markets should reach overbought by this time next week
The Big Money has been at a standstill for weeks. That’s because of the massive rotation that began after Pfizer announced a promising vaccine.
The growth-heavy technology sector took a back seat to the “reopen stocks.” From a data standpoint, that was like reshuffling a deck of cards. The selling in growth stocks offset the buying in value stocks.
But that’s beginning to shift as nearly all sectors are now attracting capital. And that is lifting the Big Money Index (BMI). Below is the BMI, which tracks Big Money going in and out of stocks. If the yellow line is increasing, money is flowing into markets… like now.
And you want to be on the right side of that money. Fighting an uptrend is a losing battle over the long-term. But, check out the red line above. That’s the overbought flag. When stocks break into that territory, it’s important to be aware of frothy conditions.
Being overbought doesn’t mean markets are going to fall right away. The hot zone can last for weeks—even months. Epic rallies can happen during extreme exuberance. It’s kind of like being at a party that’s likely coming to an end soon. Every now and then, the band keeps playing past the cutoff time.
Those are the best parties to attend. Sometimes you gotta let the good times roll.
The bottom line is this: Markets are soon to become overbought. But the data signals that stocks have further to go. There will be clues of frothiness to pay attention to in the weeks ahead. But for now, keep dancing.
Please pardon my French: “Laissez les bons temps rouler!”
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