The indices are indicated mildly higher as we enter the final three trading days of 2020. There continues to be a high level of economic optimism despite a barrage of headlines about Covid cases and hospitalizations.
In the U.S., the House of Representatives agreed to increase stimulus payments to $2,000 from $600. That now will go to the Senate for a more difficult vote. While many Republicans have expressed some opposition to the increase, the looming run-off election in Georgia may aid the passage of the bill due to the likelihood that the issue would be a critical argument in the campaign.
In Europe. optimism about a Brexit trade deal is helping sentiment and the progression of the Covid vaccine program is helping as well.
While the headline news is giving the indices a boost, the most important market driver right now is the calendar. Market players are making a series of end-of-the-year moves as they prepare for 2021. Some of these moves are tax-related and some are about locking in gains and positioning for the new year.
There is often a misperception that market players will avoid selling big winners because they wish to delay tax consequences. With the possibility of higher tax rates under a Biden administration, there actually may be a motivation to take gains in 2020 rather than risk a retroactive tax increase to the start of 2021. Also, estimated tax payments are still due early in 2021 so the benefit of delaying a tax payment is not always that great.
The important issue is that there are many reasons why some market players may wish to sell winners this year rather than next.
We saw some illustration of this Monday as high-flying small-caps and the strongest high-beta big-caps suffered relatively poor action as money rotated into FATMAAN names such as Apple (AAPL) and Amazon (AMZN) , which have been laggards lately.
Two of the biggest winners in 2020, The Trade Desk (TTD) and Etsy (ETSY) sold off hard Monday. The Innovator IBD 50 ETF (FFTY) was down 1.75% and the small-cap Russell 2000 Index ETF (IWM) declined 0.37%. Those two groups have been leaders in recent weeks but the end of the year pressures are causing some rotation action.
It wasn't all bad news on Monday as some of the strong momentum in individual stocks continued. My list of stocks up over 10% was very long and the list of new 12-month highs was very robust at 866 despite mediocre breadth of about 4-3 positive.
The remainder of the week is likely to be quite tricky for traders as there may be some leading names like TTD and ETSY that suffer profit-taking. However, those are also the sort of stocks many aggressive momentum players would like to buy on pullbacks. To further complicate matters, the Georgia runoff election will hit on Jan. 5 and that is certain to have a market impact.
I'll be focused on keeping my accounts as close to all-time highs as possible as we wrap up the year but I'll also be on the lookout for some entry points on pullbacks in favorite names. I want to protect profits and will tighten up stops to do so.