The easy summary of Monday's trading action was that news that Pfizer (PFE) has developed a Covid-19 vaccine with 90% effectiveness caused the DJIA to rally nearly 3%. A more accurate description is that the positive news triggered a rotation unlike any that has occurred previously.
On Monday the Russell 2000 (IWM) outperformed the Nasdaq by 5.2 percentage points. That is the largest outperformance ever recorded between the two indices. The Russell 2000 rose 3.7% while the Nasdaq dropped 1.5%.
The explanation for this is quite simple -- stocks that have been benefiting from the "stay at home" culture dropped sharply while those that are likely to benefit from a more "normal" economy benefited.
The "stay at home" stocks have been the winners for months and this includes big-cap technology stocks and the FATMAAN names. The laggards have been traditional retailers, airlines, oil and gas, financials, and a variety of other names.
In the early going on Tuesday morning, the Nasdaq 100 (QQQ) is trading down another 2% with stocks like Amazon (AMZN) and Apple (AAPL) under pressure again (read Jim cramer's take on the FAANG stocks here). The DJIA is indicated up about 0.5% as Boeing (BA) and JPMorgan Chase (JPM) are indicated higher.
The situation on Monday was complicated by the fact that last week the indices had their biggest upside move since June. Many stocks and the indices were already technically extended when the vaccine news hit so there was some inclination toward a "sell the news" reaction in place.
The political news seems to have settled down for now but one issue that will be in play again is the potential for more fiscal stimulus. Both House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell indicated a willingness to do a deal but both want it on their terms. It is also likely that the vaccine news will have some impact on the thinking about a stimulus.
It will still take months before a vaccine is widely available and there are no signs yet of the slowing in the number of Covid-19 cases. This doesn't seem to have much impact on economic optimism as consumers and businesses seem determined to return to "normal" despite the headlines about new cases.
We have a very tricky market environment to navigate. Overreactions are occurring in both directions and that will create opportunities, but the timing is quite difficult. I expect to see some FATMAAN bottom fishers show up soon, although this is the third time the Nasdaq 100 has dropped since the end of September and that makes support levels a little more difficult.
My game plan is to work on repositioning. There should be some new leadership emerging as this rotation plays out and there will be good values as well but the choppiness will make it difficult.
The main thing to keep in mind right now is that we are seeing record-setting rotational action and that will lead to a new crop of opportunities.