Not Overbought: But Same Song

December 28, 2020

Market Update, 2020-12-28: Not overbought. In last week’s abbreviated holiday week, the S&P 500 closed essentially flat.  President Trump weighed in on the second Stimulus Bill, concerned about too-small direct payments to Americans and far too much wasteful spending.

Unhelpful news outlets say overbought

The vast majority of financial news outlets continue to parrot the same two negatively tilted taglines: 1) the global stock indexes are overbought and 2) the Covid virus outbreak continues to worsen. Neither of these statements or conditions are at all helpful in directing investors to what is likely to happen in the market over the next few months, and almost entirely useless when considering the long term.not overbought

Overbought does not require loss

Bull markets can get overbought and stay overbought for months, quarters and years. “Overbought” readings, historically, have not been predictive of negative returns in bull markets. If anything, “overbought” market moves can typically end in exponential short-term moves over the final three to five weeks. Our view is that this is not where the market is right now.

Covid lessening

On the second issue of the Covid virus getting worse, the real-time data shows that this is categorically false. The rate of change in virus cases peaked weeks ago here in the United States.  COVID-19 trends have improved so much, that the percent of the US with declines in COVID-19 cases is now at 62%. This is the highest since August and one of the most convincing signs that Wave 3 is rolling over. Unfortunately, both network news outlets and social media outlets draw ratings with sensational opinions dressed up as “news.”

From a market’s perspective, a rolling over of COVID-19 should be a signal for cyclical and variable-spend stocks. The reason, naturally, is that these stocks are more sensitive to economic re-opening. Hence, we should expect these stocks to rally as Treasury yields rise, led by the component of real-growth versus inflationary growth.

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