S&P 500

Pfizer’s Vaccine and US Elect Generate new Capital Distribution

The light at the end of the tunnel shined brightly on Monday, November 9, creating a new dynamic in the equity markets. Pfizer (PFE), the pharmaceutical giant announced the results of its stage-3 trial for its COVID-vaccine, which showed a robust 90% efficacy. US stocks surged, especially many of the value stocks that have been hammered during the spread of COVID-19. Oil prices roared, and small-cap shares rallied, as investors began to reprice stocks. While it will take some time for Pfizer to produce enough of the vaccine to create herd immunity, this may be the first vaccine that has some real success behind it.

Will There Be Enough Vaccine to Create Immunity

The news that a real vaccine could be available in 2020 means business can get back to growing in due time. Pfizer announced that it would be able to produce 50-million doses in 2020, and 1.3-billion doses in 2021. While the company did not take any money from the US government to produce its vaccine, its partner BioNTech SF did receive almost $450 million from Germany.

The US government did agree to pay $2 billion upfront for 100 million doses of the vaccine and an option for another 500 million doses. Additionally, the US will get to decide who gets the vaccine first, which likely means it will provide it to its citizens before distributing the vaccine globally. It also appears that Pfizer will handle the distribution of the vaccine directly and has designed the reusable containers that keep the vaccine at the cold temperatures necessary to store the vaccine.

Sentiment Soars is Several Sectors

The announcement by Pfizer was a huge relief for traders, investors, and business owners who started to buy equities on this positive news. Several sectors outperformed, and some that did not. Hospitality and leisure, transportation, energy, financials, and real estate rebounded sharply. Oil prices rallied 11%, as investors expect a return to travel especially air travel.

Oil demand has been hammered since the onset of the pandemic. According to the Energy Information Administration, US oil product demand is down 11% year over year. Gasoline demand is also down 11% while distillate demand, which includes diesel and heating oil has declined 7%. The biggest drag on oil demand in the US has been jet fuel demand which is down a whopping 45% year over year.

The introduction of a vaccine means that the ravel sector should have better times ahead and oil consumption should recover to pre-pandemic levels. Oil prices have been in a sliding downward sloping range. A close above $44 per barrel, should lead to a test of the $55-60 region. Since many of the US production and exploration companies need oil prices above $50 to make money, a rally back to profitable levels could lead to further gains in the energy sector.

Small-Cap Shares are Breaking Out

Money is piling into the small-cap stocks Russell 2K index. Small capitalized companies are in desperate need of fiscal stimulus, and the end of the pandemic. Small-cap stocks were the best performing of the US indices rising more than 7% at one point on Monday, November 9. Many of the regional banking companies fall under the Russell 2K. The KRE SPDR Banking Index surged more than 15% on Monday. Trading volume in travel and leisure stocks was up 900% on Monday. Small caps have been dormant since 2018, and are breaking out. The IWM ETF completed an ABC correction wave and is poised to test higher levels. This group of stocks could become the next leading stock index, or at least give the Nasdaq a run for its money!

I am looking at some leading sectors using a BAN trading strategy which allows us to outperform the market during major market rallies.

Redistribution of Assets

Monday was moving day. It appears that investors are confident and money is being pulled out of the precious metals sector and dumped into the risk-on assets (stocks). Gold dropped over 5%, and silver down 7.5%. US treasury yields surged higher, with the 10-year treasury yield rising 12-basis points, which was the largest one-day rally since March 2020. Higher US yields helped buoy the US dollar which paved the way for lower gold prices. Gold prices appear to have tested support near the September lows at $1,848 and are oversold on an intra-day hourly chart as the fast stochastic hit a reading of 7, below the oversold trigger level of 20, which could foreshadow a temporary correction.

The news over the weekend that the US had a new President-elect which was followed by the results of Pfizer’s vaccine results sparked a distribution of capital. It’s a big moving day with big winners and big losers.

Concluding Thoughts:

Investors and large institutions are just starting to rebalance and invest their capital. Until there Biden is in the house and there is more details on the vaccine I expect the market to continue making large swings. Risks are still hight overall so stepping into this market lightly is what we are doing for the time being.

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Chief Market Strategies
www.TheTechnicalTraders.com