- Sentiment still stretched despite cooling after the vaccine value rotation on news of further lockdowns, which could have a material consequence on the economic recovery.
- The pandemic-induced liquidation of businesses not equipped to survive disruption and the accelerated adoption of new technology suggests growth stocks have staying power.
- Broad-market equity indices ended in a larger balance area suggesting further acceptance of the positive response to upside earnings surprises, a divided government, and vaccine results.
- Friday’s monthly options expiry may mark a decisive move depending on how existing derivatives exposure is rolled forward and the presence of impactful news.
- Institutions differ in opinion over the market’s strength into year-end.
What Happened: Following the post-election rally, U.S. index futures remained range-bound as sentiment cooled in the face of new lockdowns and fading stimulus hopes.
What Does It Mean: After Monday’s initiative upside drive on news that another COVID-19 coronavirus vaccine developed by Moderna Inc (NASDAQ: MRNA) was 94.5% effective at preventing cases of the virus, U.S. index futures pared their advance, as participants struggled to maintain higher prices, evidenced by a divergent delta (i.e., the non-presence of committed buying) and mechanical trade (i.e., low-excess at the edges of balance).
What To Expect: On Friday’s end-of-day sell-off away from value, the S&P 500 closed within a prior balance area marked by the $3,580 spike base and $3,506.25 excess low.
Given that Friday’s session failed to retake Wednesday’s spike liquidation, auctioning back into the micro-composite high-volume node at $3,557, the fairest price to do business during the prior week’s balancing activity, initiative sellers remain in control.
As a result, participants come into Monday’s session knowing the following:
- Prior end-of-day spikes were the result of weak-handed, short-term buyers liquidating in panic.
- The selling did not attract increased participation (i.e., price diverged from value).
- Friday’s monthly options expiry may mark a decisive move depending on how existing contracts are rolled forward. Given that $3,600 is the highest gamma strike, the probability of sustained directional resolve, absent material news, is much lower.
Therefore, in light of a weak response to the $3,557 high-volume node and Friday’s options expiry, participants can carry forward the following frameworks for next week’s trade.
If participants manage to spend time and build value in or below the prior selling activity, then initiative sellers remain in control and the liquidation could be the beginning of a new trend to the downside, confirmed by range expansion beyond the $3,506.25 excess low. Otherwise, there is the potential for a failed break-down in which participants manage to rotate back over the $3,580, a balance area boundary.
Conclusion: Friday’s monthly options expiry may mark the beginning of a decisive move. The only thing that’s needed? A catalyst.
In case of sustained upside, Goldman Sachs Group Inc (NYSE: GS) gives the S&P a $3,700 target on an expectation the v-shape recovery will continue into next year. Contributing factors including a divided government, vaccine administration, rebound in profits, low rates, and a small rise in the yield curve.
In case of further balance or selling, JPMorgan Chase & Co (NYSE: JPM) sees vulnerabilities as mutual funds look to sell $160 billion in global equities to revert to their target 60:40 allocation.
Levels Of Interest: Micro-composite HVN at $3,557, the $3,506.25 excess low, as well as the $3,580 balance-area low.