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We all want a safe and effective vaccine for the coronavirus. Certainly one or more effective vaccines will be good for the economy.
However, the stock market is detached from the economy. So here is the key question for investors: “How will the stock market react to the news of vaccines, not immediately but over a period of time?”
Let’s examine with the help of a chart.
Chart
Please click here for a chart of the Dow Jones Industrial Average ETF DIA, -0.23%, which tracks the Dow Jones Industrial Average DJIA, -0.23%.
Note the following:
• The top pane of the chart shows the Dow Jones Industrial Average’s reversal.
• The top pane shows that since the reversal, the Dow is still continuing to levitate.
• The second pane of the chart shows Tesla TSLA, -0.14% stock. It is important to watch Tesla these days because it is a good indicator of speculative sentiment. The chart shows that Tesla has lost momentum since the reversal day. Pay close attention to the scale on the right-hand side of the chart. Tesla stock reached a high of $1,794.99 but has since moved down to $1,550.30 (shown in red background on the scale) as of this writing. This is a big move.
• The third pane on the chart shows Amazon AMZN, +3.83% stock. Amazon has been the poster child of stocks benefiting from the coronavirus-led economic lockdown. Amazon stock has moved since the reversal day from $3,344.29 to $2,991.12 as of this writing. This is a big move and shows loss of momentum, just like Tesla stock has.
• The fourth pane of the chart shows Netflix NFLX, +0.87% stock. Netflix stock has been the beneficiary of people staying at home watching more video. The stock has moved down since the reversal day from $575.37 to $490.89. Again, this is a big move showing loss of momentum.
• Similar to Tesla, Amazon and Netflix, momentum loss since the reversal date is evident in the momo (momentum) crowd’s favorite stocks, such as Zoom Video ZM, +4.70%, Fastly FSLY, +7.99%, Peloton PTON, +9.15% and DocuSign DOCU, +1.31%.
• Among popular tech stocks, Apple AAPL, +0.68% and Microsoft MSFT, +1.80% are also showing loss of momentum but to a lesser degree. Alphabet GOOG, +2.06% GOOGL, +1.85% and Facebook FB, +0.21% have been more resilient to momentum loss.
• Pane five of the chart shows Moderna MRNA, -10.13%, and pane six shows AstraZeneca AZN, -0.85%. These are coronavirus vaccine stocks. They have gained momentum during the same period, as shown on the chart.
• Not shown on the chart are vaccine stocks Pfizer PFE, +1.51%, BioNTech BNTX, +4.79%, Novavax NVAX, -2.96% and Inovio Pharmaceuticals INO, -5.19%. These stocks have also gained momentum.
What does it mean?
The conclusion to be drawn from investor behavior so far is that popular stocks are stretched to the upside. When there is good news about a vaccine, popular stocks may lose more momentum and fall over a period of time.
Don’t let the initial reaction fool you. Initially, money will flow into futures and ETFs, boosting stocks. Main Street stocks that have been hurt may benefit. These include Carnival CCL, -2.13%, American Airlines AAL, -2.81% and Cheesecake Factory CAKE, -3.41%. As a note of caution, these stocks should be bought only on dips in buy zones, when signals are given or on other news in a properly diversified portfolio. Please read, “Here’s the secret sauce to handle the stock market’s election and virus fears.”
Disclosure: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.
