Last week I made the case that despite accelerating worries regarding the election, COVID-19, stimulus and the overall economy, a rebound was likely early this past week. Daily momentum was oversold and poised to bottom, the VIX was already showing evidence of peaking at advanced levels, US 10-year yields were firming, and cyclicals were broadly emerging. With election anxiety dissipating this week, equity markets held and rallied from key support at the September lows and the VIX has dropped sharply. I continue to expect the VIX to follow the post-election patterns that developed in 2012 and 2016 which should signal more upside for equities well into 2021.

While I was reassured by the equity market’s positive response to technical setup I saw developing late last week, I also had a number of clients question my view on the drop in bond yields and snap rotation back to growth stocks away from cyclical stocks. To be clear, I am not negative on growth stocks, but I had definitely not expected the 10-year bond yield to fall so precipitously on Wednesday, nor had I expected the sharp sell-off in cyclicals. Has my view changed? Absolutely not. In fact, this past week’s market behavior only reinforced my bullish technical outlook for equities into and through 2021 and I continue to see cyclicals as an area of opportunity.

At the market level, after this past week’s rebound, I would not be surprised to see equities churn for a week or two to digest the recent gains. However, I would encourage investors to continue building exposure to equities given the long-term technical structure remains positive and a growing list of stocks, notably cyclicals, continue to show evidence of resolving their June-November trading ranges to the upside.

Look to Lagging Cyclicals; UBER Ideally Positioned Technically

UBER illustrates this last point almost perfectly, accelerating above its June-November trading range on a high-volume break out. Of course, the results from the election in California were the catalyst but the break-out pattern is similar to what is developing for many other cyclical stocks that have been in broad trading ranges through Q3 into Q4 of this year.

Granted after a 20+% surge this week, many of you may question whether it is too late to buy UBER. I disagree and view UBER’s break out as the beginning of a new bull cycle uptrend that I expect to last through 2021. In addition, relative performance versus the S&P 500 is confirming the recent move as it breaks above the Q1 2020 highs.

Bottom Line: While COVID-19 and work from home worries are likely to dominate headlines for many weeks to come, I continue to recommend that investors with a time horizon beyond 3-6 months accumulate near-term weakness in many of the lagging cyclicals stocks that will ultimately be beneficiaries of people returning to work and the economy repairing. I consider UBER to be ideally positioned technically to benefit from our favorable long-term outlook for the market and cyclicals overall.

Figure: Weekly Sector Review
Source: Fundstrat, FactSet

  • Technology snapped back as growth stocks were bid up post this week’s election but remains in a broad trading range that began at the end of August.
  • Discretionary has pulled back but not significantly to conclude a negative trend shift is developing.
  • Despite the selloff in cyclicals, industrials and materials have remained in relative uptrends above their rising 50-day sma’s.
  • Financials briefly pushed above the 50-day sma only to round trip to revisit the low end of their 3-month trading ranges.
  • After second half October rebound, utilities are again stalling while staples remain weak and healthcare bounces
Look to Lagging Cyclicals; UBER Ideally Positioned Technically

Figure: Best and worst performance sectors over past 3 months

Look to Lagging Cyclicals; UBER Ideally Positioned Technically
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