S&P 4000 likely in Q1 2021 - Accumulate near-term weakness

Cyclicals surged this past Monday in response to Pfizer’s vaccine announcement prompting some of our clients to ask whether they should fade the rally given the reacceleration in COVID cases.

While I am expecting equity markets to chop sideways in the very short-term to digest their recent gains, I do not recommend fading the recent rally in equities overall nor cyclicals specifically. From my perspective, I continue to see the technical backdrop improving rather than decaying and expect further upside through year-end well into the first quarter. Simply doubling the recent 11+% trading range that developed between September-November would support a move toward S&P 4000 by early-mid Q1. See this week’s chart featured below. More importantly, the longer-term 4-year cycle work I study suggests the current cycle should support equities through 2021 into 2022 before a cycle peak develops. If prior 4-year market cycles in secular bull markets are any guide for the current cycle, then a move toward 4400-4600 is possible before the cycle peaks.

Looking at cyclicals more closely, I would highlight the following key points: First, a growing list of cyclicals, notably industrials, are now in confirmed price and relative performance uptrends versus the S&P 500. That is impressive given how strongly growth stocks have dominated the market this year. Secondly, an expanding list of cyclicals are resolving their June-October trading ranges to the upside. Think about that for a minute. After 4-5 months of uncertainty, a growing number of investors are willing to pay higher prices for these cyclicals presumably in anticipation of better earnings prospects in 2021. Third, the cyclicals stocks hardest hit in 2020, airlines, cruise lines, casinos, hotels, resorts along with banks, are beginning to rally above their declining 200-dma’s. Even the energy sector and more cyclical REITs are showing evidence of bottoming intermediate-term after selling off since June. I am not convinced all these groups are new long-term leadership but their recent action signals that they are incrementally completing bottoming patterns and offer attractive upside into and possibly through 2021.

Bottom line: My recommendation continues to be to increase portfolio exposure to cyclicals.

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