The good and bad of Monday’s price action

Free After-Hours Analysis:

The S&P 500 slipped on the first Monday after the Thanksgiving holiday.

Last week was a good one for the market and prices rallied 2.3%. But as is often the case during holiday weeks, stocks tend to undo whatever happened during the low-volume period when institutional investors were on vacation. Big money managers want to start where they left off and that often means undoing what retail investors did the previous week. In their mind, a move isn’t real until they are the ones making it happen. Hence today’s modest dip that erased a portion of last week’s rally. 

I don’t see anything alarming or even concerning about Monday’s give-back. In fact, the early bounce off of 3,600 is far more positive than negative. The day started weakly, but rather than trigger a bigger wave of selling, supply dried up because most owners would rather hold for higher prices. When confident owners refuse to sell, it doesn’t matter what the headlines are telling us.

As bad as the current Coronavirus situation is, investors don’t price stocks based on what is happening today, but what they expect six months from now. While infection rates are dreadful and only getting worse, most stock owners expect the situation to be under control by next summer. No one wants to sell their favorite stocks at a discount today when they know the situation will be a lot better in a few months. Or at least that is the logic bullish owners are using. Only time will tell if their optimism is warranted.

The indexes are trading well, but we are at the upper end of the trading range and a lot of bullish vaccine news has already been priced in. Stocks are expensive and a lot of the near-term upside potential has already been realized.

While momentum will likely continue pushing us higher, the risk/reward is fairly marginal and not at all stacked in our favor. We can own stocks at these evels, but we need to be careful if the market’s mood sours. Modest upside with a lot of air underneath us is not a great place to be adding new money. We can ride this momentum higher, but we need to have a plan ready to go if the tide turns against us.

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