Article edited on 11/15/2020

The stock market rally after Pfizer announced that its Coronavirus vaccine had 90% efficacy was premature since the vaccine:

  • Now in stage 3 clinical trials has been fast tracked by FDA for emergency use ONLY
  • Must finish Stage 3 and also stage 4 clinical trials before being approved for masses
  • Not scalable since it requires to be stored at -70 degrees Celsius (-97 F)

Probability is high for the vaccine driven rally to fizzle with Dow Jones 30 Industrials & S&P 500 composites reverting back to their October 30th lows and declines of approximately 10% by end of 2020 for three reasons:

  1. Surges of the following to new highs for week ended November 15, 2020:
  • S&P 500 to new all-time closing high.
  • AAII (American Association of Individual Investors) Investor Bull Ratio Sentiment Survey from prior week’s 37.96% bullish to 55.84%, a three-year high. The chart below depicts that from January of 2018 through November 13, 2020 there were four spikes in investor sentiment to above 45% bullish and two of the four were above 55%.  

The chart below overlays the S&P 500’s all-time highs since January 2018 which occurred either slightly before or after the four bullish sentiment spikes.   The occurrences of both sentiment spikes and all-time highs for the S&P 500 resulted in sharp corrections ranging from 11% to 35%.

2. Smart Money is selling stocks.

Excerpt and chart below from “The Smart Money Is Leaving Town” by CFA Mike Lebowitz which was published by RIA Pro on 11/12/20.  

“Bloomberg’s Smart Money Flow Index is a measure of how ‘smart money’ is positioning itself in the S&P 500. The logic behind the index is that smart investors tend to trade near the end of the day, while more emotional-based traders dominate activity in the first 30 minutes of the trading day. The index is calculated as follows: yesterday index level – the opening gain or loss + change in the last hour.  As shown below, the Smart Index and the S&P were well correlated until late August. Since then, as highlighted by the red arrow, they have diverged sharply. Over the last ten years, the S&P 500 and the Smart Index have a strong correlation of .65. As such, we expect they will converge in time. The light blue circle shows they also diverged, albeit to a much lesser extent, in January and February as the smart money correctly sensed problems.”

3. Sharp decline in University of Michigan’s November 2020 readings for two Consumer confidence surveys. After reaching its highest level since March of 2018, in February 2020, the reading declined to its lowest level since 2011.  Since July of 2020, the reading had climbed for four consecutive months. 

The chart below depicts the sentiment readings for a University of Michigan niche survey of participants from the Republican and Democratic parties.  The decline in the sentiment of Republicans from over 120 to 70 provides further rationale for a market correction to be swift and severe.  The plummeting consumer confidence readings for the members of the Republican Party, long known as the party for the wealthy, spells disaster for the stock market and the US economy.   The sharp decline in Republican sentiment increases the probability that they will become sellers of stocks. According to the Bureau of Labor Statistics the richest 20% of Americans are responsible for approximately 40% of consumer spending. 

The two surveys are critically important since there is a correlation of Consumer confidence to consumer spending which accounts for 70% of US GDP.   The chart below depicts the tight correlation between the University of Michigan’s consumer confidence and consumer spending from 2003 to 2019. 

After the correction occurs the Dow Jones 30 index will likely stage a secular bear market rally before it heads to new lows in 2021.  The fourth secular since 1929, began after the aggregate valuation of the Dow Jones 30 Industrials composite members reached a ratio of 132% to US GDP in February 2020.  The two prior secular bears began after the Dow’s ratio peaked 116% and 123% of US GDP.

The chart below depicts the Dow to GDP ratios at the secular bear market bottoms. 

The chart below depicts the durations and percentage declines for past three secular bears.

To learn more about secular bear markets and why they should not be confused with a cyclical bear market view “4th Secular Bear since 1929 caused by Coronavirus” video below.  Included in the video is the five proven secular bear investing strategies.

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