Is this exuberance rational? Broader indexes once again trading higher as the markets prepare for a new stimulus plan announced by President Elect Biden.  With a $2 trillion price tag being bantered, the Russell 2000 is the index outperforming.  Energy (XOP +3.1%) and Banks (BKX +2%) helping the Value vs Growth trade, but it’s Telcos (XTL +3.4%) and Semis (SMH +3.2%) with the news.  Acacia (ACIA +32%) is rising after Cisco said they would buy them, and Taiwan Semi (TSM +9.6%) earnings, are supporting those sectors respectively.  TSM will also spend $25-28 billion on capex in 2021, pushing semicap cos (ASML, AMAT, KLAC, LRCX) up 6-7% on the day.  Since it’s such a positive day, it makes sense for two new IPOs to skyrocket; Petco (WOOF) is up 60%, and Poshmark up 131%.  Add that bitcoin is back to $40,000, and GameStop (GME) is up 26%, exuberance is bubbling. 

Calm on the Surface… Granted things are looking a bit more exciting this afternoon as equities are finding their footing, but this morning’s choppy trading around the unchanged mark might’ve suggested there’s not much going on for the market to digest. An ongoing (second) impeachment vote, several Fed speakers making comments, President-elect Biden scheduled to reveal details of his stimulus plan tomorrow: these are things investors have grown accustomed to coping with coolly. Still the S&P intraday chart masks the underlying churn, as markets are seeing a bit of a reversal of the reflation/rotation trade that’s been in focus recently. Tech has wrestled back a spot at the top of the sector charts (NYFANG +1.2%) along with more defensives Utilities / Real Estate, while Intel (INTC +7.6%) is chipping in to help Semis after replacing its CEO with VMWare (VMW -7.2%) CEO Pat Gelsinger. Target (TGT -0.9%) also a splash this morning announcing a holiday sales blowout, but with expectations already so high the news received little reward (though XRT +0.2% is pushing for yet another ATH). On the flipside it’s the value/cyclical sectors that have popped recently that are lagging today: Banks, Materials, Autos bring up the rear.

Turnaround Tues… – Well perhaps not quite. It seemed like we were set for the typical BTP-bounce back this morning but the broader market hasn’t played out that way. Cyclicals have held firmly onto the torch today after various members of the FANG world (Amazon, Netflix and Facebook to name a few) hit 3m relative lows yesterday. The 10-year yield hitting its highest in 10 months (target still 1.5%) has spurred banks, themselves appearing on 3m relative high lists, just in time for investors to decide if this is much ado about nothing (earnings Friday). Crude also made 10m highs yesterday and that trend carries on today, the sector capitalizing on the underlying commodity’s strength. But it’s autos that are miles ahead of the pack, and it’s just because Elon tweeted something clever! Instead, Aptiv is ripping after their performance at CES yesterday as it attempts to be the main brain behind autonomous driving. With the move higher in yields however, telcos and utilities are lagging significantly. Could a change in market leadership finally be coming? A stimulus package in the offing (details expected this Thursday), higher rates and stretched valuations from the growth/Mo crowd suggest it just might be.

If You Like Pina Coladas…Just a week in and already thinking of an “Escape” from this glacial, Northeast terrain? You are not alone. The good news is 2021 is quickly shaping up (unlike our decrepit physical bodies) to be anything but bland, and should continue to befall us with a number of high octane moving parts throughout the year. We’ve got gadgets and gizmos of plenty, potential melt-up risk galore. You want asset bubbles? We’ve got twenty! But who cares…no big deal…we want mooore….stimulus (Name That Tune is back on TV, fyi). Either way, today is being passed off as a pause for breath with tech bearing the brunt of the losses. There is very real potential for heavily enhanced regulation of big tech after the storming of the Capitol was planned and discussed on social media. Twitter is down 5% after banning President Trump’s personal account, citing the risk of further incitement of violence. But again, today’s move is merely a cooling off. The signs of exuberance are not fading away and as long as the Fed is engaged, why should they? Clarida’s comments last week eased concerns around Fed tapering, and Brainard and Powell speaking this week are unlikely to rock the boat as well. Much is being made of yields and $ rising, but perspective is key: The UST 30-yr is still only where the 10-yr was this time last year (and most of major sovereigns are negative yielders); Equity TINA is still not at risk yet.

Freddie Mercury Was Right… “Nothing really matters, anyone can see…Nothing really matters, nothing really matters to the S&P-eeeee”. At least that what it seems like as we wrap up a chaotic opening week that’s felt longer than a half-speed rendition of “Bohemian Rhapsody”. The “Everything Rally” has more than picked up where it left off last year, and the list of indices that made ATHs on yesterday’s close (S&P, SML, RTY, MID, CCMP, NDX, SOX, TRAN) made clear that really means everything. While the party hasn’t completely stopped today, enthusiasm is understandably tuckered out at the moment (with some exceptions). Banks are taking a breather after a surging through the week, even as the US 10-yr yield has continued to push higher above 1.1%; same goes for Cap Goods names that earlier cheered the potential for greater infrastructure spending under a Democratic Congress. It seems even Semis are a bit tired, with Micron (MU -1.9%) now red even after raising its sales forecast. One notable exception that never seems to run out of gas is Tesla (TSLA +6.2%) which is driving Autos higher (I have a feeling we’ll be saying this a lot from now on) and helping ensure NYFANG (+1.7%) will finish the week well in the green.

Get out your Surfboard – The Georgia senate election had been on everyone’s calendar since November and it now appears markets will get a Blue Wave after all.  Exactly how much can be done remains the question, but the rotation occurring today is a hint as to where investors see the opportunity.  Rate sensitive financials (yields moving higher) are the day’s best performers.  JPM (+5.5%), BofA (+7.6%) and Wells Fargo (+7.6%) are just some of the highlights, and the performance is putting them on the Redburn 3 month relative high list.  Metals and Miners are also getting a boost (infrastructure spend) from US Steel (+18%) and Century Aluminum (+17%), while Industrials (+3%) benefits from Caterpillar (+6%) and Deere (+6.5%).  Even the Nasdaq 100 (-11bps), which was down 1.6% at the open due to its mega tech exposure (FANG -1.3%), has been pulled up by the broader outperformance from semi’s, retailers and leisure cos.   While there are still two hours of trade left, the S&P and Russell are in ATH territory, with Value ETFs outperforming Growth by 2.3%.

Lessons Learned… “Expect the unexpected”… Surely if 2020 taught us anything, that would be one of the primary takeaways. With that in mind, it’s not a shock to see investors treating the Senate run-off election in Georgia with caution despite the increasingly shaky consensus there won’t be a Democratic sweep. Yet US indices are attempting to make up some of the ground lost in yesterday’s bumpy ride (granted on near holiday-like volumes), thanks largely to Energy leading the way on back of WTI crude briefly rallying past $50 for the first time since February as OPEC+ reaches a deal on voluntary output cuts through March (XOP +9%). The positive start to year in terms of eco-data continues, as a solid beat from Dec ISM Manufacturing helped solidify the positive tone this morning. The gains also come as Value is outpacing Momentum names (VLUE +1.3% vs MTUM +0.6%), as a Democrat triumph would mean more stimulus spending (DXY lower again) and as the profit-taking action seen yesterday sees some follow through. The love for Cyclicals consequently has more defensive sectors on the back foot: Food Retail, Household Goods, and Telcos are all in the red.

A New Year Indeed – Christmas and New Year’s Day were beautifully situated on the calendar to offer a nice extended break so many of us may feel like we haven’t been in the seat for a while. For those that qualify, we closed an otherwise dreadful year with all-time closing highs in the S&P as well as the index’s Equal-Weighted and Total Return iterations.

The closing bell – It’s a quad witching expiry day along with a special S&P 500 inclusion, creating a super volume storm for traders (although most of that coming near the close).  The Tesla event has been well flagged, but that coincides with an estimated 90mln option contracts expiring (+24% y/y).  Once those have expired, taking some of the S&P gamma hedging with it, the broader indexes could have some breathing room into year-end (Nomura sees 38% of S&P gamma hedges removed today).  The S&P is currently sitting just below one of the main levels (3700), with Homebuilders (ITB +83bps) rallying for a second day.  Energy and Autos are the laggards, albeit that latter sector will get a nice bump when the new entrant arrives.  While the S&P and Nasdaq are lower, the Russell 2k is higher by 59bps, getting a nudge by growth (IWO +1%).  Stimulus talks are ongoing in Washington.

Plowing Ahead… Neither rain, nor sleet, nor a big blanket of snow (as has covered the US Northeast) can put a dent in the ongoing enthusiasm for stocks. Same goes for disappointing eco data, as jobless claims coming in at their highest reading since early Sept has only further fixated attention on the hurried stimulus negotiations in Washington.