“To put things into perspective, BioNTech Chief Executive Officer Ugur Sahin noted that ‘more than 90 percent is extraordinary’ considering the effectiveness of previous vaccines were expected to be in the 60 to 70 percent range. ‘It shows that Covid-19 can be controlled,” Sahin added. “At the end of the day, it’s really a victory of science.”
- The Wall Street Journal, Nov. 9, 2020
“President Donald Trump’s…to reverse an apparent win for President-elect Joe Biden by challenging votes in courts suffered three big setbacks in Arizona, Michigan and Pennsylvania on Friday.”
- CNBC, Nov. 13, 2020
Last week was full of catalysts for stock investors, especially as it pertains to the U.S. elections and the ongoing COVID-19 pandemic. Investors bid up stocks in response to various headlines, including news that the Pfizer (PFE) and BioNTech (BNTX) vaccine candidate is 90% effective, and that Eli Lilly’s (LLY) antibody drug received emergency use authorization from the Federal Drug Administration (FDA). Overall, those headlines seemed to overshadow challenges to election results set forth by President Donald Trump, who as of this writing is yet to concede.
Still, there is much left to be decided when it comes to a vaccine. Experts are currently figuring out how it will be stored and shipped across the country, given the extremely low temperatures it requires. Another question mark is how many people will choose to, or even have access to the vaccine. And lastly, there is still the matter of what former Vice President Joe Biden’s victory means for stimulus efforts, as cases go up in all 50 states and legislators threaten to re-implement stay-at-home orders.
More groundbreaking headlines are already rolling in too, after the big Monday morning news that Moderna's (MRNA) vaccine achieved 94% efficacy in preliminary phase three trials. There is a solid chance investors could learn more about the results this week, when the biotechnology company appears at the 2020 Jefferies Virtual London Healthcare Conference, which runs Tuesday through Thursday.
“…buyers have emerged at the SPX’s year-to-date breakeven level, but sellers have generally emerged at the level that is 10% above the SPX’s 2019 close. With the elections coming to an end, will this pattern finally break in favor of bulls? Or will the lawsuits and recounts be enough for the pattern to continue? Additionally, the Nasdaq Composite (IXIC – 11,895.23) closed just 115 points shy of the key 12,000 millennium mark. Since first touching this level on Sept. 2, this marks the only time this benchmark closed above 12,000.”
- Monday Morning Outlook, Nov. 9, 2020
Market participants seemed to agree that lockdowns are less of a concern, while a re-opening of the economy in the coming months is more of a reality, given the S&P 500 Index (SPX – 3,585.15) was driven up about 2% for the week. In fact, the SPX briefly traded above its early-September closing high of 3,588, though momentum stopped right there, as the index fought to overtake this resistance level later on. In fact, the index closed back below 3,553 on Tuesday and Thursday, which corresponds to a 10% gain for the index, and a level I have been saying could be important for weeks.
Meanwhile, the Nasdaq Composite (IXIC – 11,829.28) briefly traded above the 12,000 level, but was ultimately rejected, as investors bid up stocks that could benefit from economic growth as a result of the vaccine, and rejected technology stocks that are the drivers during stay-at-home orders.
The Russell 2000 Index (RUT – 1,744.04) -- which is heavily weighted with industrials, consumer cyclical and financial services companies, as well as stocks tied to an improving economy -- was the true winner last week, rallying roughly 6%. The small-cap index broke out above key resistance levels, specifically the round 1,600 level, which had acted as resistance on multiple occasions since January 2018.
Furthermore, the benchmark rallied above its 2019 close of 1,668, and this year’s January high of 1,715. Coming into this week’s trading, it is situated around a two-year, all-time monthly closing high of 1,740. If this area is taken out, it would set up the possibility of a year-end rally into its next potential major resistance area at the 2,000 level. This area also corresponds to double the benchmark’s March monthly closing low, and is roughly 20% above the 2019 year-end close.
With total short interest on RUT components rolling over, but still near multi-year highs (per the char below), the index could benefit from short covering after there is a resolution to the election, and a near-resolution to the COVID-19 vaccine, as well as the index’s technical breakouts discussed above.
“So, now what? According to most measures, the VIX action looks bearish for volatility, and bullish for equities. And if those that took the other side of the massive put buying on the November VIX futures contract are forced to hedge their position to remain neutral, we could easily see the VIX and November VIX futures contract drop to the 20-21 area.”
- Monday Morning Outlook, Nov. 9, 2020
After the VIX closed below its 30-day and 252-day moving average last week, as well as a trendline connecting higher lows since August, I suggested the action looked bearish for volatility. That turned out to be true, given the SPX and RUT rallies, and a relatively weak showing among market-leading technology stocks. Volatility, as measured by the CBOE Market Volatility Index (VIX – 23.13), traded as low as 22.41 last week. Meanwhile, the November VIX futures contract (/VXc1) closed the week at 23.30, ahead of the contract’s expiration on Wednesday morning.
Looking ahead to the expiration of the VIX November futures contract, and the open interest configuration, there was only minimal put liquidations last week. If there is any negative news regarding surprise lockdowns, or poor results from Moderna’s vaccine before expiration, I would not be surprised to see the November VIX futures contract and the VIX move up to the 27 area, where a huge number of put contracts could expire worthless.
Even after Moderna's upbeat news this morning, there is still potential for delta hedge selling of VIX futures that could send the contract down to 20-21 by Wednesday morning expiration, should the results come within that time frame. If the VIX gets to the 20 area, volatility may be vulnerable to a reversal higher in the short term, as the VIX bounces from its August lows.
Todd Salamone is Schaeffer's Senior V.P. of Research
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