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The rally we've seen the past few weeks sped up Monday, with the Dow gaining more than 900 points - even though we had two investing legends say last week that things were looking bad for both the stock market and the economy.
That's this week's Reality Gap. Let me explain...
As you saw me saying last week on FOX Business Network's "Varney & Co.," and on our own Markets Live livestream, the Fed's and Congress's financial stimulus allowed traders to move markets up above the key support levels recently, and pushed them up big time late on Friday.
Then U.S. Federal Reserve Chair Powell appeared on "60 Minutes" Sunday night. Two quotes from the Fed Chair were particularly important in driving the market's reaction.
First, he said he has plenty of ammunition left if more stimulus is needed, showing that the Fed is not "out of ammunition" to fight further economic downturn: "There's really no limit to what we can do in lending programs."
The second was that the economy could recover over the second half of this year. It was an intermediate-term pronouncement on economic possibilities: "Assuming there is not a second wave of the coronavirus, I think you will see the economy recover steadily through the second half of this year."
Then on Monday morning, biotech firm Moderna Inc. (NASDAQ: MRNA) announced positive results from its early trial of an experimental vaccine against COVID-19. This phase 1 study looked only at safety, and there were no significant side-effects among the patients. But the fact that all the patients in the small dose vaccine subset developed antibodies the same as a recovering COVID-19 patient really stoked the stock markets.
The mood, in other words, is bullish. (Cue The Beach Boys' "Good Vibrations"!)
It's so bullish, in fact, that headlines are starting to leave out some nuance that I don't want you to ignore...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
How the Market Is Reacting to Both Events
Powell, for example, predicted that the economy would recover over the second half of the year if there is no second wave of COVID-19 cases as America reopens.
If we do see a surge, Powell sees the recession lasting until the end of 2021. That's a much gloomier possibility.
And he's not the only one thinking that. Investing legend Stan Druckenmiller recently called the idea of a rapid, V-shaped recovery a "fantasy."
Then one of the best-paid hedge fund managers in the world, David Tepper, said stocks were more overvalued than at any point in his life other than in 1999.
Traders sold off a bit on these comments last week but quickly got back in the game.
It may look like traders are pushing stocks higher with their eyes closed, choosing to ignore warnings about the strength of the economy.
But that's not exactly what's happening; the reality is different.
Money managers with billion-dollar portfolios such as Druckenmiller and Tepper are always looking at what's going to happen over the next few months and years. That's what you have to do to balance a portfolio of that size.
With that longer-term perspective, it's only natural that they're cautious and sounding the alarm.
But us traders, we're looking at short-term trades, out a week or two (maybe a month, tops). We need to be bullish right now, as the two tailwinds of stimulus and good news are pushing us ever higher.
In fact, it looks like we may finally break out of the trading channel we've been bouncing around in for over five weeks this week.
It's not that traders are flat-out ignoring the threats to this rally, it's that there's very little that can stop this feel-good rally right now. States only just began reopening, so it will be a week or two before we really see if there's a spike in infections or not.
In the meantime, there are no big earnings coming out that could sour the mood.
The only fly in the ointment is the return of last year's trade dispute with China.
On Friday, the White House clamped down even harder on Chinese telecom giant Huawei. It is now illegal for any company, anywhere in the world, to supply Huawei with semiconductors made using U.S. technology, unless they first obtain a special license from the Commerce Department.
Then Monday, one of the largest chip makers in the world announced they would comply with the new rule. Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM), often called TSMC, has stopped taking new orders from Huawei. That's despite Huawei being TSMC's second-largest client, accounting for 15% to 20% of revenue.
This trade dispute could quickly escalate into a "cold trade war," as a Jefferies analyst called it. The Global Times, a Chinese government-run newspaper, has already threatened to put Apple Inc. (NASDAQ: AAPL), Cisco Systems Inc. (NASDAQ: CSCO), Qualcomm Inc. (NASDAQ: QCOM), and other U.S. tech giants on blacklist, restrict their operations in China, and so on.
More news like this is what could dampen this short-term "feel good" rally.
Until then, we have a plan to enjoy a short-term rally while being aware of potential trouble ahead. As I've said before, this is why it's good to trade now, invest later (or invest a little now, but not everything). Slowly add to positions now, and you'll be able to add more whenever prices dip.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.