At the onset of Covid-19, a group of stocks coined ‘Stay at Home’ or ‘Work from Home’ (WFH) joined and even surpassed super-hot mega-cap tech names as fan favorites. In fact, these names sizzled in ways that reminded many of the go-go era in the late 1990s. Initially, the biggest winners were the oldest names in the market from toilet paper manufacturers to bleach producers.

I guess it’s true that they say what goes around…comes around.

The question now: will it stay around? 

Value Proposition Time

The stock market is always going through a discovery process akin to separating the wheat from the chaff, which allows the most deserving stocks to rise in value and the others to slip to where they belong. 

The process can be manipulated, overrun by waves of emotions, or even temporarily wrong - but in the long run, it always works. 

(By the way, don’t be that person that always thinks the market is wrong because all the ideas in their portfolio are getting hammered.)

There are a lot of names considered “Covid-19 Stocks.” But many have other businesses that did not need to be forced into a lockdown, or other businesses growing strongly before the virus arrived.

I like to take a glance at earnings trends as I begin to build my case for owning a stock. With that as a guide, I find Zoom (ZM) and Peloton (PTON) to be the most compelling names. I was surprised at how many of these names are seeing static earnings trends or even declining earnings estimates.

For the most part, I have been featuring these names on our Swing Strategies service because of the volatile nature and higher-than-average risk. I will be watching closely tomorrow or the next day for potential trades for double-digit gains.

As for names like Netflix (NFLX) and Square (SQ), I think those businesses will thrive in any healthy environment. Meanwhile, we are equally going to see if lightning strikes again in Financials, Energy, and Materials, as they continue their stealth rally.

Note: there will be more positive vaccine news, and each one further changes the dynamics of these hot stocks.

Major indices were higher except the tech-heavy NASDAQ Composite, which finally had its comeuppance. Overall, the rally came off the highs into the close, and the biggest winners in the S&P 500 finished in the red.

Sharing the Wealth

Since early summer, I’ve continued to point out the biggest challenge for broadening the rally beyond a few stocks, and how much these names influenced the overall market. There had to be a monster session for the market to hold up, as those titans were taking it on the chin.

The good news is there are now more winners on the S&P and NASDAQ than any other time this year.  Also, the average winning stock is up more than the average losers are down.

 S&P 500

Winners 

• 268 winners have an average gain of +24.45%
• The top 20 winners average gain of +87.46%         

Losers 

• 237 losing names with an average loss of -20.70%

• The bottom 20 losing names have an average decline of -56.86%

NASDAQ

Winners 

• 571 winners have an average gain of +64.27%
• The top 20 winners average gain of +500.05%          

Losers 

• 442 losing names have an average loss of -23.05%
• The bottom 20 losing names have an average decline of -65.75%

After the Close

Beyond Meat (BYND) was hammered after reporting its financials. Management blamed Covid-19, but for a while, this stock was considered a Covid-19 stock.

There are reports that Southwest Airlines (LUV) may buy as many as 300 Boeing 737 Max jets. Talks center around so-called ‘white tails’ or jets that have lost their original buyers. The order would replace an order for different planes. The news would be great public relations for a company that needs it desperately.

Technical View

I was prepared to write about the importance of the S&P 500 consolidating gains and holding above its prior record high level, but it became somewhat moot when that new support failed to hold yesterday. 

Hotline Model Portfolio Approach

We took profits in three positions and opened two new ones yesterday.  This morning, we took profits in one stock and are adding to Industrials in our Hotline Model Portfolio.

Today’s Session

Pre-open trading has been very compelling.  The Russell 2000 is rocking, and the Dow Jones Industrial Average has been encouraging, as the NASDAQ looks to open significantly lower.

This, after a session of feast or famine, as winners were up huge and losers got crushed.  The best performer on the S&P 500 was Carnival Cruise (CCL), +39%, while the biggest decliner, Biogen (BIIB), was -28%.

Long Term Outlook

I didn’t like the way the market closed, although, it was a lot to expect major indices to close at session high points. 

That being said, according to SunTrust, the S&P 500 climbed more than 10% in six straight sessions, and historically that bodes well for the rest of the year, where the average gain is 20%. Only once was the market lower one year later (2000).

That doesn’t mean smooth sailing.  There were only four times when the market wasn’t lower during the one year period out of eleven times this phenomenon has occurred.

Note: The move since March 30, 2020, only accounts for six months.

Rotation Continues

There have been several periods of small cap outperformance over the last six months, but each was short-lived, and the Russell 2000 struggled to stay in the plus column for the year.  The current move began on the first day of October.

This morning, the Russell 2000 has indicated to open as much as 2.0% higher.