We have a fantastic question from a long-time subscriber Tudor who has a question about the market’s reaction towards some incoming vaccine news from Moderna yesterday, and Tudor asks why didn’t the market continue to move higher on the positive vaccine news, adding that a prior news event saw a similar big move to the upside followed by a strong pullback the day after.
Thanks for the great question Tudor, I think in these two situations it might have been a couple of factors playing out, some of them slightly different in the two moves, and we can look at them individually, but arguably the biggest reason might be as simple as looking at how the news changed the overall market theme or narrative.
So, let’s take a look at the two moves that the question refers to. The first one occurred on the 9thof November 2020, when Pfizer released news that showed their vaccine in it’s phase three trial was 90% effective according to the preliminary results. Now, going into the news we knew that vaccine news was going to be important for the market, not only due to the obvious benefits to the economy, but also because the recent spike in virus cases which led to renewed lockdown restrictions brought it front of mind.
So, after the Pfizer news we saw that strong initial push to the upside, and we saw the market trade this the exact way that we would have anticipated with equities higher across the board (apart from downside of course in growth stocks as rotation flows favoured the battered down value and cyclicals), we saw bond yields pop higher across the board, safe havens moving lower and the high betas moving higher. But we also saw quite a big pullback the day afterwards.
Looking at the pullback in a bit more detail, I think there was two specific reasons which made a strong pullback more likely after the move higher. The first reason was some caveats to the Pfizer vaccine which raised concerns about it’s distribution, such as the temperature under which it needs to be stored as well as the short shelf-life, so that probably added to the pullback but the more reasonable catalyst was just some simple mean reversion. Equities had been rallying quite hard for a couple of sessions before the news, if we take a look at this histogram chart tracking the absolute value on a weekly basis we can see the out-sized moves that we had, so for me the fact that equity futures was at elevated levels and also trading at key resistance areas probably was a very good opportunity for some of the longs to take profit after the vaccine spike, and profit taking would also explain the exacerbated pullback.
So, moving on to yesterday’s news which was the 16thof November 2020, we had Moderna also delivering good news about their vaccine, which in many ways was much more positive than the Pfizer news because of the efficacy rate as well as the lower temperatures required to store the vaccine and the longer shelf-life. To your question, we saw the exact same move play out with a strong initial move higher and then a substantial pullback.
So, let’s take a look at the probable reasons why the market pulled back, because remember the news was even more positive compare the Pfizer news. One possible reason, could once again be mean reversion, it’s not uncommon for the market to retrace after seeing big jolts (either up or down), and if we take a look at the charts the markets basically ran into the exact same resistance areas that they ran into the previous Monday, so still trading at elevated levels.
So, the type of reaction for me isn’t as interesting as the difference in the size of the moves themselves. If we just look at the content of the news itself, we should have seen a much bigger move from the Moderna news. So, as we mentioned in today’s Daily Risk Event Outlook report, we should always remember that the market gets used to the same type of narrative fairly quickly, which means that similar news might be expected to see even less of a reaction if we see positive results from other vaccines in the race.
The next big release on the virus or vaccine front will probably be news that one of the vaccines has actually been submitted for FDA approval and then after that the next big release will be news that either of the vaccines has been approved for distribution.
So, there are reasons to explain the two moves and it certainly does make sense and seems reasonable. But, at the same time I do want to mention that the market doesn’t always need a reason to do what it does, of course as traders who follow the fundamentals and sentiment we want to know why thing happen so that we can know whether price reaction might be sustainable or not, but there will be plenty of times when there will just be no real good reasons for particular reactions in the market, and it might just be down to the ebbs and flows in the market.
So, I hope that helps with the questions Tudor, and as always please let us know if there’s any other questions.