Trading the market in 2021

The last quarter of 2020 had to be one of the more predictable periods in the market for some time, but that is likely not to change coming into 2021. As per any US election year, the market was very sideways coming into the election but extremely bullish coming into the end of the year. So now we are in 2021 what is next? How do we trade 2021?

As a starting point, let’s talk about what will likely drive sentiment, then look at the Technical and Seasonal patterns.

First off, we have the US Senate runoff election which will either keep the senate as a Republican majority, or hand it over to the Democrats. As the Democrats already have the majority in the House, having the majority in the Senate will mean they can more easily pass their agenda. Part of that agenda is increasing corporate taxes which will likely weigh on market sentiment. 

Joe Biden will be sworn in as president on the 20th of Jan. Biden is very pro lockdowns and may look to restrict movement in the US to get the Virus under control. The market has been balancing the COVID forces of; Virus, Lockdowns, Stimulus, and Vaccine, and should continue to do so. Vaccine rollouts in the US and UK are looking promising through 2021, which has helped sentiment. Locally we have much better control over the Virus relative to others. We will need to be ready for another wave however, if it happens, we will see switching back to the stay at home stocks. 

US company reporting will kick off late next week, and then Australian reporting will kick off in early Feb. In the US, the sectors to watch will be Communication services and Tech which have been the main beneficiaries of the COVID-19 ‘stay at home’ mentality. But many stocks in this space are looking expensive so they will need to provide strong earnings growth and future guidance to keep the momentum going. 

At some point, we should see a switch back towards ‘back to work’ sectors (like travel, energy or banks) as Vaccines roll out and economies switch into recovery mode. Both here and in the US, we expect infrastructure spending to help push sectors like Industrials, Financials, and Materials higher. Travel stocks have also pulled back recently, in which some will likely rebound if we see vaccines rolled out quickly. 

Finally, the market will want to see Central banks remain very dovish. So, FED meetings are important as any sniff of a hawkish FED could see sentiment turn negative very quickly. We expect the FED to continue to increase their balance sheet spending through 2021, which will generally help keep debt markets liquid and push the equity markets higher.

The key seasonal pattern that we see playing out currently is the US election, this pattern tends to see a strong year after the election. Following the 2016 Trump election, the SP500 rose almost 30% from election day to the end of 2017. Following the 2012 Obama election, the SP500 rose over 38% from election day to the end of 2013.

Technically, the key market indices in the US and Australia are both still trending up, the US SP500 is showing continuation as they broke higher holding trend. Locally, the XJO is in a channel at the top of the range, we are looking for a break of 6,770 to confirm the continuation of the trend. 

If you think you have missed on the upside – think again. If Central Banks and world governments continue to spend and stimulate for the years to come then markets will naturally continue higher. There is still plenty of stocks that got battered down from COVID-19 that will make a comeback. We are telling all our clients it is time to be in the equity markets, but timing and what companies to trade are important. 

We use a combination of Technical Analysis and Fundamental Analysis to make our trading decisions. When timing the market, we tend to lean more on Technical Analysis, and tend to stick to stocks we have a high Fundamental conviction on. 

We are running a webcast on Thursday the 14th of January where we will discuss opportunities in the market for 2021 and what strategies we are using to help increase our probability of success.  This is a great opportunity to listen to a professional trader, get his view and learn about trading the Australian market. Click here to register your place.