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Legendary Traders Warning Rings Against Vaccine-Hype Stock Rally

Last Updated September 23, 2020 2:04 PM
Joseph Young
Last Updated September 23, 2020 2:04 PM
  • The U.S. stock market is set for another positive day after positive vaccine test results from Moderna.
  • Top chartist Larry Williams anticipate a pullback after July 26, as stocks get overheated.
  • Various technical indicators point at an over-extended rally in U.S. stocks.

The U.S. stock market is soaring due to Moderna’s optimistic vaccine test results. But prominent chartist Larry Williams, who is known for the creation of technical indicator Williams %R, sees a short-lived rally.

Speaking to CNBC, Williams said that he expects the ongoing U.S. stock market rally to end by July . Based on technical analysis, the trader said the stock market could peak by July 26.

Various Technical Indicators Signal an Overheated Stock Market Rally

The stock market, specifically the S&P 500 Index, has recorded a strong upsurge since the start of July.

stock market
The U.S. stock market set for another positive day after 2% gain on Tuesday | Source: Yahoo Finance

FAANG stocks, alongside several bluechip stocks such as Tesla, have pushed the stock market up in recent weeks.

Based on the strength of the stock market’s momentum, Williams hinted at a 4% gain in U.S. stocks in July.

As the stock market enters August and the fourth quarter of 2020, Williams forecasts a pullback in equities markets.

Jim Cramer, who interviewed Williams, said:

The charts, as interpreted by the legendary Larry Williams, suggest the S&P could climb another 4% or 5% over the next two weeks, but come July 28, he expects the market to start rolling over. Given that the expanded unemployment insurance benefits from Washington expire at the end of the month, well, I wouldn’t be surprised.

Since May, the U.S. stock market saw heightened levels of retail trading activity.  Hundreds of thousands of Robinhood users pushed popular stocks, like Tesla, to new highs in the midst of a pandemic.

Hinging on that vaccine. | Source: Jim Cramer 

As the value of stocks relative to their respective revenues surges to record highs, institutional investors could look to take profit.

On June 25, JPMorgan said that it expects pension funds to trim $170 billion in equities  after a monster rally. But the bank’s analyst Nikolaos Panigirtzoglou maintained an optimistic outlook on U.S. stocks.

A potential sell-off among financial institutions and a cut in unemployment benefits could catalyze a downturn in the stock market.

The S&P 500 also saw a TD9 sell signal confirm on July 14, which suggests that the uptrend of stocks is overextended.

Moderna Vaccine Hype Seems to be the Primary Catalyst Behind Overnight Stocks Rally

On Tuesday, Moderna posted optimistic trial results on its ongoing vaccine development. The biotech company said its vaccine created neutralizing antibodies against the virus in 45 patients.

Michael Yee, a managing director at Jefferies, said both Moderna and Pfizer are on track  to produce vaccines by the year’s end.

He said:

This is all along our positive thesis and our view that both Moderna and Pfizer-BioNTech are definitely on a good track to get a vaccine by the end of the year.

The stock price of Moderna surged by 16% after it published results in the New England Journal of Medicine.

Pre-market data shows the Dow Jones Industrial Average demonstrated a 200-point gain overnight, following a 2% stock market rally on July 14.

The stock market has aggressively responded to any progress in vaccine development as vaccines would boost economic recovery from the pandemic.

In the near-term, chartists foresee a minor pullback based on varying technical indicators that suggest an overheated market.