November Ends
As it turns out, November ended on a sour note. However, we can’t let that make us miss out on one of the most amazing months in market history. Combined factors that were the market entering the month oversold, the election hedges unwinding, and 3 successful vaccines coming out all helped stocks do well, with specific outperformance by value stocks.
As you can see from the chart below, the Dow had its biggest monthly percent gain since January 1987 as it was up 12%. Global all country world index was up 12% which was the best month ever. Russell 2000 was up 18% which also was its best month ever. Many traders feared November because of rising COVID-19 cases and the election. Fact that so many feared the month provided the ammunition for the rally. The successful vaccines sparked the ammunition.
Value stocks entered November in bad shape as many energy stocks were making new lows and the banks were very weak. No one expected Exxonmobil and Wells Fargo to rally sharply which is partially why they did. Value had been underperforming for years, with 2020 being the worst of the run.
Everything changed in November. Value had its best month ever as you can see from the chart below. Value stocks like rising rates and cyclical recoveries. Rates actually fell in November. It seems like value caught up to the late October rise in rates. Many indicators imply the 10 year yield should be higher. It’s currently at 84.4 basis points. I see it getting to 1.5% next year.
Stocks Are Overbought
Obviously, stocks are overbought. Pretty much anyone can tell you this. People who don’t even follow stocks know they are overvalued. Even Tesla shareholders think it is too high. In fact, Tesla shorts have gone long the stock in anticipation of S&P 500 inclusion on December 21st.
Some investors never thought we would see the day where the most ardent shorts who think Tesla is a fraud would be betting on the stock. They are emblematic of the market. Short sellers barely exist. This has been one long bull market since 2009. A crash in March wasn’t a real bear market.
We know the market is overbought because the CBOE 5 day put to call ratio is the lowest since June. Other than that, this is the lowest ratio since 2000. As you can see from the chart below, 92% of S&P 500 stocks were trading above their 200 day moving average heading into Monday’s session. That’s the highest percentage since 2013.
NAAIM exposure index rose from 106.41 to 106.74. That officially put it above the August peak. It’s obvious stocks are more overbought than August. Difference is the rally is broader based. In fact, the Nasdaq 100 isn’t at a record high. This could be a double top. It likely won’t hit a new record high for a few quarters.
Monday’s Market Action
Monday was a terrible day for small caps and value stocks. It was very bad for energy as there are worries OPEC will end its production cuts in anticipation of the economy reopening. Investors are worried that the oil market will be flooded before the economy can start accelerating. Demand probably won’t explode until Q2.
S&P 500 was down 46 basis points. Nasdaq was down 6 basis points. Russell 2000 was down 1.91%. As you can see from the chart below, the stocks that had the best month were down the most. Best decile of stocks in the month fell 1.87% on Monday, while the worst decile was only down 10 basis points. That decline was nothing as the stocks in the best decline were up 66% on average through Friday.
It was a brutal day for value as the banks and energy were crushed. Small cap value index was down 2.83%. That was way below the Nasdaq 100 which was up 29 basis points. This is like the reverse of late August as we are probably near the end of a rally except value is the leader instead of growth. Oil services ETF fell 6.65% and the regional bank index was down 3.7%.
On the other hand, the cloud index was up 31 basis points. All growth stocks didn’t win though as Nio and Tesla were down 6.43% and 3.1%. S&P 500 inclusion catalyst has likely run dry. Latest news is Tesla stock will be added to the index all at once instead of in stages. That’s very bullish in the short run, but investors ignored it on Monday. This bubble has been pumped too much.
Zoom Disappoints Investors With Guidance
Zoom Video beat earnings and sales estimates, but its stock fell on its guidance. Everyone knows the stock faces a cliff in Q2 (the firm’s Q1) in which vaccines are fully out and demand for video chat falls. The firm also has insanely difficult comps which will probably result in negative yearly growth.
Their stock fell 5.1% after hours after earning 99 cents in Q3 which beat estimates for 76 cents. It had $777.2 million in sales which beat estimates for $694 million. Sales were up 367% after rising 355%. In the quarter before that, sales were up 169%. That will be the first tough comp.
Next quarter is the last one with an easy comp. Zoom guided for 329% growth. That’s sales between $806 million and $811 million. It only expects EPS between 77 and 79 cents. This quarter is set to be the last of the glory days for Zoom.
Only the craziest bulls think Zoom won’t see a decline in demand in 2021. It’s painfully obvious. The stock was only down 15.83% from its peak as of Monday’s close. It will probably fall well over 50% before bottoming late in 2021. We will probably know by the end of next year how many clients actually will stick with the service when it is ok meet in groups indoors again.
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