2020 Is The Year Of Extreme Greed

Euphoria Keeps Going

With the great housing starts and mediocre industrial production reports out, stocks rallied on Friday like they seem to do almost every day. This rally has been very impressive. As of Thursday, the 14 day RSI was at 74.59. Usually, when it’s over 70, it means stocks are ready for a correction. But nothing has happened after the multiple times it has risen and stayed above that level in the past few months. 

After Friday’s rally, the metric went above 75. It’s very unlikely to reach 80. With the 0.39% rally on Friday, the S&P 500 is up 3.06% year to date as it has nearly hit my year end price target in the first month of the year. Very few analysts expected stocks to rise more than 5% this year because stocks started 2020 expensive.

With the increase this year the S&P 500’s forward PE ratio is 18.6. If it gets to the low 20s, This could be described as a bubble. We still aren’t in a bubble; I just think stocks are fully valued. There will likely be almost no further upside in the next 11 months. 

CNN fear and greed index stayed at 89 which is extreme greed. It has been in extreme greed all year. 2020 is the year of extreme greed. It probably won't ast until the end of the month. Supporting the point that stocks have rallied too far too fast, the S&P 500 is almost as high above its 200 day moving average as it was in January 2018 as you can see from the chart below.

Review Of Tuesday’s Action

Nasdaq was up 0.34% as Apple was up again. It rallied 1.11% and is now up 8.54% year to date. Momentum can’t be stopped. The Russell 2000 underperformed as it fell 0.33%. VIX fell 22 basis points to 12.1. S&P 500 hasn’t rallied or fallen more than 1% in 67 days now. Best 3 sectors on Friday were technology, communication services, and utilities which increased 0.71%, 0.9%, and 0.76%. The only down sector was energy which fell 0.66%.

Utilities rose even though the 10 year yield was up, albeit, it only increased 1 basis point to 1.82%. Some are saying that passive investors who own stocks are seeing their money re-allocated into treasuries which is keeping yields low. That’s possible, but the 10 year yield would be up more if nominal growth expectations were higher because it has a good track record in predicting nominal GDP growth. 2 year yield fell 1 basis point to 1.56%. Somehow, there is a 14.4% chance the Fed hikes rates next Wednesday, the 29th. I find that to be an impossible suggestion based on the Fed’s rhetoric.

The only Democratic poll that came out of Friday was one that showed Bernie Sanders winning New Hampshire by 5 points over Buttigieg. Klobuchar jumped from 2% to 10% in that poll which was interesting. I’d be shocked if Bernie doesn’t win New Hampshire. It’s near his home state of Vermont. The election is on February 11th

PredictIt shows Biden has a 38% chance of winning the nomination and Sanders has a 33% chance. Biden is the favorite, but if Sanders wins Iowa, New Hampshire, and Nevada, he could gain momentum. He’d also get a boost if Elizabeth Warren dropped out.

Earnings Update

So far this earnings season, 44 firms have reported results. Next 3 weeks are the meat of earnings season. As always, Netflix will be the first of the FANG stocks to report results. It reports earnings on Tuesday. As you can see from the table below, 73% of firms beat EPS estimates and 61% beat sales estimates. 

Non-GAAP EPS growth is 2.85%. The Earnings Scout is expected to show between 3% and 5% non-GAAP EPS growth. FactSet will show a little less growth, but it will still be positive.  

Housing Price Growth Increases

MBA applications, housing starts, and the Housing Market index were all strong. Adding to that point, housing price growth is increasing. As you can see from the chart below, according to Redfin, yearly home price growth was 6.9% in December which is the highest growth rate in 19 months. 

Growth peaked at 9% in February 2018 which led to the housing downturn in 2H 2018. Price growth troughed in February and March of 2019 which helped housing rebound in 2H 2019. I wouldn’t be surprised if this uptick in price growth scares some buyers away. Good news is rates have stayed low. Prices increased because inventory fell 15% from last year. Inventory was the lowest since December 2012. A spike in housing starts in December will increase inventories.

GDP Estimates

Retail sales report caused the Atlanta Fed’s estimate of GDP growth to fall 0.5% to 1.8%. Housing starts and industrial production reports caused no change to the Nowcast because the estimate for real personal consumption growth fell from 1.6% to 1.4% and the estimate for real residential investment growth rose from 4.3% to 5.5%. If that’s the case, Q4 was a weak one for the consumer. 

On the opposite side, the NY Fed’s Nowcast rose 11 basis points to 1.22% which is still relatively weak. Its Q1 estimate calls for 1.67% growth which would be solid. St. Louis Fed Nowcast is at 2.06%. Average estimate on Wall Street is 2%.

ECRI leading index is calling for economic growth to accelerate in 2H 2020. The index was up 2 points to 150.6 in the week of January 10th. As you can see from the chart below, the yearly growth rate rose from 3.3% to 4.4%. The index is closing in on its all-time high. A rise in stocks obviously helps this index’s case. 

It will be interesting to see next week’s update because the coincident index will give its December reading. I’m expecting growth to have rebounded in December. In the last 2 months it was stuck at 1.8% which is the lowest growth of this mini cycle which started in 2H 2016.  

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