Correction Still Not Over

Correction Not Over (But Tesla Rallies)

Just because the stock market rebounded, doesn’t mean the correction is over. Sure enough, there was a selloff on Thursday with the S&P 500 falling 1.76%. Nasdaq fell 1.99% and the Russell 2000 fell 1.23%. Tech stocks underperformed, but not by as much as most thought they would. 

Apple fell 3.26% and Tesla actually rose 1.38%. It shocked many to no end that Tesla rose today. It is the face of the euphoric market getting ahead of itself. It likely rallied because of Battery Day. Hype is starting up again. A Marker article titled, “Why Tesla’s Battery Day Will Actually Live Up To The Hype” was trending on Twitter.

Tesla may have been helped by the short report on Nikola which knocked GM stock down 5.57% and Nikola stock down 11.33%. GM fell because it took an 11% stake in Nikola in its partnership to manufacture its trucks. Quite frankly, everyone needs to ask what Nikola actually does if GM is making its trucks. 

Car manufacturers sometimes partner with each other, but in this case, GM is basically planning to build the entire Badger which is Nikola’s flagship. Frankly, it's unlikely that the product will ever get made.

Negative Sentiment Shift

There may have been a negative sentiment shift which will turn into a waterfall lower. If the market was in a bubble, the situation won’t resolve itself with a mini decline. Retail traders need to be shaken out which involves a major correction, with the story stocks taking the brunt of the selloff. 

As you can see from the chart below, the 3 month average of the daily sentiment index peaked where it has in the past few years. This was a euphoric bubble. If it goes down near the previous bottoms, we could be looking at a 15% decline or more in the S&P 500. This recent correction is significant because of how overbought the market got. It's doubtful that it will get anymore overbought. Many think the S&P 500 has made its high for the year.

Somehow even though the AAII sentiment survey was already bearish before this small correction, it got even more bearish this week. Percentage of bulls fell 7.1 points to 23.7% and the percentage of bears rose 6.7 points to 48.5%. Pessimism is at a 6 week high; it’s already almost as bad as the March bottom which is crazy because this has been a small correction. Investors in this survey hate this rally, and they have a point because tech stocks are in a bubble.

Major Decline In Investor Exposure

Even though the Nasdaq is not close to done declining, it’s worth mentioning the counter-argument. As you can see from the chart below, the NAAIM investor exposure index ended its 8 week streak of above 90 readings. It had a massive 42 point drop to 53 from 95. That’s the 2nd largest decline in the history of the survey. It only took a 10% decline in the Nasdaq to do that which is bullish. It’s bullish to see investors take off significant long positions. 

At this rate, we could be oversold with another 5% drop in the Nasdaq which wouldn’t be that bad. On the other hand, we could see tech stocks get very oversold before this bubble fully unwinds. If that’s the case, we might see the 30% decline some have been calling for.

Tech Hasn’t Been The Safety Trade

Fact that tech was a safety trade in the bear market and the beginning of the bull market was a big deal because these are usually high beta names. However, when the risk is a pandemic that moves activity online, tech becomes a safe haven. That’s not the norm. It worked out very well for these names; they outperformed on the upside and the downside. Frankly, we don’t see how this continues as the economy heads towards normalization as COVID-19 cases and deaths fall. 

That might be why in the past few weeks, as the chart below shows, tech stocks haven’t been a safe haven. This is a big deal because when the market has a ‘risk off’ day, the biggest stocks in the market won’t be there to save the index. That could accelerate declines. Tech is falling more than it usually would because it got overbought.

IPO Mania

As you can see from the chart below, IPOs have started to do a lot better on their first day this year. This is starting to look like the tech bubble of the 1990s. A big difference is there are much fewer firms doing IPOs. There are SPACs though. Five SPACs priced their IPOs on Thursday evening which is a new record. That’s $1.625 billion in gross proceeds. If Nikola fails, the SPAC craze will end because that’s one of the most well known SPACs.

Most hyped IPO this year is the SaaS firm Snowflake. This company plans to sell 28 million shares at $80 which would give the firm $2.24 billion in proceeds. The firm will be selling $500 million to Salesforce and Berkshire Hathaway in a private placement. Fact that Berkshire is making an investment will give this stock even more hype. At the $80 level, it will have a $22.8 billion market cap.

EV to sales multiple will be 56.7 which means it will be incredibly overvalued. This IPO will take place within the next couple of weeks. It’s important for the overall SaaS space because if it does poorly, sentiment will turn negative. Plus, this is new supply to the market. 

Whenever an area of the market gets hot for a long enough time, the market gets new supply. That eventually ruins the party. Obviously, Snowflake didn’t formulate itself overnight to take advantage of this craze. However, the valuation is only extreme because of the bubble. Even if you like this business, you can’t buy at these prices. 

Spread the love

Comments are closed.