Euphoria In Nio Cannot Be Tamed

Small Cap Rally

Stocks sold off to start the day, but recovered most of their losses by the end of the day on Thursday. Small caps beat large cap tech which is surprising because COVID-19 is getting worse and the stimulus is up in the air. Investors heavily invested in small banks even though rates are still low. This action didn’t make sense because initial jobless claims were so high. 

Specifically, the S&P 500 fell 15 basis points, the Nasdaq fell 47 basis points, and the Russell 2000 rose 1.06% because the banks had a great day. Small cap value rose 1.48%, while the Nasdaq 100 fell 0.67%. Tech had a bad day partially because Fastly crashed 27.2%. It’s only a $9.4 billion company after this crash. I

t’s surprising such a small company could have this much of an impact. Maybe investors are starting to realize cloud stocks can’t win. COVID-19 will be gone within 6-18 months and competition and tougher comps are coming next year.

Details Of Thursday’s Action

Regional banks destroyed the cloud stocks as the KBW was up 2.42 % and the CLOU index was flat. Fastly isn’t in the CLOU index, so it wasn’t weighed down by it. Is it possible that the small cap banks are in an uptrend? First step would be for the index to rise about 5% to get above the August peak. 

It’s impressive that the banks are doing so well with the 10 year yield at 72.9 basis points. Obviously, some have reported good results like Hingham. We'll all be waiting for Enterprise Bank’s report on Monday.

Draftkings stock is in disaster mode as it fell another 5.4% on Thursday. It’s down 29.4% from its peak on October 2^nd. Penn Gaming didn’t follow its lead as the stock was up 2.9%. A most interesting stock in the market is the Chinese electric car company Nio. The stock rose 5.9% on Thursday as you can see from the chart below. 

This is one of the biggest bubbles in the market as it is up 764% in the past 6 months. 4 of the 6 most active options were in Nio stock calls. Investors have shied away from Tesla because the firm is losing market share in Europe. Nio is the new craze. This stock is on such a tear, but it can’t last much longer.

Some Euphoria Is Back

This market reminds me of the fall of 2018. We had the euphoric top in January 2018, but stocks rallied after the correction before falling 20% near the end of the year. We had a euphoric top in late August and now the market is showing signs of euphoria again. 

A gap between bullish options positioning in individual stocks and indexes on the Cboe just reached the highest point in 20 years. Excluding VIX contracts, it’s in the 90^th percentile. That’s still very high.

AAII individual sentiment survey finally almost had more bulls than bears. This has been by far the longest streak with more bears than bulls. It continued by the skin of its teeth. Percentage of bulls was the same at 34.8% and the percentage of bears fell 3.2 points to 35.7%. 

Some investors are gaining confidence now that we had a correction. That’s insane because the market is hardly off its high. Stocks like Shopify and Zoom are still showing euphoria. In fact, Zoom stock was up 5.3%. It’s up 31.4% in the past month.

NAAIM exposure index showed optimism is back and almost as crazy as it was in August. As you can see from the chart above, the index spiked from 73.05 to 102.93 in the past week. That’s a massive jump. It peaked at 106.56 in August. We went from neutral to above 100 in just 2 weeks. As the table shows, being above 100 doesn’t mean stocks are in trouble. However, considering the retail optimism, they likely are.

COVID-19 Is Ramping

Small cap value isn’t caring as much about COVID-19 considering how much cases are ramping. That might be a good sign. Either small cap value is about to crash or there is a reason it has done well. Potential reasons are that the virus is becoming less deadly, future full-fledged lockdowns are unlikely, we are close to better treatments, vaccines are coming in 2021, and testing is increasing.

This isn’t an ideal scenario, but if the past is any indication of the future, the spike in cases in the Midwest is likely near its apex. We just don’t know when that will be. There were 1.006 million tests on Thursday in the U.S. 7 day average is 1.018 million. Number of people in the hospital increased again to 37,308. 7 day average of deaths is still low at 680. Coming increase in deaths will lead to a lower peak than this summer.

As you can see from the chart on the left, the spike in Wisconsin is about as large on a population adjusted basis as the spike in New York and Arizona. If it tops at the same point, it has very little room to increase further. France is the other concerning area as it is seeing its outbreak expand. On October 15^th, there were 30,621 cases which is a new record high by a lot. The 7 day average is 19,721.

We still aren’t seeing much of an increase in deaths in France. The 7 day average of deaths is 86 which is up from 72 on October 1^st. One of the reasons deaths are low is because younger people are getting it. However, you’d think the outbreak is getting so large that it would be spreading to older people as well. 

Another aspect to consider is there is a difference between how each country determines whether someone died of COVID-19. That’s why it's good to look at the rate of change within countries.