Sell This Rally In Tech
If you own any tech stocks with a greater than 30 PE ratio or any of the speculative EV, SaaS, or online retail stocks, you must sell them now. This is a rare moment where speculation exceeds basically every other market in history. The CNN fear and greed index is at 88 which is extreme greed.
That doesn’t come close to explaining how frothy the market is. It’s very common to see speculative stocks rise on no news. In fact, when a stock rises hugely, we can assume nothing happened.
One of the most bubblicious stocks is the software company Palantir. It rose 21.4% on a report it received a $44 billion contract with the FDA. The stock is up 97.3% in the past month even though few people even understand what it does. We have watched the CEO stumble trying to explain what the firm does. Most don’t understand it. Retail traders love this stock even though it’s very complicated. This isn’t like buying Apple or General Mills.
The speculative stocks are obviously very frothy, but there is broad based optimism in this market. As you can see from the chart above, 79.6% of stocks in the Nasdaq are above their 200 day moving average which is the highest percentage since January 2014.
Another couple of up days will have us looking years further to see what this tech bubble compares to. The cyclical stocks might have a small correction, but they aren’t to be sold. Some investors are still bullish on the industrials, the banks, and energy.
People talk a lot about software stocks being in a bubble, but semiconductors are also in a bubble. The SOXX semiconductor ETF is up 40.4% in the past 6 months. As you can see from the chart below, since 2013, the small cap semiconductor stocks have never been this far above their 50 and 200 day moving averages.
Small cap semiconductors have also outperformed the S&P 1500 by more than at any point in the past 7 years. Obviously, it’s not just small firms rallying. Nvidia stock is up 126.9% year to date.
Nasdaq Leads The Charge
The 4 week streak value has beaten growth looks like it is near its end. You would have thought it would end by value having a correction, but instead growth is going full speed ahead. It was wrong to predict the Nasdaq 100 wouldn’t reach a record high. It has been painful as the index is now on a 10 day winning streak. It was up 57 basis points on Monday, putting it up 8.4% since November 10th.
As you can see from the chart below, these streaks usually don’t mean doom is coming. The longest ever steak was in 2013 which lasted 14 days. It’s amazing that there weren’t any 10 day streaks in 1999. This bull run has been like no other. Maybe the winning streaks have to do with the increase in passive investing.
The Nasdaq was up 45 basis points, while the Russell 2000 and the S&P 500 were down 6 and 19 basis points. It wasn’t a great day for small cap value as that group fell 53 basis points. Energy lagged for a change as the energy services index was down 2.45%. The CLOU cloud index was up 35 basis points which put it down just 1.37% from its October 13th record. It might be wrong again in to predict that this wouldn’t hit another record high for many quarters.
Tesla is the biggest bubble in the market. It led the rest of the EV stocks higher. Tesla was up 7.1% which gave it a $608 billion market cap. It’s going to have about a 1.5% weighting in the S&P 500 when it’s added. It was wrong to be bearish on this leading up to inclusion.
It will be fun to see how its addition impacts the index’s PE ratio. It’s one of the biggest firms, but it will still have a weighting in the low single digits. However, even that low percentage will impact the index because Tesla has a 4 digit PE ratio. The firm isn’t profitable without tax credits.
The stock is up 57.3% since November 16th; it is up more than Cisco was in the 18 months prior to its peak in March 2000. Let’s see if Tesla can get to above $800 billion which would be the inflation adjusted market cap Cisco peaked at. No one should be rooting for this because the bigger it gets, the worse the crash will be.
An $800 billion company crashing over 50% next year will pull down all the indexes, especially the Nasdaq 100. You can be sure everyone’s heads will explode if Tesla’s market cap passes Facebook’s. Nio stock was up 4.8% and Electrameccanica was up 9.1%.
As you can see from the chart above, the 10 day average of the CBOE put to call ratio is the lowest in the past 10 years. It will be exciting to see what the NAAIM and AAII surveys show. The NAAIM index will probably be above 100 for the 4th straight week. The percentage of bulls in the AAII survey should increase. This magnitude of euphoria is rare.
COVID-19 Update
There’s a reason California’s economy is shutting down. The COVID-19 numbers are beyond grim. The 7 day average of cases is 196,882 and the 7 day average of deaths is 2,204 which is a new record high. December is going to be the deadliest month of the pandemic for America. There haven’t been cases in Australia for 8 months. We're all curious if the vaccines have any impact on the spread of the virus in January.
There are now 102,148 people in the hospital. That means the 7 day average of deaths will increase for the next 2 weeks. We are just starting to see the impact of Thanksgiving. It’s tough to tell what it was because cases, hospitalizations, and deaths were increasing before the holiday and they are increasing now.
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