Monster FANG Rally To End The Year

Another Santa Rally

The stock market usually does well in the week between Christmas and New Years Day. The fact that we got a stimulus during this week made the rally even stronger (S&P 500 was up 87 basis points). Plus, many investors probably don’t want to sell because they would rather pay taxes next year instead of this year. 

We can expect a lot of selling early next year in the hottest names. There might not be that much selling in the overall market though. The S&P 500 is up 15.6% year to date. That’s a better year than normal, but it’s not good enough to cause selling at the start of next year.

FANG Destroys Small Cap Growth

Monday was extremely interesting because some of the hottest stocks crashed even though the overall market rallied. The Russell 2000 fell 38 basis points as it was brought down by growth stocks. The index is on an 8 week winning streak which is the longest since February 2019. This index tends to go on long runs (up and down). Small cap growth fell 99 basis points which is pretty bad for a day where the Nasdaq was up 74 basis points. 

Large cap growth stocks destroyed small cap growth stocks. The Nasdaq 100 was up 1.01% while the average stock in the index was down 17 basis points. Of course, all the companies in that index are big. The smaller firms did even worse as I mentioned.

The FANG stocks were up 2.76% while the rest of the Nasdaq 100 was down 33 basis points. As you can see from the chart below, the IPO index had its worst performance versus the FANG+ index since FANG was created. The IPO lagged by more than 6%. They are usually correlated because of the growth trade.

The best performers in the group were Apple, Amazon, Facebook, and Google. Apple was up 3.6% to a new record high for the first time since September 1^st. It has a 31.7 PE ratio on 2022 earnings. For a company looking to grow earnings in the high single digits, most wouldn’t pay more than 25 times estimates. 

Amazon was up 3.5%; it’s still down 7% from its record. Facebook was up 3.6%, putting it down 8.9% from its record. Finally, Alphabet was up 2.1% as it is 2.8% from its record earlier this month.

On the other hand, some of the hot names were clobbered. Zoom was down 6.3% which puts it down 38.2% from its record high. The scary thing for these investors is it is still very expensive. It needs to fall another 50% for me to be interested. Furthermore, Cloudflare fell 8.8%, Stitch Fix fell 8.8%, Carvana fell 8.5%, and Fubo TV fell 11.9%. Fubo TV is down 37.2% in the past 3 days.

There Are No Shorts

This was the worst year ever for short sellers because heavily shorted stocks were up well over triple digits since the March low. Tesla is the biggest loss short sellers probably have ever taken. Most people have covered at one of the best times to short it. The stock was up 29 basis points on Monday as it shook off the rust of S&P inclusion and the news Apple could come out with an electric car in 2024.

The scary thing for Tesla is if EVs end up being a big growth market, all the big tech companies might try to throw their hat in the ring. Amazon once made a smartphone after all. Tesla stock will probably see profit taking early next year. There have been stories about Tesla shareholders becoming millionaires in the mainstream media in the past few weeks. That’s a very bad sign. The last of the most foolish people are getting onboard. The next stop is a major crash in 2021.

As you can see from the chart above, the short interest in the S&P 500 ETF is the lowest since the end of February. It has made no sense to short anything because the market is very short term oriented. Bad fundamentals haven’t mattered for a while. Money losing tech stocks rose 333% from the bottom in March.

IPOs Raised A Ton Of Capital

It’s a big deal that IPOs raised so much money this year since SPACs were all the rage. There was money to be made in both groups. Investors are very excited for Robinhood’s IPO early next year. As you can see from the chart below, IPO volume reached $178 billion which was a new record by far. Obviously, with inflation and the rise in asset prices, volume is higher than 2000. However, this is easily the greatest speculative frenzy since then.

ARK Fund Takes A Hit

As you can see from the chart below, the ARK Innovation fund is 69% above its 200 day moving average. The Nasdaq in 2000 was only 60% above its 200 day moving average at the peak in 2000. Even though ARK has been flying high, it had a bad day because one of its top holdings crashed hugely. 

Arcturus Therapeutics fell 38% after hours after its vaccine data update disappointed traders. The ARK Genomics fund has an 8.3% weighting in this stock as it is their 2^nd best idea. That’s a complete disaster. ARK is the largest shareholder of this stock.

Conclusion

A few of the hottest growth stocks crashed on Monday. It seemed like investors wanted to end the year owning FANG stocks rather than the riskiest names. Most don’t see why they would because they have big profits in the hot names and it looks better to investors if managers own them. 

Obviously, owning Apple isn’t a bad look, but Cloudflare has had a much better year. Apple is up 82% year to date and Cloudflare is up 355%. ARK genomics fund is in for a rough ride as there is a lot of speculative fervor in the group from retail investors who don’t know anything about biotech.