Rally In Cloud Stocks Has Gotten Absurd

Suckers Do Well

Bears are calling this a suckers rally. They have to do that because they predicted for years that when the party in stocks ended, there would be a long downturn in markets without a new high for years, or even decades if we followed Japanese markets. Rather than taking years, this bear market lasted a couple months. Personally, I’m declaring an end to this bear market as stocks have moved relentlessly higher. The stock market always moves further than you’d expect.

Many investors that are skeptical of this rally think stocks should go up in the long term, but not in the short term. They think stocks have gone up too fast. However, if everyone think stocks will be much higher within a few quarters, doesn’t it make sense to get ahead of the game? This rally is about frontrunning the inevitable recovery in the economy. Exogenous shocks usually end quickly. This one is the mother of all shocks.

Without government intervention, the economy would have imploded. Instead we have businesses getting loans and many workers getting paid more to be unemployed than to work. Even with the unemployment rate in this recession more than doubling the peak of the financial crisis, this recession should do less harm to people because it will be short lived. 

People who can’t pay their mortgage for a couple months won’t be kicked out of their houses because the fundamentals of the loans are solid in normal times.  

We Are At An Extreme Moment

There has been a strong rally off the low. But the AAII investor sentiment survey shows investors are still bearish which is a great sign. It has never happened before. There has never been a more than 10% rally in 7 weeks with more than half of investors being bearish. Twice the market has rallied that much with more than 40% bearish. Those points were in December 1990 and April 2009. 

Both of those points were amazing buying opportunities. CNN fear and greed index stayed at 41 which is fear. VIX fell 2.68 to 31.44 which is why the bear market is officially over. With stocks expected to rally on Friday, the VIX will get below 30. S&P 500 might also make a new bear market high. Nasdaq is already up year to date. Those aren’t things you see in a bear market.

Many investors, including myself, are extremely bearish on the cloud stocks. That's because many will likely fall over 20% in the next few weeks. As you can see from the chart below, the NYSE advance decline line has closed at least -500 issues lower than it opened in the past 3 days. That has never happened with the S&P 500 gaining at least 1% in that time. The market has terrible breadth.

Cloud stocks, with their lower growth rates and small if any profits, are in a big bubble. Twilio stock rose 39.6% on Thursday and Fastly stock rose 45.68%. Both were up on earnings. We’re at the point in this rally where companies we’ve never heard of are getting massive market caps. 

For example, Livongo Health is up 63.64% in the past month and now has a $5.09 billion market cap. Most had never heard of this company before a week ago. CLOU cloud ETF was up 4.76% on Thursday and is up 2.07% from its February 19^th high. It’s up 47.44% since March 18^th. This is a bubble.

Details Of The Big Rally

S&P 500 was up 1.15%. Even though the market is about 2% below its April 29^th high, this rally seemed like euphoria. That’s because the Nasdaq was up 1.41% which put it in the green for the year. It’s up 8 basis points year to date and 12.76% in the past year. With the economy in its deepest recession ever, a normal return over the past 12 months seems wrong. A rally in tech has gotten out of control. Russell 2000 was up 1.58%.

PayPal stock had a great day as it was up 14% because of its earnings. The firm reported 66 cents in EPS which missed estimates by 9 cents. It reported revenues of $4.6 billion which missed estimates by 3%. At least it made profit. The money losing Lyft stock rose 21.67% on Thursday as it is up 98% from its low on March 18^th. 

That’s insane because the company faces a long road ahead because consumers don’t want to get in a stranger’s car. Pretty much any tech firm that reports earnings will have it stock go up no matter what the company says.

Best sectors on Thursday were financials and energy which rose 2.22% and 2.47%. Energy sector had been oversold. Two losing sectors were consumer staples and healthcare which fell 0.41% and 4 basis points. That makes sense because this is a risk on market.

Uber Loses A Lot Of Money

Uber is in terrible financial shape as the company is not close to making money. The firm had projected profitability by the end of the year which likely won’t happen. It is guiding for $1.35 billion in losses in 2020. And the firm lost $1.7 per share which missed estimates for an 88 cent loss. It has lost money for 8 straight quarters. Revenues were $3.54 billion which beat estimates by $40 million. Rides gross bookings were $10.87 billion and Eats bookings were $4.68 billion.

Rides revenues fell 5% in the quarter and fell 80% in April. Bookings for Eats were up 50% as people ordered food from restaurants since they couldn’t dine in. The company laid off 14% of its 26,900 workers. 

Uber is leading a $170 million investment into the electric scooter and bike business Lime. Personally, I don’t think that’s a good idea with the company in such bad shape. That being said, the stock rose 6.11% after hours on this report after rising 11.06% on the day. It was up 109% since its trough before that after hours rally.