Most Stocks Selloff
In a normal market, you would say Thursday was an extremely unusual day. However, this is the most bizarre market most have ever seen, so it’s consistent with the new normal. Logically, it makes sense stocks fell when the housing market was imploding and the banking system was shaky back in 2008.
It also makes sense there was panic when a global pandemic in March of 2020 when we knew little about was spreading. Now we have extreme speculation in a few stocks which price them beyond what they can possibly return to shareholders.
This is similar to the nifty 50 of the 1960s and 1970s and the tech bubble in the late 1990s. Since many didn’t follow those markets in real-time, this is our only taste of extreme market craziness.
Thursday was extreme because the overall index rose while most stocks fell. Specifically, the S&P 500 was up 0.32% even though 193 more stocks fell than rose. Only other times since 1995 the S&P 500 gained at least 30 basis points and the advance decline line was -150 or worse were on February 23rd 2000 and March 17th 2000.
Facts back that up that since 2007, there has never been such extreme action like we are seeing now. There are a few ‘haves’ and many ‘have nots.’ From March 17th to the peak, the S&P 500 gained 6%.
Since we are so close to the peak in this market, that needs to be said. Normally, you would hear someone discuss the late 1990s or 2000 and immediately get scared.
Nasdaq Running On Fumes
Nasdaq is running on fumes; it is being pushed higher by a few extremely expensive stocks. Usually, it’s difficult to determine if a market is vulnerable based on individual company analysis because you’d need to look at most stocks in the index. This is different as a few firms are controlling the market’s performance. Thursday was another factor day as large growth destroyed small value.
Nasdaq was up 1.06% and the Russell 2000 was down 0.49%. Furthermore, the cloud index was up 1.9% as it continues its recovery from its early August correction. It’s down 2.4% from its peak and up 7.2% since August 11th. It seems inevitable that it will hit a new high. However, when the trend changes, it will fall at least 40%.
On the other hand, the small bank index fell 2.2% and the small value index fell 0.7%. Small value is down 3.2% since its double top on August 11th. Many are very optimistic about the small cap value stocks for the long term, but pessimistic in the near term until a vaccine has good phase 3 trials or a stimulus passes. Upside is much greater than the short term volatility.
Odd Days & Bad Breadth For Nasdaq
Odd days are becoming a lot more common. As you can see from the chart below, an odd day is when the Nasdaq is up more than 0.7% and more stocks are down than up. There have been 4 odd days in the past 15 days. That’s the most since 2007 when there were 5.
At the peak in the Nasdaq, there were 8 odd days out of 15. It wouldn’t be surprising if the total grows in the next few days as the craziest action happens at the top. If the Nasdaq peaks in October, we could be in for a crazy next few weeks. Speculation might beat out 1999 and 2000.
Obviously, we don’t know when the bubble will burst. Cloud stocks were overbought even in late May. Investors switched to calling it an outright bubble sometime in June or July. There have been a couple times since July when it looked like the bubble was bursting, but it shifted higher.
As you can see from the chart below, the 21 day advance decline line peaked and has fallen below 50%. This was a great signal to sell before the last 2 crashes in the past couple years. This time might be different because this might represent a phase change away from growth and towards value. Growth has been outperforming value for over a decade. It's too hard to try to predict when the Nasdaq will peak.
Tesla Bigger Than Wal-Mart
Apple and Tesla drove the market higher on Thursday. They control the world. It’s a confusing match because Apple is the most profitable company in history and Tesla has never made a profit from its business operations. Apple is extremely overvalued because it barely grows.
Apple’s net income is up 9.4% in the past 5 years and its stock is up 320%. It has a 36 PE ratio even though it might not grow at all in the next 5 years. Tesla stock was up 6.6% on Thursday even though it came into the day with a 73.5 14 day RSI. Tesla is now the 9th biggest publicly traded company in America.
As you can see from the chart above, it surpassed Wal-Mart. Next company it can pass is Johnson and Johnson as J&J has a $398.6 billion market cap. This company can barely make a profit and can’t deliver products on time, yet is bigger than the biggest retailer in the world.
There are always bubbles, but there has almost never been a company with this bad fundamentals at this high a valuation. Everyday you watch Tesla and Apple stock, you are watching financial history which will be taught to investors for decades.
It might even make it to the general history books like the bubbles of the 1920s and 1990s. If Tesla falls, more than 80% in the next few months, it would be historic.
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