Horses Carry The Market To A Record High
On Tuesday the stock market reached a record high in very unconvincing fashion. Large cap tech stocks drove it up, while most stocks actually fell. S&P 500 had 161 net decliners which means 161 more stocks fell than rose. The stock market has had 12 days this year where it was up and had more stocks fall than rise.
This was the 2nd weakest breadth in a positive day. On May 11th, there were 190 net decliners, but the index was only up 2 basis points. It was up 0.23% on Tuesday. Russell 2000 fell 1% showing you most stocks in the entire market fell as well.
Amazon played a huge role in driving the S&P 500 higher as it was up 4.1% to a new record high. Apple was up 0.8% as it now has a $1.98 trillion market cap. It's unclear where the bulls think this stock can go to as it already has a 35 PE multiple. It’s remarkable that speculators think this stock can avoid the weak economy.
If there is no stimulus, people won’t be able to buy expensive iPhones, iPads, and Macs. Tesla helped drive the Nasdaq up 0.73% as the stock increased 2.8% to another record high. It’s now worth $351.7 billion despite not making a profit when you exclude its tax credits. And it’s up 37.3% in the past 5 days.
There is a strong possibility it will get momentum from the hype about the battery day event. At the rate the stock is appreciating, this is about to be one of the most hyped investor events ever.
2nd Fastest Recovery Since 1950
This market is truly unbelievable. The table below shows this was the 2nd fastest bear market recovery since 1950. Even still, the S&P 500 is drastically underperforming the Nasdaq. S&P 500 is up 4.9% year to date while the Nasdaq is up 24.6%. It turns out, the weakness in tech in late July and early August was just a correction.
CLOU cloud index was up 1.8%; it’s up 5.6% since August 11th and is only down 3.8% from August 5th. On the other hand, the regional banks fell 3%. They are down 6.1% since August 11th. It appears small cap value stocks made a double top with the June 8th top. This index is down 2.3% since August 10th.
Volume Doesn’t Exist
There is no more volume. This is the ultimate late summer market as no sellers are materializing. As you can see from the chart below, $12.96 billion worth of $SPY traded in the past 2 days which was the lowest reading since Christmas Eve.
Even some single stocks traded more than the index which rarely happens. VIX is at 21.5 which is actually relatively high for a market at a record high. CNN fear and greed index is at 70 which is greed.
Investors will be excited to see if more bears in the AAII survey converted to bulls due to the record high. You would think it would be tough to stay bearish in this market. Some are already negative on the tech stocks. That signal would give another data point to make that case.
We can be fairly confident the NAAIM investor exposure index will have its 6th straight reading over 90 since it was over 100 last week and stocks have done well since last Wednesday.
Which Trade Is The Most Crowded?
Tech had cooled off modestly until this week in which Amazon, Apple, and Tesla all hit record highs. As you can see from the chart below, the Bank of America fund manager survey shows the percentage naming tech as the most crowded trade fell from about 75% to about 60%.
While tech had a few weeks of weakness, the decline likely came because of the spike in gold prices. Gold had its best run ever. It’s no surprise those naming gold as the most crowded trade rose from 10% to 25%.
Gold may have topped for a long time. It fell back below $2000 on Tuesday as it was down 0.57%. Even bulls were begging for a correction. Problem is this volatile commodity doesn’t correct 10% like stocks and then continue moving higher.
It can fall over 50% if rates rise a bit. I thought we were done with bitcoin forever, but in a market where the riskiest stocks do well, it’s no surprise even bitcoin has been rising. It got above $12,000 on Monday before falling 2.9% on Tuesday.
Short term speculators are chasing whatever they can. There is no difference between bitcoin, Apple, gold, and Penn Gaming to them. In the end, they will all perform similarly when the era of euphoria abates.
Apple trades at a 35 PE multiple even though it has recently grown net income in the low single digits and faces controversy over its 30% App Store fee to app developers. That’s why we can put it in the same basket as crypto and money losing companies.
Software Revisions Weak
As you can see from the chart below, the 2021 software earnings revision breadth versus the S&P 500 is poor. That’s not in line with the rally these stocks have seen. Longer the market ignores the fundamentals, the harder these stocks will fall.
Nasdaq 100 will likely fall at least 30% in the next bear market which could start before the end of the year. Biggest negative catalyst would be a vaccine having successful phase 3 trials.
Moderna’s vaccine is now being tested along with one in the U.K, and 3 in China. We will get the results of them within the next few months. If any of them work, the market will immediately shift away from the software stocks and towards the cyclical stocks.
It could be one of the most violent swings in market history. It would help this move if deaths fall precipitously in the next few weeks as expected. In that case, there would be 2 layers to the cyclical bullish thesis.
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