Tech To Have A Bad 2021

Solid Day For Stocks Other Than S&P 500

Thursday was a mostly good day for stocks. There was some modest volatility near the close on the news that Pfizer cut its estimated vaccine distribution for 2020 in half. That’s not important to stocks. The year is practically over. Vaccines aren’t going out until the last 2 weeks of December. This is just a small delay. That’s just how some view this impacting stocks. In the real world, 1,780 people are dying per day which means a delay of just 1 week costs 12,460 American lives.

The S&P 500 was the only index that fell. It was down 6 basis points while the Nasdaq was up 23 basis points and the Russell 2000 was up 58 basis points. One of the most interesting news items of the day was that Warner Brothers stated all of its films scheduled for theatrical release in 2021 will be released simultaneously on HBO Max. That’s bad news for the theaters because now they don’t get a few weeks of exclusivity. 

Furthermore, it’s bad because they were counting on a bunch of new movies coming out in 2021 because of delays. Maybe 2021 won’t be a boon for them after all. The consensus is it will be safe to gather in groups in the 2^nd half of 2021, so this move tells us how the future after COVID-19 will look. This news sent Cinemark stock down 22% and AMC stock down 16%.

Small Caps On Fire

Small caps are on one of the best runs I’ve ever seen. The Russell 2000 finally broke out from its August 2018 peak. The index is up 27.36% since September 23^rd. That’s 2 years’ worth of gains in a little over 2 months. The index actually matches the chart below which is the small caps’ earnings revision ratio. 

It has spiked to a record high because the negative expectations due to COVID-19 are being wiped away. The economy is recovering quicker than expected. Furthermore, rates are rising which is good for banks.

Details Of Thursday’s Action

Investors are starting to get skittish about how much stocks are rising. The CNN fear and greed index is at 85 which is extreme greed. The NAAIM investor exposure index is at 103.17 which marks the 3^rd straight week investors were leveraged long on average. That won’t continue much longer. The CBOE equity put to call ratio is at 0.35 which signals euphoria. 

The VIX is at 21.28 which is relatively high for such a euphoric market. We are near the end of a speculative cycle even though the economic cycle is just getting started. Most don’t think a recession is needed to bring down these crazy valuations and speculation in SPACs/tech stocks. As you can see from the chart below, the median PE ratio is near the 99^th percentile.

Even with the late day volatility, both large cap growth and small cap value were up. The small cap value index was up 56 basis points. It’s down 1.86% year to date. It would be impressive if it gets to the flat line. The Nasdaq 100 was up 14 basis points to a record high. It’s up 40.77% year to date which is remarkable. 

Tesla is the driving force behind its returns. Tesla was up 4.32% on Thursday, putting it up 589.6% year to date. The S&P 500 inclusion date is December 21^st, so expect some wacky trading in the next 2 weeks. When it crashes in 2021, it will hurt both the Nasdaq and the S&P 500. Only the Russell 2000 and the Dow will avoid the negative impact of the crash.

New Cycle

The regional bank index was up 54 basis points. It’s down 14.5% year to date. Since this index was founded on June 23^rd, 2006, it’s up 5.7%. That’s 14 years of no returns because it was created right before the financial crisis. Similarly, the CLOU index will go a decade without returns from this cycle’s peak. 

The CLOU index was up 1.66% on Thursday which means it is down just 2.3% from its record high in October. It’s up 60.7% year to date.

The oil services index was up 1.7% on Thursday. It’s up 66% since October 28^th, but it’s down 43.45% year to date. If you thought the regional bank index had a bad run, close your eyes. The oil services index (OIH) is down 76% since February 6^th, 2001. That’s almost 20 years of terrible performance.

We are entering a new cycle where energy and banks outperform tech. It sounds crazy because of the price action in the past few years. As you can see from the chart above, the tech sector versus energy is peaking. The total return ratio peaked at a higher amount than at the end of the tech bubble. That’s because energy is in much worse shape now. Energy is having its worst run since the early 1930s.

Handy EV Bubble Guide

The table below is a handy guide to the EV bubble. Nio stock was down 5.5% on Thursday which put it down 15% from its recent record. Arcimoto is down 26.5% from its recent high. We might be at the end of the EV bubble. These stocks have underperformed recently considering the Nasdaq 100 is at its record high.

Only Tesla is left standing because of the hype around it being added to the S&P 500. Some still think it will fall in the next few days as investors take profits ahead of the day. Then, the day before it is added, which is December 18^th, it will rally modestly. That’s the final catalyst of this bubble stock which has reached a $562.5 billion market cap which is a few billion above where Cisco peaked at in 2000. Tesla’s recent rally has been steeper than Cisco’s rally. 

On the other hand, on an inflation adjusted basis, Tesla would need its market cap to get above $800 billion to match Cisco. We don’t think it will get there. If it did, it would beat Facebook's market cap.