Euphoria Brings Another Record High For Stocks
Investors and traders are getting euphoric as they are completely ignoring the bad economic data and hoping there will be a trade deal and a cyclical recovery. Normally, I'd agree with the bull thesis. But even I’m having trouble with grasping how much stocks have rallied in the past few weeks.
After the retail sales and industrial production reports, Q4 GDP estimates cratered as some barely see any growth at all. Traders laughed at these reports and bought stocks on the hope of a trade deal. Many GDP estimates are too low because the GM strike hurt industrial production growth and consumers are still primed to spend money this holiday shopping season. It’s still amazing to see estimates for below 1% growth in the current quarter while the stock market roars to new highs. Even though it’s already up over 20% year to date.
Specifically, the S&P 500 rose 0.77% on Friday. Investors have ignored the relatively high 14 day RSI, streak of no back to back down days, and streak of the VIX being below 15. As well as the extreme CNN fear and greed index which all signal there will be a decline in the short term.
S&P 500 is now up 24.48% year to date. This has been a fantastic year. A Santa Clause Rally is right on cue as the market increased 0.89% this week and is on a 4 day winning streak. As of Thursday, the 14 day RSI was at 70.81. I’m guessing with the rally on Friday, it hit above 72 and made a new 2019 high. In the past 10 years, the RSI has only gone above 80 twice. It’s near its limit. CNN fear and greed index already hit its limit last week. But markets have since hit new highs. It rose 4 points on Friday to 87 which is extreme greed. It was 91 the prior week.
MSCI all country world index ETF rose 0.66%. It’s very close to its record high. It’s at $77.39 which is 15 cents below its record. It will likely break that very soon. In the past few days, the S&P 500 has been outperforming global markets. VIX is on pace to set a new 2019 high streak for the numbers of days it is below 15. It fell 1 point to 12.05. And it has been below 15 for 25 days. 2019 high is 26 days. Last summer/fall it had a streak of 66 days. That was prior to the 20% correction in Q4.
As you can see in the chart above, the net short position in the VIX is at a record low.
S&P 500 has gone 28 trading days without having back to back down days. That’s the longest streak in almost 8 years. I predicted it wouldn’t get to 30 days. Now, I’m getting close to being wrong. But I still think there will be a quick correction that’s painful for the bulls. They are extremely confident right now.
Even a 5% decline will bring a long of pain to leveraged traders. Too many people are short the VIX and betting stocks will move higher. The gains many thought would occur in 2020 have mostly been taken away. Without a correction, I see 2020 as being a weak year for stocks.
Trade Deal Is The Gift That Keeps On Giving
Gone are the days where stocks rally on bad news because it means the Fed will cut rates and save the day. Odds of a rate cut next year have increased. However, now stocks rally after bad news. Investors are confident there won’t be a recession and hopeful about a trade deal.
Latest news on trade that sent stocks higher was Larry Kudlow’s statement that there were very constructive talks about ending the trade war. He said, “It’s not done yet, but there has been very good progress and the talks have been very constructive. We’re getting close. The mood music is pretty good, and that has not always been so in these things.”
Now, I’m not saying a deal won’t happen (I think one will in about 3 weeks). But Kudlow has been positive for months. It’s amazing to see stocks ignore poor retail sales and rally because a person who’s known to say positive things said a positive thing.
Details Of Friday’s Action
Nasdaq was up 0.73% and the Russell 2000 was up 0.48%. Russell 2000 still isn’t at its 2019 high let alone it’s record high. It’s not a surprise it wasn’t up much. Poor economic data means rate hikes aren’t coming. Rate cuts are becoming more likely as the odds of a cut in 2020 is 61.7%.
2 year yield increased 2 basis points to 1.61% on Friday and the 10 year yield was up 1 basis point to 1.83%. 10 year yield certainly didn’t strongly support the rally in stocks. Every single sector was up except materials which fell 7 basis points.
This rally was boosted by healthcare which increased 2.21% to a new record high. It’s interesting that healthcare rallied because Warren’s odds of winning the nomination have increased slightly recently. They are up 2 points to 29% in the past 3 days.
As you can see from the chart above, the inverted returns of managed care stocks versus the S&P 1500 are highly correlated with Warren’s odds of winning the nomination.
In the latest Nevada poll from Fox News, Biden was up by 6 points over Warren. In the latest North Carolina poll, Biden was up on Warren by 22 points. Biden does very well in the southeast. I think he will lose the Iowa Caucus and New Hampshire primary and win the South Carolina primary in a landslide.
Even though the threshold to make the November 20th debate was raised to 3% in 4 polls, there will still be 10 candidates in it. Finally, in the December debate, the field will winnow because candidates need 4% in the polls. I expect there to be 6-8 candidates in that debate (6 have qualified so far).