Moment Is Here
Recently, many have recognized the possibility that this would be a historic moment in markets in terms of euphoric speculation. Mostly that was because of the unprecedented new retail trading accounts. In early to mid-May we thought there were some buys. Then, several investors started becoming more bearish in late May and early June.
2 weeks ago, people were calling for a minor 5% correction because stocks were heated. They have continued to get more heated. This market has gone parabolic. That’s a very bad sign for bulls. We can expect all the gains in the past couple weeks to be wiped away. Stocks usually don’t rise this quickly in bull markets. In fact, this was the best 52 day period ever, so you can say they never rise this much, period.
Eventually, retail trading will become a big problem. This market will go out with a blast. It won’t be like the period from mid-April to mid-May where stocks stabilized. There will be sharp volatility in June. By the way, the VIX index fell 1.29 to 24.52 on Friday. This market action reminds me of bitcoin in late 2017 and early 2018.
Bitcoin was probably the biggest speculative bubble of our lifetimes other than the late 1990s tech bubble. There won’t be as much of a decline as bitcoin had in 2018. Many don’t even expect there to be as much of a decline as there was this March.
Remember, when stocks were extremely overheated in January 2018, the correction was only in the low double digits. People forget that the stock market was expensive in February. There is no way the market should be at February levels with this economy. We already know it’s getting better, but the whole recovery is already priced in.
S&P 500 is only down 1.14% year to date. We expected about a 5% increase this year before the deep recession. Now we can’t possibly believe the recession will lead to stocks doing better than they would have otherwise done. Year over year, the stock market is up 13.01% as if this was a normal period. That’s unbelievable! S&P 500 is down 5.68% since February 19th and it’s up 13.26% since May 13th.
Right now, it feels like the major industrial stocks have an all-clear sign to rally back to their previous highs. Boeing was up 40% this week. However, Boeing took on a massive amount of debt this year and won’t be operating normally for many months. It shouldn’t go back to its previous high for many quarters. Investing isn’t that easy even though it seems that way right now. Whenever it seems like going higher is a given, sell. Don’t wait until selling becomes obvious.
Nasdaq is up 9.38% year to date, making this a fantastic first half as it’s on pace for an over 20% gain. It's highly doubtful that one will materialize. Tech stocks are about to lead the correction. CLOU cloud stock ETF actually fell 0.3% on Friday which was an amazing day for markets. Nasdaq is up 29.55% year over year. That’s spectacular; it won’t continue.
Let’s Look At The Euphoria
Unbelievably, we are already at such a euphoric level. January 2018 peak in euphoria was like nothing we had ever seen. That was the high for the cycle which was correct. February 2020 didn’t get that high, but it was close. NAAIM index in December 2019 was impossibly high. Usually, this level of euphoria happens late in cycles. This new expansion is probably a few weeks old, yet the market is acting like it is 5 years into a bull market.
Part of that is related to the stimulus checks and unemployment insurance people got which is flowing right into stocks. Consumers paid down debt, increased savings, and invested the money. They had nowhere else to put the money because they couldn’t go out.
Many are curious if the economy reopening causes people to stop investing. A market crash could possibly do that. Cloud stocks will possibly fall in excess of 30% which will cause retail traders to retreat. Many are extremely bearish on the online gambling stocks which have become popular with retail traders.
The table below shows the new index called BETZ. That’s a strong short. You can see all the gains in these stocks like DraftKings and Penn National Gaming. Dave Portnoy, the newly minted trader, believes he should retire and invest in stocks for a living because he’s such a genius. That’s a case study on retail investor sentiment.
NAAIM index was in the low 90s this week. If that survey would have been taken on Friday, it would have been in the mid to high 90s. I want to see stocks rise in the first half of next week, just to see how close the index can get to 100. CNN fear and greed index rose 4 points to 66 which is greed. That’s not a sell signal. The chart below shows the 14 day S&P 500 relative strength index is at 73.24 which means the market is overbought. One or two more up days would send this to a historic level.
14dayrsiat73 CHART
Details Of Friday’s Action
Stocks rose because of the labor report. Don’t be fooled into buying stocks because of it. This was a good report, but stocks have already priced in the entire recovery. It’s now time to fade retail traders. The S&P 500 was up 2.62%, the Nasdaq was up 2.06%, which was a record high, and the Russell 2000 was up 3.79%.
Small caps are up 22.21% since May 13th which is a much stronger rally than the one off the March low. The index is down 10.95% from its February 19th high, but we can still expect a correction. Yes, the economy is headed in the right direction. The problem is everyone else knows that too. That’s why the big winners on the day were the cruise stocks with Royal Caribbean up 20.4% and Carnival up 16.4%.