Most Overbought Ever
This is the most overbought market we’ve ever seen. That includes the January 2018 VIX shorting mania. It's because stocks have run up faster and there is more risk. In the beginning of 2018, there wasn’t much risk other than prices being too high. Now, we are potentially exiting a global pandemic, potentially seeing the trade war heat up, and entering election season.
When the market ignores risk, investors focus on it. Normally, many would be bullish because the economy is coming out of a recession, but COVID-19 is unpredictable and valuations are obscene.
As you can see from the chart above, the 44.5% gain in the S&P 500 in the past 53 days is the best performance since 1933. This rally is stronger than the one in 2009. Imagine if the entire bear market was rescinded in 2009. Some investors would be bearish then even though the economy was just starting an expansion which ended up being the longest ever. It took a global pandemic to end it.
US momentum short index is more than 50% above its 50 day moving average. Only other time this has happened was May 2009 in which it lost 15% in the next few days and didn’t reach a new high for over 2 months. Concept of a 15% correction seems absurd with the market levitating almost every day. S&P 500 is up 14.62% since May 13th and it’s now up 5 basis points on the year. US momentum short index is up 66% in the past 16 days which is the best performance in the past 2 decades by far.
Excited For History
We are witnessing market history. It isn’t the typical market where it is mildly overbought and it falls 5%. This is something special. CNN fear and greed index disagrees with me as it rose 2 points to 68. That’s only greed. That’s nothing to write home about. This week in the AAII report the percentage of bulls will likely surpass the percentage of bears for the first time in months. That’s also not a big deal. If stocks rally on Tuesday and Wednesday, the NAAIM index will get above 95 which is a major deal. It means stocks are ready for a correction.
A most interesting indicator is the put to call ratio which signals the market is outrageously overbought. As you can see from the chart below, the put to call ratio fell to 0.37 which has only been reached 4 times in the past 4,160 trading days. You can see the market’s reaction in the 4 blue boxes. There will be profit taking over the next 2 weeks. I see the potential for a 10% to 15% decline.
Retail Traders Love This Market
This is one of the craziest markets most have ever seen, which in itself is shocking. We just exited a bear market recession. It's unbelievable how quickly the market reached euphoria. It usually takes much longer to rally than to decline. This recovery has been lightning quick.
Retail traders aren’t moving the market, but they are moving bankrupt companies that are seeing their stocks explode. Hertz is up 574% since June 3rd and JCPQ is up 200% since June 4th. These are bankrupt companies.
Furthermore, the company with no sales, Nikola, was up 104% on Monday. This stock is a strong sell. Personally, I’d rather own Tesla. Nikola aims to sell hydrogen to fuel cell trucks. That’s a long shot as the technology won't likely be ready for a few years.
On the other hand, Model Y was rated the best car in the world in the WSJ. Tesla is a real company with real sales that’s probably overvalued. The stock hit a record closing high on Monday which was $949.92. It’s up 163% since March 18th. It’s up 121% year to date.
This retail speculation all leads up to the chart below which shows small trader call buys to open. There were over 12 million contracts bought which is about 4 times the normal amount. This speculation by retail traders is similar to the bitcoin bubble in 2017. When the stock market falls about 10% over the next few weeks or days, retail traders speculating in stocks like Nikola are going to lose most of their money. Companies with the worst balance sheets will underperform.
Review Of Monday’s Action
S&P 500 was up 1.2% on Monday. This was the 7th straight Monday rally which is the longest streak since May 2017. The Nasdaq was up 1.13%; it was the 3rd straight day with over 6 billion shares traded on the Nasdaq which is a record high. From 2009 to 2020 there wasn’t even 1 day where the Nasdaq traded 5 billion shares.
That's odd, because usually trading volume is low when stocks rally. Russell 2000 was up 1.97%. This rally is reaching impossible heights as the index is up 24.62% since May 13th. Just this latest run is better than the rally off the late 2018 low. If you go from the market bottom, this index is up 51.6% which is faster than anything most ever seen.
Leader of the retail traders, Dave Portnoy, has been talking about how easy making money in the stock market is as he has been betting on airlines and cruise ships. Spirit Airlines is up 219% since May 15th. He was right and Buffett was wrong. Every sector was up on Monday.
Best sectors were the utilities and energy which rose 2.64% and 4.32%. Personally, I’m no longer betting on energy as it has had an impossible to imagine run. A rally makes sense because the sector had never been that hated. We don’t know when the rally will end, but it is up to the point where the risk reward doesn’t make sense to many. OIH oil services index is up 156% since the bottom in March.