Irrelevant Tuesday Decline
It’s as if stocks fell slightly on Tuesday to sprinkle in a down day every few days. We should hardly acknowledge that decline because this is one of the most euphoric markets most have ever seen. A 0.78% decline in the S&P 500 and a 0.29% gain in the Nasdaq does nothing to change the situation.
One selloff that is important was the decline in the extremely risky bankrupt stocks. Hertz fell 24.41% and Chesapeake fell 66.03%. Nikola, the hydrogen fuel cell stock with no revenues rose 8.82%, but fell 8.44% after hours.
Some have been toying with the notion that the meme stocks will crash, while the overall index holds up mostly. In this scenario, we’d see the retail traders blow up, while the index falls a few percentage points. On the other hand, I still think the cloud stocks will fall. If Microsoft and Amazon fall with them, the index will fall significantly because they are so large.
We haven’t seen such a decline yet even though Shopify stock is 10% off its high. Stocks like that don’t just plateau. They either explode higher or crash. Shopify is the most expensive cloud stock which is a dubious honor because the median cloud stock trades at a price to sales multiple in the mid teens.
Tuesday’s decline is irrelevant because the real decline that reverses the FOMO trade will be large. There could even be a mini panic. Personally, I’m ignoring the improving economic fundamentals and focusing on the reversal of this parabolic move which should come soon. Just like how expensive cloud stocks can’t just be steady, it's doubtful the market stays in a range; there will be a decline.
Once stocks stop rising, traders will be encouraged to take profits. Many retail traders want to sell once these stocks reach their previous highs. The overall market is within striking distance of its high. You want to sell before the crowd starts selling because once the waterfall begins, there’s no way to sell.
Details Of The Mania
It will be exciting to see the AAII survey and the NAAIM positioning index on Wednesday and Thursday. As for now, we still have a few great stats to review. SPY ETF’s 14 day RSI high hit 75.24. That’s usually a top signal, although, there are rare times it gets to the low 80s. In the past 11 weeks since the bottom, every single S&P 500 stock is up. Since at least 1997, there has never been such a situation.
CNN fear and greed index fell 1 point to 66 which is greed. Market momentum index in this indicator was upgraded from fear to neutral last week. SPX’s RSI has only been this overbought in February 1991 which followed the 1990-91 recession and was the start of the decade-long bull run. It’s extremely important to note that when comparing this bull run to the others which came after recessionary crashes, recognize that this market is more expensive than all of them.
The top chart above shows the percentage of S&P 500 members with an RSI that’s over 70 which is overbought. That reading over 40% has only been bested in the early 1990s. In fact, the stock market has rarely been this overbought. Don’t trust anyone using a couple examples like this to tell you where stocks are going. Only 2-4 examples of this occurring is not enough data to tell you anything.
Almost 100% of S&P 500 stocks are above their 50 day moving average which is also an extreme reading. Previously, it was mentioned that this has been the best 53 day run ever. That was a mistake. This has been the best run since 1933. Back then, there was no S&P 500, so you can argue that it was correct. Finally, the bottom chart shows the percentage of stocks above their upper Bollinger band is also elevated.
Retail Nonsense
Retail investors are extremely bullish on stocks. If you are known among your friends and family as someone who follows markets, you have likely fielded questions from new traders. They unfortunately are willing to take unlimited risk. It’s sad to see. The chart below shows the massive influx of Robinhood accounts in the past year. On February 19th, Robinhood had 16.41 million users. That spiked to 21.48 million on March 23rd.
A crash in stocks got more traders involved. Subsequent rally has surprisingly got even more people involved. User growth has been 73% since the bottom as people are piling on. That’s 37.13 million users. There aren't many people who would be willing to invest that aren’t yet doing it. Robinhood users are no longer dip buyers. They are FOMO buyers. Last ones in will lose the most money. It’s a disaster waiting to happen.
Stocks Are Expensive
The stock market is very expensive if the Democrats raise corporate tax rates next year like they want to do. This rally isn’t anything like the ones after prior bear markets because stocks have recovered quicker than ever to a more expensive level than ever.
It seems the market is not at the beginning of a multi-year rally. This is nothing like 2009. Even though the recession is over and we could be embarking on a multi-year expansion, this stock market is priced like one at the end of a cycle.
As you can see from the chart above, the S&P 500’s 5 year normalized PE ratio is in the 95th percentile. People keep saying the stock market isn’t the economy as stocks rally while the economy is weak. Personally, I think we will see that statement bear truth in the opposite direction as stocks perform poorly in the next few years even as the economy rebounds. Valuations still matter.