Extreme Market Gets More Extreme
The stock market and precious metals are on a rampage. S&P 500 is up 4 days in a row, the Nasdaq is up 6 days in a row, and gold has been up 12 of the past 13 days. Gold has never gone on such a run, so you can say gold has never been more overbought. It appears a double top is not in the works as it has powered through $2,000. Gold is up 86.3% in the past 5 years which is starting to become respectable. Remember, you don’t get dividends on gold.
This is the Nasdaq’s fist 6 day winning streak since early May. Prior to that, it had an 11 day winning streak in December. Euphoria in markets is dramatically higher than it was at the end of 2019 and early 2020. Nasdaq is up 22.6% year to date and 42.4% in the past year. It is having a fantastic year.
Ironically, the more it rallies, the more likely it is to be a bubble. Some could have argued we weren’t in a bubble 2 months ago, but now everyone who is of sober mind is aware it has gotten overheated. As you can see from the chart below, the Nasdaq 100’s 20 day moving average is up 82 days in a row which is the 3rd longest streak ever.
Does anyone doubt this streak will last another 8 days to break the record? It seems inevitable although obviously the daily winning streak will end soon.
Record Bearishness Extends
Percentage of bulls in the AAII survey increased 3.1% to 23.3% and the percentage of bears fell 0.9% to 47.6%. However, the streak of more bears than bulls extended to 24 weeks which made a new record. It's highly likely that there will never be more bulls than bears until there is a correction.
People calling this market a bubble aren’t going to become bullish if the market rallies a few more percentage points. Even if there is a cure for COVID-19 tomorrow, the stock market is expensive. In fact, a cure would cause it to fall because the software stocks would decline.
In the past week, Apple and Microsoft were the top stocks Robinhood traders invested in. About 87,000 new accounts bought Apple and 68,000 bought Microsoft. As you can see from the chart above, the market cap of the FAAMNG stocks is larger than the materials, energy, industrials, and financials combined. Even though there was a bear market and stocks have recovered, that wasn’t a true refresh.
Sentiment got really bad for about 2-3 weeks and then people bought the winners from the previous cycle. From the market’s perspective, it’s like the cycle continued even though the economy clearly went into a recession and isn’t close to back to normal. Unemployment rate is still higher than it was at the peak of the last recession.
Recap Of Wednesday’s Action
Investors are flummoxed that the stock market didn’t react to the weak ADP report. S&P 500 rose 0.64% and the Nasdaq rose 0.52%. Perhaps the market is starting to price in a stimulus passing and COVID-19 cases declining because the Russell 2000 rose 1.91%.
Small cap value index rose an impressive 2.22% as it is only down 4.9% from its June 8th high. It would be poetic if the small cap value index passed that high on the same day the stimulus passed. That’s unlikely though because the stimulus will likely pass this weekend.
Actually, this is a great market because no matter what leads on the day, the index always increases. Small cap value had a good day, but the large cap index still increased. This is turning out to be a good year as the S&P 500 is up 3% year to date. Regional bank ETF was up 2.5%.
Cloud ETF rallied again as it was up 0.91%. It’s now up 84% since the March bottom. This has been an impossible to believe rally in cloud stocks. Square stock was up 7.1% after its earnings report, which was accidentally released a day early, showed strong revenue growth. Square is up 23.5% since July 13th. Square has a $64.4 billion market cap. It’s inching closer to Wells Fargo which has a $100.5 billion market cap.
Best sectors were the financials, materials, and industrials which increased 1.5%, 1.5%, and 2%. Airlines had a great day as President Trump is planning to support the industry. He’s in favor of giving an additional $25 billion to the industry. This sent American Airlines up 9.5%. JETS ETF was up 3.4%. 10 year yield increased from 50.8 basis points to 55.5 basis points which finally stemmed the losing streak.
Some analysts think that low yields are here to stay, and are basing current valuations on very low yields. That’s dangerous for growth investors who seemingly are willing to pay any price for stocks. 10 year yield will likely increase to 1% this fall.
Fed is trying its hardest to raise inflation, COVID-19 cases are falling again, and a stimulus is about to be passed. Great news is another stimulus isn’t going to be needed because the unemployment rate will probably fall below 8% by the end of the year.
2020 Election In Focus
Once the stimulus passes, everyone will be focused on the 2020 presidential election. More COVID-19 deaths fall, the more the election will be pushed by the media to generate eyeballs. PredictIt shows Biden has a 60% chance of winning. He would raise taxes on corporations which is a big negative for the S&P 500. The market has completely ignored this risk.
Joe Biden will pick his running mate next week. First debate will be on September 29th, but there is a chance it is moved up because absentee voting will be so prevalent this year. 8 million votes might be in by that first debate.