Big Sector/Factor Rotation
This stock market never seems to go down. Either growth or value stocks do well. No matter what outperforms on the day, the S&P 500 always ends higher. On Friday, there was a major sector rotation out of large cap growth stocks and into small cap value names.
Even so, the S&P 500 still managed to extend its winning streak to 6 days. S&P 500 doesn’t even have small caps and it was positive. There was a last ditch effort to save the winning streak at the end of the trading session as it increased 0.65% in the last hour and 35 minutes. It closed up 6 basis points, putting it up 3.73% year to date.
The market is only down 1% from its record high. It will be interesting to see if the market can reach a new high while extending this very long winning streak. It would be doubly impressive to have a 7 or 8 day winning streak and a record high in a year with a pandemic. This 6 day winning streak is already the longest once since April 2019. 14 of the past 15 Mondays have been positive. Obviously, that doesn’t mean stocks will hit a record on Monday, but the trend is in its favor.
Details Of The Rotation
Nasdaq as down 0.87% which isn’t bad considering many of the cloud names were destroyed. Apple fell 2.27%. Apple will likely fall 40% which sounds like a lot, but consider its 35 PE ratio and only 9% net income growth over the past 5 years. That’s like 2% growth per year. For a hardware business, that’s way too high of a multiple. Services are important, but services only exist because of the iPhone.
If Android takes market share or if a new type of device comes out, Apple might be in trouble. Smartphones have only been our main computing device for about 5 years. They have only been popular for about 10 years. The idea that the smartphone is always how we are going to access information is ridiculous. Most are not smart enough to know which technology will disrupt the smartphone in the next 10 years, but we can be confident it will be a startup company that does so, not Apple or Alphabet.
Cloud Stocks Were Hammered
CLOU fell 3.35% which also isn’t that bad considering the recent blowups in tech. Alteryx fell 28% on weak guidance. It’s down 32% in 2 days. It’s notable that when growth stories break, the stocks don’t rebound. This stock is still very expensive. It’s not going to hit a new record high soon. It may never reach a record high.
After the late 1990s bubble peak, many companies went out of business. Even the successful ones took many years to get back to their prior highs. Datadog fell 16% after its earnings report; it’s down 21.3% in the past 4 days. Finally, Fastly fell 11.5%. It’s down 31.7% in the past 3 days.
These stocks aren’t done going down. Fastly is at the same price it was at 2 weeks ago. We need to see widespread weakness. Stocks that recently declined, might be the worst hit when the bubble bursts, but stocks like Shopify and Tesla are still going to be hit severely. They will fall by more than 50%. Tesla is down 11.6% from its record high which is nothing.
Nikola is up 21.4% since July 30th. It only reported $36,000 in sales. Its sales were from installing solar on the chairman’s house. That’s the most insane thing most have ever heard. GM is looking to spinoff its EV business. That’s like when Barnes and Noble wanted to spinoff its internet business in 1998.
At least GM is more known for electric vehicles than Barnes and Noble is known for websites. Penn National Gaming was up 11.7% on Friday. It’s up 44.8% since July 31st and 68.2% since July 14th. Investors don’t believe in this company because there are too many new online gambling apps competing with it.
Other Markets On Friday
Worst sector on Friday was technology as it fell 1.6%. 2 best were the utilities and financials which rose 1.8% and 2.2%. The financials rose because of the increase in the 10 year yield which was up 2.8 basis points. Because the yield is so low, that’s now a big move. It’s only at 56.8 basis points which a 6 basis point increase from 3 days prior.
Many are still calling for the 10 year yield to get to 1% in the intermediate term. It's surprising that it’s so low as the economy is recovering. Unemployment rate is slightly above last cycle’s peak. However, it is dropping quickly.
Dollar index had a rare up day as it increased 0.65% to $93.39. As you can see from the chart above, the net speculative long position in the euro is at a record high since the euro started trading in 1999. Similarly, the dollar sentiment index is near where it has bottomed in the past 9 years.
Price of gold finally fell as it was down 1.68%. It’s still above $2000 though. Silver was down 3.6% as it is usually more volatile. As you can see from the chart below, call volume in the SLV ETF is at its 2011 peak which is a very bad sign.
COVID-19 Update
There was a burst in COVID-19 cases. It was a data dump which occurred possibly because of the tropical storm. Even with this dump, there were only 63,246 new cases which was down from 71,113 the Friday before. There were 1,290 deaths. That was down from 1,458 from the prior week.
Media is now picking up on the decline in deaths which will probably increase consumer confidence. We can expect much improved consumer confidence numbers in August. 7 day moving average of new deaths peaked on August 4th at 1,129. It’s now at 1,047. It’s about to start accelerating to the downside. It will be below 1,000 in a few days.