Market Is Unstoppable
Just like Friday, the small cap value stocks outperformed dramatically. Once again, the S&P 500 rallied (0.27%) even though the winners of the past few months didn’t drive it higher. It’s remarkable to see the tech stocks underperforming while the index increases. Bears have been saying that the stock market can’t go up without the winners. So far, that hasn’t been true.
However, we can agree with the bears because momentum stocks have much further to fall. Generally, value stocks don’t see the same level of speculation as the growth stocks. Plus, they are a smaller percentage of the market. This sector rotation won’t be as pretty as it has been in the past 2 days. Many are calling for a modest decline in value stocks which will be a vast outperformance to the growth names which will crash.
This is a very critical point for the S&P 500 because we are seeing the market leaders being taken out, it’s near its record high, and it’s on a ridiculous 7 day winning streak which means it is very overbought.
CNN fear and greed index hit 75 which is extreme greed. That’s the first extreme greed reading since this bull run started. It will be safe to call this a bull market once we see a new record high. It’s down 0.76% from the February 19th high. It’s now up 4% year to date.
It would be incredible to hit a record high on this winning streak. This is the first 7 day winning streak since April of last year when it went up 8 days in a row. It hasn’t gone up 9 days in a row since November 2004. The market would need one last gasp of air from the tech stocks to rally on Tuesday and Wednesday. I highly doubt that will happen.
Tech stocks haven’t fallen 3 days in a row for 107 days which is a new record. Tech stocks have nothing left to give as the momentum trade nears its end. It’s interesting that the S&P 500 hasn’t rallied more than 1% in this streak. However, it’s still overbought because of its intense rally since March 23rd.
Factor Craziness
Factor investing has dominated the market ever since cyclical stocks peaked on June 8th. As you can see from the chart below, factor standard deviations have been high just like in the past 2 bear markets. Cloud stocks fell on Monday as the index dropped 1.9%. It’s down 6.8% in the past 3 days as Alteryx is down 38.9%. It reversed most of its rally since early April in just 3 days. This is just the beginning as most of these cloud stocks will fall over 50%.
Shopify was down 4.5% which put it down 8.1% from its record close. Tesla was down 2.4% as it is down 13.7% from its record close. This is the biggest cult stock of the market. It needs to fall over 50% before you can think about buying growth stocks. It’s the biggest leader in the market with the least fundamental backing. Investors are very excited for battery day on September 22nd, but the craze is on its last legs.
Current decline isn’t even noticeable. We need to see it fall 20% before the excited bulls even notice. Then, we see the beginning of the panic where it all comes undone. Speculators hyped up the S&P 500 inclusion which is a weird thing to speculate on in the short term because it can happen at any moment. If the stock falls 50%, the exposure in the index will be half.
You can see the factor performance at work with the indexes’ performance. Dow was up 1.3%, the Nasdaq was down 0.39%, and the Russell 2000 rose 0.99%. Small cap value index was up 2%. It’s up 8.9% in the past 4 days. All of a sudden, the most hated stocks are overbought.
S&P 500 is facing resistance at its record high and the cyclical stocks are facing resistance at their June 8th high. Both are within 1% of those milestones. Stocks that do well when COVID-19 is at bay rallied which means the airlines exploded. JETS ETF was up 4.8% on Monday and is up 13% since July 31st. Tech sector fell 0.33%, while energy and industrials rose 3.08% and 2.43%.
FAAMG About To Crash?
Retail investors are trading extremely speculative stocks such as Nikola and Zoom Media. However, this craze isn’t about just retail traders. Big fund managers are all involved. Valuations haven’t mattered for years which means the winning investors don’t care about them. Recklessness has been rewarded. Buying Apple with a 35 PE multiple seems reckless. It’s almost the size of the entire Russell 2000. Regulations are coming along with a shift in sentiment.
As you can see from the chart below, the FAAMG stocks had the lowest 1 month average put to call ratio ever and it appears to be bottoming. When these types of extreme levels reverse, there is a huge change. It’s not as if these stocks will fall 10% and everything will go back to normal. They can fall 40% which would be a huge deal because they are so large.
Bearish On Treasuries
Personally, I’m very bearish on treasuries as the economy is seeing a cyclical upturn along with the decline in COVID-19 cases and the likely decline in deaths in the next few weeks. 10 year yield is all the way up to 58.3 basis points which is above the recent bottom of 50.8.
Junk bonds combine the decline in yields with the euphoric desire for risk assets. As you can see from the chart below, the corporate yield to worst rate is at 5.35% with a new issue priced at 2.875% which is the lowest priced junk bond yield that’s 5 years or longer ever.
yieldsplummet CHART
