Now The Market Sees An Economic Recovery
Starting in July, this has been the craziest market most have ever seen under the hood. Factor performance dispersion is higher. Starting Friday, we have seen value small caps outperform after sharply underperforming large cap growth stocks since June 8th. There were many interesting movements on the day. Most interesting was in the 10 year yield which is now at 65.4 basis points which is up from 50.8 basis points on August 4th.
Investors have been calling for higher yields, so we're not surprised at the move higher. Some still see the yield getting to 1%. 2nd most interesting action was in precious metals. Spot gold fell 5.7% which was its worst day since April 15th, 2013. Gold is suddenly on a 3 day losing streak.
Silver ETF fell 13.6% which was the largest 1 day decline since September 2011. Another big change was that the tech sector fell for the 3rd straight day which ended its 107 day streak without a 3 day losing streak which was the longest such streak in history.
Big Reversal
Many had been wondering if the S&P 500 would set a record high within this winning streak. It almost extended the streak to 8 days, but then had a sharp reversal at the end of the day. From 1:25 PM to the close, the market fell 1.38%, ending the streak. The market would have just barely missed the record closing high if it closed at its intraday high. It’s tough to bet against the market hitting a high even though it’s overbought and the tech stocks are due for a major decline.
Once the new record is hit like everyone is looking for, there will probably be a correction. As you can see from the chart below, the 50 day moving average of the put to call ratio has never been lower in the past 18 years.
Details On Tuesday’s Action
The market is starting to see things my way which means we're starting to not be contrarian anymore. The market sees the cyclical upturn. Small cap value index was flat on Tuesday which was much better than the S&P 500’s 0.8% drop. It’s down 0.77% from its June 8th high.
If the S&P 500 hits a record high, small cap value should surpass its June 8th high. A big worry is in the past 5 days the 7 day moving average of new COVID-19 cases has stopped falling. Small cap value index is up 15.4% in the past month which is much better than the cloud index which is down 2.2%.
Biggest problem with the market in the past few days is that the tech stocks aren’t falling enough. Value stocks will likely hold their own in a correction. We're not expecting them to lead the next leg of this rally. They can’t increase as much as they did right after the late March bottom.
Momentum investors are starting to get slightly concerned and wondering why we can see much more pain coming. After all, the CLOU cloud index is on a 4 day losing streak in which it has fallen 9%. Shopify stock is down 11.2% in that period. To most stocks, this would be a big deal, but in Shopify’s massive rally in the past few months, it has fallen double digits several times. Tech bulls are actually buying the dip right now because they are confident. They say they are hoping for a larger decline. Their sentiment will shift when the cloud index is down 30%,
Nasdaq fell 1.69% as Apple fell 3%. Apple isn’t even close to done falling. This is going to be the end of the era where growth stocks outperform value by a massive amount. With higher rates, the FAANG stocks will underperform. Apple might become cheap by the time this bear market is over.
Apple is down 4% from its record high. It would need to fall 40% before you can consider it cheap. Russell 2000 fell 0.6% as it was dragged lower by growth stocks. IWO small cap growth index was down 1.2%. Nasdaq 100 was down 1.69%.
Worst sectors were real estate, tech, and utilities which fell 1.9%, 1.8%, and 2.1%. That makes sense because rates rose. It's a bit surprising that utilities fell this much because they hadn’t been performing well. Since June 8th, the sector is down 4.3% and since February 18th, it’s down 15.3%.
Tecla’s 5 For 1 Split
Tesla announced a 5 for 1 split which will put its stock in the high $200s based on current prices. Obviously, a split doesn’t impact the fundamentals, but it doesn’t trade on fundamentals anyway. Therefore, we shouldn’t be surprised it rose 6.5% on this new after hours.
Tesla was probably getting nervous about its stock’s recent decline. Keep in mind, S&P Global might not add it to the S&P 500 for months, if ever. Catalyst disappeared. It’s amazing to see people defending the stock’s rise on this news by saying more people can access the shares. That’s ridiculous. You can buy fractional shares. That means you can buy $5 worth of Tesla if you want.
Conclusion
Factor rotation has gone fully in favor of small cap value stocks as the cyclical recovery is here. However, the cloud stocks likely haven’t fallen enough. It’s amazing how much markets reacted to a small rise in the 10 year yield. Imagine the chaos that would ensue if the 10 year yield rose to 1% in a few weeks.
We would see major declines in tech stocks and precious metals. Speculative cloud stocks like Shopify could fall over 50%. I also think Tesla will fall over 50%.