Huge Wednesday Rally
Some investors thought the sharp reversal on Tuesday afternoon was a key signal. That was a mistake as the market had a huge rally on Wednesday for seemingly no reason. S&P 500 was up 1.4%, the Nasdaq was up 2.13%, and the Russell 2000 was up 0.52%.
Mega cap growth stocks destroyed the small cap value stocks after the latter had outperformed for 3 straight days. Tech came back with a vengeance after having its first 3 day losing streak in 107 days which was a record. Small cap value index fell 3 basis points. Being flat on the day was huge underperformance.
Nasdaq 100 was up 2.52%. The leader of the pack was Tesla as it rallied 13.1% on the news of its stock split. This announcement had perfect timing because it was oversold. It had been down 16.4% in the prior few weeks. It’s now back near its record high. Many are still hugely bearish on this stock.
However, recognize that the stock might hit a new record high as investors get hyped for battery day on September 22nd. This is one of the most hyped events in company history because it was delayed due to COVID-19. It’s bigger than launching a car because this new technology could affect all the cars.
The battery is expected to be made in house and have a 1 million mile lifespan. One of the biggest worries prospective electric vehicle buyers have is about replacing the battery. If you buy an EV and the battery needs to be replaced after 5-10 years, that will cost you more money than you save in gas for years. Hope is that Tesla can use the batteries after the car isn’t in use anymore because they will still have juice left.
Electric cars still aren’t viable alternatives to internal combustion engines for most people because EVs are too expensive. Key is to lower the cost of the battery. Once EVs become cheaper, customers will go crazy over them because they require less maintenance and have instant torque. We don’t expect that threshold to be reached for another 3-5 years. But Tesla investors think battery day will help Tesla get there by next year or whenever the new tech is implemented.
Retail Traders Are All In
Besides Tesla, the big tech stocks did well. They rallied as if they were extremely overbought because people can’t fall out of love with these names. They have done well for years. Investors have been rewarded when they have bought the dip in the past 6 years. They aren’t going to stop until everyone is involved. Tesla and Apple’s splits might be a sign the euphoria is reaching a peak. Jim Cramer asked for more stocks to split to get retail traders involved which is illogical for a few reasons.
Firstly, retail traders looking to buy a few hundred dollars worth of stock won’t impact markets. Secondly, retail traders are already in the market. As you can see from the chart below, the lockdown and commission free trades caused an avalanche of trading from newbies. They already have access to fractional shares, so smaller share prices have little impact.
Tesla and Apple are already two of the most popular stocks among retail traders. If retail traders were limited by the high share price, these stocks wouldn’t be 2 of the most popular holdings on Robinhood.
It’s annoying when traders claim this market isn’t as euphoric as the late 1990s. That doesn’t matter. It’s crazy to bet on this market getting more euphoric. You’re betting on irrational behavior continuing. CNN fear and greed index is only at 75 which is extreme greed. However, it’s not the S&P 500 that’s in a bubble; it’s the tech stocks.
There was significant capitulation in the AAII investor sentiment survey. Remember, this survey has been showing more bears than bulls for a record period. There were 6.7% bulls this week as it went up 30% which is 8% below normal. There were 5.5% fewer bears as it fell to 42.1% which is 11.6% above average.
Bearishness is no longer extreme. Maybe if the market hits a record high, sentiment will get back to normal. S&P 500 is about 6 points below its record high. Those been saying that investors in this survey wouldn’t turn bullish unless stocks fell were wrong. They can’t take being wrong any longer. It might mark a top when there are more bulls than bears.
Big Tech Still High
CLOU cloud index was only up 0.6%. However, Apple and Microsoft led the market higher as they were up 3.3% and 2.9%. Amazon was up 2.7%. Volume in down stocks in the Nasdaq was more than half the total which never happened in a day where it rallied more than 2%.
Tmes where more than 40% of the volume was negative were all in 1999 and 2000 which is an eerie signal. There have been spooky signals like this for a couple months, but FANG hasn’t topped. Tech sector did the best as it was up 2.3%. All sectors rallied except the financials which fell 0.29%.
As you can see from the chart below, the financials are only 10.3% of the market which is about where they were at the bottom of the financial crisis. Energy is 2.8% which is about where it was at the tech bubble peak. Technology including Amazon is 30.7% of the market which is about at the peak in 1999. 10 year yield hit 68 basis points on Wednesday which was about 17 basis points higher than the bottom on the 4th.
Conclusion
This market is very haphazard. After pricing in an economic recovery, it reversed course and fled back to the tech stocks. After finally declining after a 7 day winning streak, it spiked. It missed the record closing high by just 6 points. Surely, it will hit a new record this month. Once it does, many more stubborn bears will capitulate.