No Record High Friday
A record high seemed to have been all but assured this week, yet it didn’t happen. Considering how much stocks rallied on Wednesday, there is obviously resistance at the February 19th high. It’s not a coincidence that the S&P 500 rallied sharply on Wednesday, but stopped right before the record and that stocks fell modestly on Thursday and Friday.
If there wasn’t this resistance, stocks would have powered through the high. Next week is do or die. The market is very overbought, but that’s common at records.
Often when records are set, the market powers through them. That would mean a new record implies another 5% rally by the end of the year. It doesn’t seem like the market has that much gas in the tank. We just had the best 100 day rally in S&P 500 history and the 3rd strongest 100 day rally in Nasdaq history (it increased 59%).
Best rallies for the Nasdaq ended in January 1999 and March 2000. Some speculators are calling for a bubble in stocks, but we just had a huge rally. That was it. There isn’t much left to this explosion.
How can you expect more gains when retail investors are as euphoric as I’ve ever seen them, and the average money manager is leveraged long this market? Of course, they are all in the same stocks. They aren’t buying the banks or energy stocks. They are all in on disruptive technology stocks. Even Warren Buffett sold JP Morgan, Wells Fargo, and Goldman Sachs (he did buy Bank of America).
Complete Mania Unlike Anything Many Have Seen
It’s clear this is a mania. Experiencing the late 1990s won’t tell you when this will end. You can never perfectly time such euphoria because it’s irrational. No fundamental analysis is going to tell you when Apple will fall because it has been overvalued for months and only has become more overvalued as it has risen. You can’t figure out when an irrational buyer will stop buying if they’re not using the fundamentals or valuation metrics.
The chart below shows the extreme point we are at. As you can see, from the chart below, the 10 day moving average of the CBOE equity put to call ratio is 0.45 which is the lowest since 2000. This indicator is no guarantee that the stock market is about to plummet because in the late 1990s it was this low for years before the bubble burst.
In fact, some investors actually thought there was froth in the market in 1995. They would be shocked to see the spike from 1998 to 2000. That was unlike anything we have seen in American history. It was a greater bubble than the 1920s.
This Time Is Different
This situation is a lot different than the 1920s and the 1990s because we just exited a recession. Those bubbles were in great expansions. Many investors are lulled to sleep thinking the stock market can’t crash because we just had a recession. They think the recovery is likely to continue. Problem is the bubble stocks aren’t the only ones that do well in a recovery. In fact, some of these digitalization stocks actually will do poorly if life goes back to normal.
It's frustrating when anyone claims the market has more room to run because there was more speculation in the 1990s. While, that might be true, there is no new internet technology that should excite people. Cloud and online sales aren’t new stories. They were old stories that got rehashed because there wasn’t a true washout in the March bear market and many of these companies benefit from a temporary shift towards doing more business online.
Details Of Friday’s Action
This was the 3rd straight day a new high was within reach, but wasn’t hit. It could worry speculators if a new high isn’t hit next week. People are already discussing the possibility of this being a double top. That would be an epic reversal. Specifically,
S&P 500 fell 2 basis points, the Nasdaq was down 0.21%, and the Russell 2000 fell 12 basis points. Small cap value stocks actually outperformed as they were up 0.58%. The index is about 1% from its June 8th high. Regional banks rallied 1.32%.
CLOU cloud index was down 0.5% after its major rally Thursday. Fastly stock fell 3.9%. Even though many of the growth stocks fell, Tesla was up 1.8% as it hit a new record high. It will try to rally in the next month in anticipation of battery day.
Most investors have never seen a stock this hyped or seen an event hyped this much. There are tales of glory which make it unlikely to live up to the hype. There are several YouTube channels dedicated to only covering Tesla stock. Short sellers have mostly gone home after 7 years of fighting Elon Musk. This means when the stock falls, there won’t be short sellers to take profits (cover shares).
Conclusion
The stock market fell slightly on Thursday and Friday as there might be some resistance at the February high. There is extreme euphoria in the market. It's uncertain if there is enough energy to get this market over the hump.
Either way, this rally in the hot tech stocks won’t end well. Tesla is the worst offender as its stock can easily fall 60% in the upcoming downturn. It’s a toxic combination for retail investors to be all in and money managers to be leveraged long. It may be a good idea to avoid growth stocks like the plague.