Nothing Can Stop This Market
S&P 500 has only been down twice this month. Nothing can stop this bull market besides the Fed which won’t be raising rates anytime soon. A full return to normalcy because of a better COVID-19 treatment or its spread dying off may cause tech stocks to crash.
Since tech is such a large part of the market, the leaders will be gone causing the index to fall double digits. Nasdaq might even fall over 30% when this speculative phase ends. Cyclicals and small caps have done well. Apple and Tesla haven’t had a great week, but they are nearly flat, so they aren’t dragging the market lower.
Tesla is down 1.3% this week and Apple is up 0.37%. As you can see from the chart below, net call value traded has spiked as a percentage of Apple’s market cap. Spikes like this have previously come before crashes in the stock.
S&P 500 was up 0.26% on Monday, putting it up 6.59% on the year. This is setting up to be an average year which is amazing since there was a recession. Nasdaq is overheated without the recession. Fact there was one is mind boggling. Nasdaq was up 0.76% on Tuesday, taking it to year to date gains of 27.79% and year over year gains of 47.92%.
CNN fear and greed index is at 74 which is greed. It’s amazing it’s only at 74 as this is the most euphoric market we’ve ever seen. As you can see from the chart above, the MSCI US is 12.5% above its 200 day moving average which is the highest percentage since January 2018 which was right before the short VIX traded exploded.
Previous 5 times it has gotten 10% or more above its 200 day moving average in the past 9 years have led to declines of 10%, 6%, 5%, 10% and 34%. You can see a 10% to 15% decline coming with tech dramatically underperforming.
COVID-19 Deaths Fall Again
There were 40,098 new COVID-19 cases on Tuesday which is down slightly from last Tuesday when there were 44,015 new cases. A decline in cases in the past few weeks should lead to a rapid decline in deaths in September. So far, that decline hasn’t occurred yet.
There were 1,291 new deaths. Tuesday is usually the peak for the week, so the 7 day average fell from 980 to 965. If the average were to fall 15 per day, it would be at 665 in 20 days, meaning it’s a decent pace.
Salesforce.com Beats Hugely
This was the prime moment for Salesforce.com to report earnings. Investors are in love with cloud stocks and it was just added to the Dow. The stock reacted joyously to the report as it was up 13.5% after hours. It reported $1.44 in EPS which beat estimates for 67 cents. Sales were $5.15 billion which beat estimates for $4.9 billion. It had 29% sales growth which was down from its 30% growth in Q1.
Its EPS guidance was 73 to 74 cents which missed estimates for 77 cents. Its sales guidance was $5.24 billion to $5.25 billion which was above estimates for $5.01 billion. The company is expected to make $2.97 in 2021 which would give it an 82.5 PE multiple. Nothing matters in this market especially for cloud stocks.
Digital Transformation Goes Crazy
Cloud stock index was up 1.2% on Tuesday. It will explode higher on Wednesday due to CRM’s earnings. The index should close in on its record high as it is down 2.6% from its peak on August 5th. As you can see from the chart below, the term “digital transformation” in SEC documents has exploded in 2020. This is the buzzword of the past 3 years.
Business is migrating to the cloud. That's not denying the trend. Bubbles are usually rooted reality. They are just taken too far. Because everyone becomes so bullish, they ignore the worst businesses. In fact, the fraud stocks do the best (Enron). We are getting more supply of these software stocks because the market desires them. At a certain point, the supply of money losing companies will be too much and the cloud stocks will crash.
SPAC Attack
SPACs are an alternative way to go public. They are blank check companies that are already public which find private companies to acquire. A private company becomes public through the purchase. These are like IPOs except worse. Most IPOs are bad investments. Almost all SPACs are bad investments. This speculative craze in them shows how euphoric the market is.
As you can see from the chart below, over $30 billion has been raised via SPACs this year. That’s more than double last year which was the highest ever. There was about $12 billion raised in 2007 which was right before the financial crisis. We are seeing a similar speculative craze now except the recession is over. Bad news for bulls is stocks can easily crash outside of a recession. Think of October 1987.
AAII Investors Are Bearish
AAII sentiment survey for this week comes out tomorrow, but the chart below is interesting. As you can see, the 8 week moving average of the percentage of bulls minus the percentage of bears is the lowest since the bottom in March 2009. It was a reverse indicator at that point.
However, it was about as low in January 2008 before the financial crisis. In that case, it was early to see the negative catalyst. It will likely be correct in forecasting a crash again. These investors see the big tech stocks being in a bubble. Once you realize these investors see a bubble, you can figure they won’t turn bullish no matter how much stocks explode higher.
