Rally Redo
Wednesday was a redo of Tuesday’s rally except without the crash at the end of the day. A big difference was that this time tech stocks outperformed. They made up for their underperformance on the day before. This entire crash was based on President Trump tweets. It’s starting to not matter if a stimulus is passed before or after the election since the election is next month. It definitely matters politically, but we aren’t worried about that. We are worried about asset prices.
Our government doesn’t act quickly unless there is a major imminent emergency like there was this spring. Stimulus/lifeline this spring was the greatest fiscal policy success in American history, some believe. We can’t expect Congress to actually do another thing right.
Many have low expectations for them in terms of timing. Most of us do expect one eventually though. If Trump wins, it will be like what the GOP offered. If Biden wins, we will probably get a stimulus like the ones the Democrats offered. How far each side goes depends on which way the Senate swings.
Windshield Wiper Stock Market
It's clear that the stock market has had many factor days. Wednesday wasn’t a factor day as most stocks and sectors rallied. The chart below shows this market in action. It seems that market has been like a windshield wiper in that it has gone back and forth between factors.
If this trend holds true, it’s time to sell small cap value stocks and go all in on large cap growth stocks. I disagree with that. We are finally at the point where small cap bank stocks are going to explode to the upside and leave software in the dust. Large caps tech names could be hurt by regulatory headlines. Tech sector’s main issues are higher yields and a reopening of the economy.
Sentiment Swings Positively
Recent changes to the AAII surveys differ again. As you can see from the chart below, the advisory sentiment survey showed an increase in both bears and bulls (for the 2nd week in a row) which means the percentage of neutral advisors plummeted.
Bull bear spread is still elevated. It never got close to being oversold which supports the belief that we are already seeing an optimistic market. We could be a couple weeks away from euphoria. This indicator never truly got to fear. It doesn’t always have to get to fear, but you’d expect a bigger washout given how optimistic everyone was in August. This index clearly is one to fade unlike the individual investor survey.
AAII individual investor survey had major changes as we actually got close to seeing the record long streak of more bears than bulls end. Percentage of bulls rose 8.5 points to 34.7% which is slightly below average. Ppercentage of bears fell 4.1 points to 39% which is above average.
More people likely became bullish because tech has done poorly. These people in the survey think tech is in a bubble. Plus, they need to finally admit they were wrong after being bearish for months while stocks rallied. Them admitting they were wrong wouldn’t make me sell stocks though. In fact, I think they had a point about tech being too expensive. AAII survey has been bearish before crashes. It’s actually not something you should fade.
Details Of Wednesday’s Rally
S&P 500 rallied 1.74% as it reversed Tuesday’s losses. Nasdaq spiked 1.88% as big tech outperformed. Amazon rose 3.1%. Many traders are probably wondering what the point of Tuesday’s selloff was. Its stock has been choppy for a few days now. Russell 2000 was up 2.14%. This was a rare day that wasn’t dominated by factors.
Cloud index was up 2.1% which means it’s now only down 3.2% from its record. Shopify looks a lot like that index as it rose 3.1% on Wednesday and is down 5.4% from its record. Draftkings was down 6.1% which now puts it down 16.4% in 3 days. That stock offering has been a disaster for the stock. For once, the business fundamentals are mattering temporarily.
Regional bank index was up 2.8% which means it is up 16.5% from its bottom on September 23rd. It’s right in the middle of its recent range ever since it bottomed in March. Technically, the recent rally is meaningless unless it breaks out above the June 8th high. It’s currently at $39.5; the high on June 8th was $46.02. We have far to go before this rally will matter.
New Companies Have Been Winning
You probably aren’t surprised to hear that new companies have been beating old ones because new firms are more involved with technology. They have adapted better to the COVID-19 world. The chart below separates companies by generation. As you can see, boomer and older stocks along with generation x stocks have done poorly.
Millennial stocks have done well, while generation z and younger stocks have been flying. Some investors think that you can’t own any companies that have been founded following the financial crisis because they haven’t been tested. Boy has that been a bad strategy in the past few years!
It's unlikely that this will continue though because the new technology companies are overvalued. Even a great company like Visa is extremely expensive. It’s one of the most crowded trades in the market.