Selloff Continues, Albeit Mildly
Technically stocks sold off because most fell even though the S&P 500 was up. S&P 500 was up one basis point, but the Nasdaq and Russell 2000 fell 36 and 31 basis points. We’re sort of in a selloff, but it hasn’t been deep. That makes sense because we are right before the election, the stimulus is uncertain, COVID-19 cases are increasing, and good earnings are coming out.
There are a lot of things going on at once. It doesn’t seem like the stock market will go up or down sharply until we get more clarity. Why sell stocks with earnings season going well? Why buy stocks with COVID-19 cases increasing and the election 3 weeks away?
Prior to this mini selloff, stocks were overbought. There still is euphoria in the story stocks, but the rest of the market isn’t as overbought as it was last week.
Very High Speculation
Before this choppy trading week, wome were saying how the market went from fear to greed very quickly. That comment is depicted in the chart below. As you can see, the net dollars positioned in S&P 500, Nasdaq, and Dow futures is the highest ever. 3 week change reversed from the lowest ever in September. It’s crazy that this stat shows there was more pessimism in September than at the bottom in March.
Stimulus Update
President Trump said this week that he’s willing to have a stimulus above $1.8 trillion. Pelosi holds all the cards as Trump is chasing the election. He probably wants to go with Pelosi’s $2.2 trillion deal, but the Senate Republicans won’t budge.
If Trump’s poll numbers stay weak, we could see him start to criticize GOP Senators for not getting on board. Whether anything passes comes down to whether the GOP Senate actually doesn’t support a stimulus or if it’s just McConnell holding everything up.
Details Of Friday’s Trading Session
Euphoria in markets never went away even though the Nasdaq fell over 10%. There is still extreme optimism from retail traders who think they can make triple digit gains easily without any experience. CLOU cloud index was up 54 basis points as Zoom rose another 4.2%. Investors honestly cannot believe what we are seeing. Zoom is worth $159 billion.
On the other hand, Zillow fell 4.7% as it is down 11.8% from its October 5th peak. Peloton was down 3.7% on its pedal recall, but it’s still up 54% in the past month. All this speculation in stocks like Zoom seems like child’s play compared to Hertz which was 143%. The firm got a $1.65 billion loan package while in bankruptcy.
Somehow, a bankrupt company saw triple digit gains in a day. This stock was just waiting for any good news as speculators love to toy with it.
Regional bank index was up 25 basis points which is surprising because the news suggests the stimulus plan is on life support. One will get passed is Biden wins, but that might not impress day traders and swing traders until after the election. 10 year yield had a very stable week as it ended the week at 74.6 basis points (it rose 1.5 basis points this week).
Nasdaq 100 crashed into the close. It fell 55 basis points on the day and 1.05% in the last hour of trading. Amazon was weak as it fell 2% (Netflix fell 2.1%). Investors are noticing a divergence between the big cap growth names and the story stocks which sometimes have no actual business.
Hot Stocks In A Separate League
Stocks like Nio have exploded even while the overall market has been down modestly. Nio was up 1.5% on Friday. It’s up an enormous 59.6% since September 24th. It’s hard to follow which speculative stock will be the next to receive hot money.
Tesla is down 4.7% in the past 2 days as some investors are worried about its market share losses in Europe. The firm has been cutting prices as demand wanes. Tesla is expected to report earnings this coming Wednesday.
Nio is the fun part of the speculation. Less fun part can be seen in Fastly and Draftkings which have been losing the hot money. Fastly fell 5.6% on Friday which brought its 3 day total loss to a staggering 34.3%. It’s still up on the month though.
So far, the dip buyers haven’t helped. Draftkings has been imploding. The stock fell 1.5% on Friday which put it down 30.5% from its top on October 2nd. This is while Penn Gaming is doing well. It rose 2.3% on Friday, putting it down just 4.6% from its record.
SPAC Bubble
Speculation is still here among retail traders. As you can see from the chart below, there is a huge swath of SPACs searching for companies to buy. This is genuinely scary because many of the SPACs that have already gone public are of low quality.
One can only imagine how bad the next round of businesses will be. Some of these SPACs won’t find a company to do a reverse merger with after the bubble bursts.
Arguably Good Data
There was a very large spike in COVID-19 cases, but I say it’s arguably good data because the number of people in the hospital only rose by 24 to 37,308. We need a few more days like that before saying the trend of spiking hospitalizations is near its close.
Other good news is there were 1.15 million tests which put the 7 day average at another record. At the recent rate, it doesn’t look like we will even get to 1.25 million tests per day by the end of the month. This is arguably the worst case scenario because the increase in testing is causing the media to freak out over the jump in cases, but testing isn’t up enough to allow life to go back to normal. We’re stuck in between.
7 day average of deaths fell by 2 to 678. Since cases have been rising sharply for about 1 week, we have 2-3 weeks to see if deaths rise. Everyone is hyper focused on Wisconsin which had 3,861 new cases which was a record high. Some think the spike will end this coming week.