Another Big Selloff For Small Cap Value
COVID-19 trade is on which means large cap growth will outperform small cap value most days. Tuesday was an ok day for large cap tech and another disaster for small cap value. Bad COVID-19 data suggests this will continue, but good vaccine news can change that immediately. It’s very tough to trade the market in the near term.
Earlier in October, short sellers needed to worry about potential stimulus news. Stocks would spike for a few hours on any talks Mnuchin had with Pelosi. Now, Congress is on recess until after the election. Instead shorts need to worry about positive vaccine news. Difficulty lies in the fact that the market is trending strongly one way, but can reverse in an instant.
Recap Of Tuesday’s Action
It wasn’t a terrible day for large caps, but it was a weak one for small caps. S&P 500 fell 30 basis points and the Nasdaq rose 64 basis points. Russell 2000 was down 92 basis points. Even worse, small cap value fell 1.78%, while the QQQ rose 78 basis points.
Without the vaccine, his divergence would likely have been stronger. It doesn’t seem like there was any new catalyst. Each day cases increase and there isn’t a vaccine, the more markets worry. That’s even though we shouldn’t expect vaccine data in October, but it will come out in November. Don’t be tricked into being disappointed about the lack of data this week. It’s coming very soon.
As you can see from the chart above, the industrials were down the most as they fell 2.2% because the cyclical upturn is in doubt now that COVID-19 cases have exploded. Energy was down another 1.4%. This is starting to get unbelievable. Equal weight energy index is down 54.6% year to date.
Oil services ETF is down 44.2% since its June 8th high and 63.6% year to date. From the peak in 2014 to the trough in 2016, it only fell about 60%. The ensuing rally was weak as it only went up 54% from 2016 to 2017.
We can expect a much bigger spike in the coming months once a vaccine is discovered. Only up sector on Tuesday was consumer discretionary which was pushed higher by Amazon which rose 2.5%. Amazon does better when people are forced to stay home and order goods online.
Cloud stocks did well as the CLOU was up 76 basis points. Tesla was up 1%. It is down 14.8% from its August 31st peak. That could be its ultimate peak as it is late in the game for this bubble stock. Twitter is in beast mode as you can see from the chart below.
Their stock is up 76.5% since June 26th. One thing we have been taught in the past 7 years is Twitter is always a trade and never an investment. Will that theory be true again? We will find out on Thursday when it reports earnings.
Macro Theme Stays
A great thing about macro themes is they don’t change from week to week. That means they are reliable. On the other hand, it also means they can be wrong for a couple weeks or even a few months. As you can see from the chart below, the Russell 3000 growth index is valued way above its normal range.
Since 1995, this is only the 2nd time it has gotten way too expensive. Growth stocks have been expensive for months. However, when their time is up, they will have massive declines. For example, Snap trades at 81.6 times its 2022 EPS estimates. That is an insane valuation.
On the other hand, the Russell 3000 value index is fairly valued. It’s not as cheap as it was in March, but it’s a better buy than growth. It’s interesting that the value index has almost the same trending earnings growth rate as growth. The great thing about value stocks is you don’t need to buy this index.
You can find the best stocks. It’s possible to find growth stocks at a good price, but it’s like finding a needle in a haystack. With value, it’s much easier to find good deals.
Microsoft Sells Off On Good Earnings
Microsoft posted pretty great results. It's unlikely that the stock should have declined 1.66% after hours. Earnings per share was $1.82 which beat estimates for $1.54. Sales were $37.15 billion which beat estimates for $35.72 billion. The middle of its Q2 sales guidance range implies 8% sales growth.
New Xbox consoles should dominate this holiday shopping season especially since people are spending more time indoors. Xbox had 30% sales growth this past quarter. Azure, which is the most important business line, grew sales by 48% which was up 1% from the prior quarter and beat estimates by 4%.
Two year growth stack was 4% lower, but such high growth is very difficult to achieve at this scale. It will be interesting to see how AWS does when Amazon reports earnings on Thursday.
Weakest part of the quarter was commercial PC sales which fell 22% because support for Windows 7 ended. Plus, we had the pandemic and tough comps. We'll see how Apple does following its recent great quarter for Mac and iPad. This quarter doesn’t include the new iPhones. The firm reports on Thursday as well. That’s 3 important results in 1 day as this is the most important week of the season. Earnings season ends in about 2 weeks.
Conclusion
COVID-19 trade is on which means energy, banks, and industrials will fall, while healthcare and tech rallies. A problem with jumping on the bandwagon is that positive vaccine news could come out and ruin the trade. There is no chance a stimulus comes within the next few weeks, but there is a good chance Pfizer’s data is positive.
There is no set day for vaccine news to come out. It might be released before we all expect. It's ironic that stocks were rallying in the spring on vaccine news even though a potential vaccine was over 6 months away. Now that a vaccine is about 3 weeks away, stocks are falling. Early vaccines should be given out by the end of the year.