Less Than 1% From Record High
The stock market is in an extremely euphoric state that doesn’t match the COVID-19 crisis which is set to be very deadly in December. There is high resistance at the current S&P 500 level combined with headlines of incoming shutdowns. Most don’t think there will be a 20% decline in the S&P 500, but also don’t see why it should keep moving higher.
Many would be satisfied with a 10% decline in the market. Cloud stocks were looking weak earlier in the week. They had an oversold rally on Wednesday. COVID-19 headlines could help them stave off the impending doom they face when people go back to work at offices and shop in stores more often.
S&P 500 was up 77 basis points which put it down just 23 basis points from its record high on September 2nd. Some see very little chance a new record is hit by the end of the year. If COVID-19 gets worse, pessimism will ensue. If it gets better, the large cap tech stocks will take down the market. Yet others see more downside in the software stocks than I see upside in the cyclicals. The market got its dessert without eating its vegetables.
It got the rally in the cyclicals without the severe decline in growth stocks we expected. Some software investors think this week had a bad correction, but that was nothing. We have much more to go. We might even see software crash, while the cyclicals stagnate which means there will be nothing to save the market.
Euphoria Is Here
This market looks a lot like it did in February because there is euphoria. Only investors who aren’t euphoric are tech traders who have had a bad month. They had their euphoric peak in late August though. That won’t be revisited. It’s tough to find value in this market as the S&P 500 is up 9.26% in the past 8 days. That’s a year’s worth of returns in less than 2 weeks.
CNN fear and greed index rose 8 points to 66 which is greed. We aren’t at extreme greed yet, but this indicator is underselling the optimism in the market. The stock market is wildly emotional as it goes from fear to greed often. This year has been particularly insane. And this month has been the third of the craziest of the year. March was definitely the craziest. Second was August because of the tech rally.
Euphoria is broad based unlike in August when it was mostly in growth tech. As you can see from the chart below, 76.5% of stocks in the Russell 3000 are above their 200 day moving average which is the highest since 2013.
Furthermore, there was a massive increase in the AAII bullish sentiment reading. This month has been exactly what was needed to spike confidence in this poll. Tech stocks fell. That’s important because investors in this survey see a tech bubble.
This caused the percentage of bulls to rise 17.9% to 55.8%. It’s amazing how the percentage of bulls was below average for months and suddenly it is hugely above average. This is the most bulls since the start of January 2018 which some consider to be the euphoric peak of the bull run.
You can argue we are still in the bull run that started in 2009 because the crash in March was the quickest large decline and recovery ever. It was more of a crash than a true bear market. There was a huge decline in the percentage of neutral investors as it fell 11.3% to 19.3%. Long term, average of bulls and neutral investors is 38% and 31.5%.
Percentage of bears fell 6.6 points to 24.9% which is below the average of 30.5%. There aren’t that few bears. Instead there are very few neutral traders and a ton of bulls. This is a negative short term signal. It supports an opinion that the market won’t hit a new record high by the end of the year.
It’s kind of amazing that we have such euphoria even as COVID-19 is set to kill tens of thousands of people by the end of the year. It could kill over 45,000 people in December alone.
Details Of Wednesday’s Trading Session
Wednesday was a role reversal as the growth tech stocks that had a terrible first 2 days of the week rallied, while the cyclicals declined. Stocks were due to reverse some of the huge movements in the past few days. Plus, we got headlines of incoming economic restrictions as cases hit a new record high.
Specifically, the Nasdaq was up 2.01% and the Russell 2000 was flat. Nasdaq 100 was up 2.24% and the small cap value index was down 1.25%. As you can see from the chart below, the market cap of the 5 big tech stocks fell to 22% of the market from 25%. This chart makes it look like those large caps will mean revert.
Cloud stocks spiked 3.4% and the regional banks fell 3%. It seems like the banks knew that if the bond market would have been open, the 10 year yield would have fallen sharply. That was proven true as the 10 year yield fell 4 basis points on Thursday morning. It will be curious to see if the banks fall again on Thursday even though they already fell without the long bond yield on Wednesday. One guess is the regional bank index falls another 2%.
If the market gets too crazy with selling the cyclical value stocks, they are a huge buy because we have clarity on the vaccine. We will see inklings of a return to normalcy as early as the Super Bowl next year in my opinion. Ticketmaster is testing out a function where you can buy tickets after you prove you got the vaccine. That was laughed at because the pandemic is terrible right now, but it’s actually a good way to encourage people to get the vaccine.