Yet Another Rally In Small Caps
It’s surprising how easy it was to see the rally coming on Monday. It was so easy, some investors over thought it and didn’t buy beforehand. We knew Moderna’s vaccine data would be great and that it would come out this week. A 94.5% effectiveness of the vaccine helped boost the markets further.
Even though everyone knew this was coming, the party in small caps continued as the Russell 2000 was up 2.37%. The index is up 16.05% in the past 11 days making this the best 11 run since 2011.
As you can see from the chart below, the Russell 2000 was worth less than Apple for a couple days right when the Nasdaq 100 was peaking. Now it is over $500 billion more than Apple which makes more sense. Some still think Apple is too expensive, but now the Russell 2000 isn’t too cheap.
Way Overbought Market
S&P 500 is up 10.5% in November. Once again, the market is having a year’s worth of returns in 2 weeks. Only other better November was the 11.99% gain in 1928. It will be fun to see how this month stacks up in the record books if stocks mildly increase for the rest of the month.
Even a 13% gain would be quite amazing. The market was only up 12.68% this April. We are ahead of the pace set by the fastest recovery rally ever. That’s amazing! It also probably means we are near a correction. Only 18 stocks in the S&P 500 are down this month. That’s less than 4% of the index.
Small cap value stocks are overbought and large cap growth stocks are facing fundamental macro issues. There aren’t many opportunities to be had.
Small cap value is now overbought. This group is up 19.4% since October 28th. In that same period, the Nasdaq 100 is up 7.9%. It is 3.2% off its record high. One problem is that the Nasdaq is up at all. In the summer, value stocks were falling when tech was rising. Why should tech rise when value is leading? If FAAMNG stocks were down 20% from their peaks, the S&P 500 wouldn’t be at its record.
On Monday, the S&P 500 was up 1.2% and the Nasdaq was up 0.8%. Theory that this would be a triple top in the S&P 500 is looking unlikely, but it’s still possible. Despite the Moderna vaccine data, Zoom was only down 1.1%. This market doesn’t make sense. You can’t have Boeing go up 8.2% and Zoom hardly falling. Boeing is now up 40.2% in November. It’s closing in on its June peak.
Cloud index was down 0.4% which isn’t much given the rally in value stocks. Small value index was up 3.4% which put it down 5% year to date. It can end the year in the green. And it would be tough because of how overbought it is, but most funds still aren’t positioned towards value.
They need to sell their cloud stocks in anticipation of the reopening of the economy in a few months. Also, the Super Bowl could be a key marker for this recovery and reopening. Let’s see how many people attend the game. There definitely will be some fans in the stands.
Monday was an amazing day for energy and banks as the regional bank index was up 4.2%. It is 6.8% above its June high. It’s still down 11.7% on the year. It’s unlikely that it will end the year in the green. Oil services index was up 9.7% which put it up 44.1% since October 28th. Even with this great rally, the index is down 24.7% since the June peak. 2020 could be the year of energy as investors are woefully underinvested in the sector.
Tesla Is Added To The S&P 500
Now that Teslsa will be added to the S&P 500, the prediction that the stock wouldn’t hit a record high will be wrong too. It rose 13.2% after hours on the news. That doesn’t put it above its record, but we all know that record won’t stand as investors pile in to get ahead of the forced index buying just like they did in June before temporarily being disappointed.
This could be a sight to see as the stock gets close to a $500 billion market cap despite only making a profit due to government tax credits. Good news for those trying to beat the S&P 500 is it will be much easier to do it now that Tesla is in the index. By the time Tesla is added to the index, it will be even more overvalued than it is now. Larger it is, the bigger the impact its fall from grace will have on the index.
COVID-19 The Worst Yet?
We don’t have the actual numbers, but if hospitalization adjusted for the states that didn’t give data in the spring isn’t at a new record high, it is very close. It will definitely hit a new record within the next few days, if it isn’t at a record.
We really need to rely on better treatment to avoid more deaths per week than the peak in the spring. Some still don’t think the 7 day average of deaths will get above 2,000. But that’s not a victory as analysts report that over 30,000 people will die of COVID-19 in December.
As you can see from the chart above, 73,014 people are in the hospital. 7 day average of tests per day rose above 1.5 million, but we are still below where we need to be. We probably won’t get there before the vaccine starts to slow the spread. 7 day average of deaths per day is at 1,128 which is above the summer high. December and January will be deadly as the vaccine won’t come in time to save many people.