Rally Continues For Small Caps
Large caps fell in a rare pullback for November. However, small caps were up again as they are overbought in the near term. S&P 500 fell 48 basis points and the Nasdaq fell 21 basis points. Small cap index was up 37 basis points. Reopening trade won again which is ironic because COVID-19 is worse than ever in America and shutdowns are slowing the economy in Europe. Spread has slowed in Europe, but so has their recovery.
In America, either more restrictions will be enacted in the next few weeks or the spread will continue. Let's reiterate that the stock market doesn’t care at all about the next few weeks of economic data. It has moved past COVID-19 with 2 vaccines showing promise. Vaccines could start to slow the spread late in Q1. If everyone sees a better economy starting in the spring, they will ignore the temporary rough patch.
Obviously, there is a chance the economy doesn’t recover as quickly as many expect. We will get to that issue in a few months. This economy is like a money losing firm with promise of future profitability. Speculators worry about profitability once it comes. As for now, we can put whatever hopes and dreams we have into our expectations and buy as many stocks as we can handle.
As you can see from the chart below, there have only been 22 occasions where the small caps have rallied at least 13% in 10 days since 2000. That’s about once per year, but most have clustered over a few quarters near stock market bottoms. We haven’t seen this pattern at tops. So we shouldn't take that to guarantee this rally isn’t over, but it is a nice confirmation sign.
Tech Still Crowded
Even though we have seen small caps beat out large cap tech in the past few weeks, U.S. tech stocks were widely considered to be the most crowded trade again in November. Earlier in this bull market, tech stocks were rated as the most crowded trade ever.
As you can see from the chart below, over 60% of fund managers in November stated long U.S. tech was the most crowded trade. That’s down about 5% from last month, but it’s still by far the leader.
Percentage saying short banks rose about 5 points to over 10%. Essentially, going short banks is the same trade as going long tech. Few are both overweight tech and banks (unless they use the barbell approach). People who are overweight tech like stocks such as Square and Zillow. People who are overweight Huntington Bancshares wouldn’t invest in a bunch of SaaS stocks.
Bitcoin made another appearance on this list which makes sense because it is up 55.6% in the past month. It is up 118.1% in the past year. It’s only down about 8.6% from its record high it made in late 2017. Even though bitcoin has a record market cap, it’s not discussed as much with the global pandemic going on, the political news, the wacky action in stocks, and the struggles many Americans are facing due to the lack of a stimulus.
Bitcoin is very far down on the list of topics to discuss. We have no idea where it will go in the next few weeks, but it might fall along with growth stocks when rates rise. It has no intrinsic value, but it will always have some value because it is beloved by a certain number of people. It didn’t crash to zero after the last bubble.
Tech Is Still Crowded, Not Value
It’s fairly well known that value has had a few bad years, culminating in 2020 which has mostly been awful. It’s also well known that value has done very well in November. However, calling it crowded just because most are starting to see the yield curve steepen and the economy improve doesn’t mean they are done going up. Just because it’s obvious the yield curve will steepen doesn’t mean it won’t.
Also, just because many people think value will do well doesn’t mean they are ultra-long value. They can’t be long value because energy stocks are still extremely low. As you can see from the chart below, investors are still overweight global technology like they have been for the past 11 years. This sector has been outperforming the market for over 6 years. Let’s see a few quarters of outperformance before we say the value trade is near its conclusion.
Reopening Trade Wins Again
Near-term action has been relentless towards the reopening trade. It leads almost every day. November has been a godsend for value managers if there are any left. Small cap value index was up 25 basis points and the Nasdaq 100 was down 30 basis points. Cloud index was actually up 1.2% though as Twilio was up 3.4%. Regional banks and oil services indexes were down 0.39% and up 1.35%.
Nio had an insane day as it fell 13.5% from its peak in the afternoon to its crash after hours. It crashed after hours before its earnings came out. When they came out, the stock recovered. It looks like nothing happened as the stock was up 2.17% in the cash session and down 1.05% after hours. That’s virtually no change. This is the most traded stock in the market. It’s a small Chinese electric car company with no profits. I’d never buy this stock.
COVID-19 Stays Grim
Heading into Thanksgiving, we still have record high hospitalizations and deaths above the peak in August. There are 76,830 people in the hospital which should translate into more deaths. 7 day average of deaths is already 1,160 which is the highest since the spring. Also, 7 day average should rise above 1,500 sometime in December which is grim.
Finally, the 7 day average of testing goes up every day as it is at 1.55 million. That’s not close where we need to be. As the chart above shows, the 7 day positive rate is 10% which might be peaking. If that’s the case, cases might start to fall in a few weeks. However, the fear is Thanksgiving gatherings will reignite the spread.