Another Rally For Tech & Small Caps
The usual foes, which are small caps and large cap tech, joined together to rally on Thursday in spite of the weak jobless claims report and stalled stimulus talks. The good news was the FDA took a step towards approving Pfizer’s vaccine. At this point, if the FDA didn’t approve Pfizer’s vaccine, it would be a disaster for America’s health and equities. The S&P 500 fell 13 basis points, but the Nasdaq and Russell 2000 were up 0.54% and 1.08%. The Nasdaq 100 recovered to close up 40 basis points.
The table below shows the top Nasdaq 100 stocks since the election. Tesla is number 3. It’s amazing how many stocks are up over 25% in just over 1 month. 150 stocks with a greater than $250 million market cap are up over 200% year to date. If you add up the total each year from 2010 to 2019, there were only 152.
If December is a good month, we could surpass that total in 2020. It’s notable that the mega cap tech names haven’t done that well since the election. We’ve seen value stocks do well and the riskiest speculative stocks such as SPACs do well. That leaves out quality names.
Record Sentiment
Technically, the S&P 500 is on a 2 day losing streak, but don’t let that make you think the market isn’t overbought because it still is. The CNN fear and greed index is still at extreme greed. The most interesting sentiment reading is the NAAIM index because it rose from 103.17 to 106.11 which means it has been above 106 in 3 of the past 4 weeks and above 100 for 4 straight weeks.
As you can see from the chart below, the 4 week moving average is the highest ever. High optimism in this index hasn’t been a bad thing, but is still worrisome. It would be interesting to see what it would have looked like in March 2000, but it was started in 2007. 13 years of data isn’t complete for this crazy market.
Airbnb Explodes On Its IPO Day
As predicted, Airbnb had a great first day of trading. It went public at $68 and closed at $144.71 which left the CEO speechless because it was worth only $26 billion when it raised money in March during the heart of the 1st wave of the pandemic. The CEO might be too busy running his company instead of following markets because this was expected given the huge explosion in speculation this year.
As you can see from the chart below, stocks are exploding on their first day of trading similar to 1999. Airbnb is now worth $86.5 billion. Some said it could be worth $100 billion. This market is giving out $100 billion valuations like parents giving candy to children on Halloween. The money is free flowing. Airbnb has a market cap greater than Marriott and Hilton combined.
Nio announced a secondary on Thursday afternoon as it expects to offer 60 million shares. The stock rose 2.75% on the day, but then fell 6.35% after hours because of the announcement. The market is getting ready to give investors the mother of all supply to finally end this bubble.
The bull market can’t survive if the same number of speculators stay at the party. There needs to be more money flowing into markets to keep the whole thing up. Of course, issuers and investment banks aren’t trying to end the bull market. They are just acting in their own best interest in trying to take advantage of the frenzy.
Dot Com Bust
The tech boom had a bunch of high flying stocks that investors fell in love with just like now. Amazon, Tesla, and Netflix are in bubbles along with Shopify and Etsy. The table below shows the average PE ratio of the top 10 tech darlings in the 1990s was 90. That was over triple the S&P 500’s bloated 27 multiple. Earnings multiples rise when we are in cyclical slowdowns because earnings fall.
What you need to watch out for is high multiples on peak earnings like we had in early 2000. The S&P 500 returned -32% from the end of February 2000 to the end of 2002. These top tech darlings returned -71%. Lucent and Nortel went bust.
A few EV firms are going to go bust in the next 2 years as well. It’s interesting that HP stock fell 65% even though it started with a 15.6 PE ratio. It rose about 200% in the 2 years before the crash. Its momentum reversed. This wasn’t exactly a value stock in 2000.
Tesla Will Crash In 2021
Tesla announced it completed its $5 billion at the market stock sale as it is taking advantage of the stocks run up into its S&P 500 inclusion. There are only 6 more trading days until it is included. Many thought it would crash about 2 to 3 weeks before inclusion, but speculators are still holding strong as the stock was up 3.74% on Thursday. The stock is likely to go up in the 2nd half of next week when the indexes need to purchase shares.
spxwithtesla CHART
Index investors are getting hurt badly because they missed out on Tesla's big rally in 2020 and are about to hold on for all of the losses in 2021. As you can see from the chart above, with a 1% weight, Tesla makes the S&P 500’s PE ratio rise to 23.5 from 22.1. However, it will be higher because Tesla will have about a 1.5% weight. It’s good to know Tesla can’t crash the market on its own.
Conclusion
Everyday this market looks more like 1999. Airbnb’s IPO was another example of speculation gone crazy. 19 stocks have doubled on their IPO day this year. From 2010 to 2019, there were 25 doubles. The next big IPO will be Robinhood next year. It would be ironic to see the brokerage that is the epicenter of the speculative craze among retail investors be the last big IPO of this speculation cycle.