Massive Stimulus Rally
The stock market exploded on Tuesday in anticipation of a stimulus being passed later this week. It’s likely fully priced in now. And it's likely a stimulus will happen. This has been an amazing year for stocks as the S&P 500 and the Russell 2000 are up 14.4% and 17.5% year to date despite the pandemic and subsequent recession. Tuesday was the S&P 500’s 64th gain of 1% or more in 2020 which is the most since at least 1950. We even beat out the tech bubble!
As you can see from the chart below, this has been the strongest bull market ever for the S&P 500. The initial rally made sense because we had a better understanding of the virus and we realized the mega cap tech stocks would be fine. Many software and online retailers did well in the COVID-19 economy. We foresee a continued rally in value stocks, but see the overall market being brought down by growth stocks despite the continued improvement in the economy.
Many of the COVID-19 stocks have had a poor run. For example, Zoom and Ollie’s are down 29.7% and 28.5% from their recent highs. We can expect that weakness to broaden. With Apple’s 5% rally on Tuesday, it is down just 4.7% from its record on September 1st.
Overbought Market
The stock market is extremely overbought. The S&P 500 and the Nasdaq were up 1.3% and the Russell 2000 was up a massive 2.4%. The categories that we can expect to do good are doing well, namely small caps, value stocks, and emerging markets. However, the hottest bubble stocks are staying hot as Stitch Fix is up 79.5% since December 7th.
As you can see from the chart below, the 20 day moving average of call option volume has exploded this year. It’s at a record high. Millennial retail investors never get scared of dips and always come back to buy more. Their firepower is large and it never goes away.
Usually, these types of speculative markets don’t end well, but it’s tough to see how they end because every decline is bought. Maybe we will have a few years where the market does nothing, while international markets outperform.
This is the worst market to short stocks ever because the worst companies are doing the best. For example, Fuel Cell stock is up 305% year to date, while Northrop Grumman is down 16%. Investors hate great track records of profitability. They want growth at any cost. They want hype even if it isn’t backed by reality. Nikola was caught rolling its truck down a hill instead of having it run on its own power and the company is still worth $6.3 billion somehow.
The Next IPO
Investors seem most excited about Robinhood’s IPO because we will learn more about this speculative bubble which is fueled by retail money on their app. It will be ironic if the retailers who have pushed up other IPOs push up Robinhood itself. Most can’t believe the free trading firm has become this popular since so many other firms offer free trading.
Robinhood’s IPO will be early next year. As for now, we have the Wish IPO which sold 46 million shares to trade at $24 each on Tuesday. The e-commerce firm will have a fully diluted market cap of $17 billion. This massive inflow of supply in the speculative side of the market is going to hurt the incumbents.
This is purely on a supply demand basis. More money raised will also beef up their ability to compete with the incumbents. As an aside, Wayfair stock rose 7.4% on Tuesday. It’s still down 20.5% from its record high in the summer.
The chart above shows the 2 year sales growth estimates for some of the top software stocks. This isn’t meant to impress you. It’s meant to show you what’s priced in. If the consensus expects these high growth rates, there is little room for error.
Furthermore, one has to wonder if the market for their services can handle this much growth. The trend of digital transformations is real, but we see the benefit going to the end users rather than the providers. There is so much competition in the SaaS category. Many don’t see how most of these firms become profitable.
Best Asset Of 2021
Best asset class in 2021 will likley be energy stocks. The worst will be semiconductor stocks like AMD and Nvidia. Those firms are up 98% and 123% year to date. As you can see from the chart below, the most common answer was emerging markets. The 2nd most popular answer was the S&P 500 which some disagree with as it's likely to fall.
Oil will have a great year. It’s currently at $47.47. It will spike once demand comes back. Some investors agree with the 30 year treasury getting few votes because they think yields will rise. Regarding bitcoin, the only comment is the fact that it was a choice shows how well the cryptocurrency has done recently. If bitcoin was 70% lower, it's doubtful it would have been mentioned.
Tesla Addition Incoming
Tesla stock was down 1% on Tuesday which put it down 2.6% from its record high. We are at the moment of truth. None of the major ETFs that follow the S&P 500 own Tesla shares yet. They need to by Friday if they want to properly track the index. Million of shares will be bought by the indexes on Wednesday, Thursday, or Friday. Let’s see if Tesla can reach another record high and possibly top Facebook’s market cap.
The biggest news in the EV space on Tuesday didn’t come from an EV maker. The biggest news came from Chinese internet firm Baidu which stated it has EV plans. This caused the stock to rise 13.8% to the highest level since November 2018.
You know it’s a bubble when a firm can gain billions in market cap just from an announcement. This reminds us of stocks that would pop in 2017 on crypto announcements even if no real business was coming.