Slight Decline Monday
Following the stimulus agreement and the worries about a new COVID-19 strain, the stock market opened down largely on Monday. Throughout the day, the market recovered. It only ended up down modestly, with small caps ending up. Small cap value was the biggest loser. You can say investors were scared about the new COVID-19 strain or that there was profit taking in an illiquid market. Usually, volumes are low in the week of Christmas.
We can expect a modest move higher in the next 2 weeks and then a major reversal in the hottest stocks in January. Palantir was one of the hottest stocks on Monday as it rose 9.8%. It’s up 35.5% in the past month. The stock was up because the US Army’s Program Executive Office for Enterprise Information Systems executed the 2nd year of its partnership with Palantir. That’s almost a $5 billion gain in the market cap for a $113.8 million deal. Investors love this stock at any price like they do the other hot names.
Is The Market Overbought?
We are seeing euphoria in markets. For instance, Apple stock rose 1.2% and then 1.9% after hours on a report the firm will release an electric car in 2024. It can easily reach a record high on this news because the market likes EVs. Valuations are irrelevant. The CNN fear and greed index is at 63 out of 100 which is greed.
As you can see from the chart on the left, Bank of America’s bull bear index is at 6.7 out of 10 which is neutral, but nearing bullish. Equity market breadth is in the 100th percentile. Only credit market technicals have bearish sentiment as they are in the 27th percentile. If you can believe it, the bull bear index hasn’t reached euphoria all year. It only reached that point in January 2018.
The Nasdaq 100 Can’t Possibly Fall
Tesla stock cratered on its first day of trading in the S&P 500 as it was down 6.5%. The stock fell because people who were waiting for the index inclusion sold their shares. Plus, it sold off slightly because of the Apple news. If Apple develops the battery and software for a car while an OEM such as VW makes the hardware, it can be a deadly competitive threat for Tesla.
Apple uses small batteries in its smartphones, but develops efficient software and hardware to limit the juice used. Apple usually isn’t keen on developing a product that it doesn’t completely control, but doing a car with a manufacturer lowers the risk. Apple knows nothing about manufacturing such large products. 2024 is a long time for now, but Tesla is valued exclusively on the future as it doesn’t make a profit now.
Therefore, 2024 is dramatically more important than 2021. In fact, Tesla investors might argue 2021 is virtually irrelevant in terms of the valuation. The key point is to keep the story alive which means they must release the semi truck and the cyber truck next year. Obviously, we had the S&P inclusion and the stock split, but besides that, there hasn’t been much news on the company in the past few months. Battery Day included promises that might not be delivered upon.
Even with Tesla’s crash, the Nasdaq 100 was only down 19 basis points. It has been on an amazing run ever since the March collapse. The Nasdaq composite has increased more than 0.5% in 97 days over the past 9 months. Such a non-stop rally only happened in the 2nd half of 1999 as you can see from the chart below. The index rose for another 6 months before cratering. Tesla and most other hot stocks will likely have a terrible 2021.
Many Records In The Small Cap Index
The Russell 2000 was surprisingly up 2 basis points. That was all because of growth stocks. Small cap growth was up 48 basis points and small cap value was down 71 basis points. Small banks were up modestly, but the real winners were large cap banks because the Fed allowed them to buy back shares again.
JP Morgan was up 3.75% and Bank of America was up 3.9%. This new Fed allowance has nothing to do with regional and community banks as they have been allowed to buy back shares all year.
As you can see from the chart below, the Russell 2000 is up 96% from its March low making this the fastest almost double ever. 12% of Russell 2000 members have made 52 week highs which is the most since June 2018. The percentage making new highs surely won’t stay this high, but the overall index won’t necessarily crater because of this indicator.
Best Year For Momentum In Decades
This has been a great year for momentum investors as you should be aware of given the spikes in the FANG names as well as story stocks like Snowflake, Palantir, and Tesla. As you can see from the chart below, momentum beat contrarian by the most since at least 1998. It’s amazing that momentum hardly beat contrarian in 1998 and 1999.
This year is like no other. After the vaccine data came out, momentum had its worst selloff ever. Many wonder if that can be repeated in 2021 as the economy reopens and speculative stocks get swamped by dilution and new IPOs/SPACs. If contrarian wins in 2021 like it did in 2000, look out for a major decline in the Nasdaq 100, while the hated banks and energy stocks win big.
Conclusion
Stocks fell slightly on Monday, but the euphoria is still paramount in the hot stocks such as SaaS, SPACs, and online retail. In fact, Carvana rose 4.6% which put it up 119% in the past 6 months. Contrarian will likely beat out momentum in 2021 just like it did in 2000. If that’s the case, look out below for the Nasdaq 100.