Big Rally, New Bear Market High
Shattering records, the stock market had a great Tuesday as it hit a new bear market high. At this rate, we could see a new record high before summer starts. However, stocks won’t continue at the latest torrid pace. This is similar to the rally off the low in December 2018. Stocks had a great initial burst and then continued at a historical average pace for a few months. Obviously, the explosion in Q4 and the start of 2020 was better than average. That spike made this bear market decline worse.
The stock market is highly overbought in the very near term (think hours) as it is up 4.1% since its Monday low. It was up 3.06% on Tuesday. It is approaching its 50 day moving average and already recovered over half of its losses. It’s only down 11.91% year to date. It’s down just 2.11% in the past year. That was a very quick bear market.
As someone who is rooting for the economy to reopen, I think the rally is a good thing. Currently we are focused on markets, but ultimately we all want the economy to get back to a sense of normalcy even if it is in a recession.
Amazon & Microsoft Explode
Amazon dominates the consumer discretionary sector. At the rate it has risen recently, it will dominate the entire S&P 500 soon. A bullish thesis a couple weeks ago suggested the market wouldn’t retest its bear market low because that would mean Amazon and Microsoft would have to fall. A scary aspect is they have gone parabolic. Investors are starting to worry about the staying power of this rally in these names. Many are choosing not to go long parabolic stocks.
If the world is in a disaster, even these companies can’t do well. Amazon stock was up 5.28% on Tuesday as it is up an astounding 36.18% from its bear market trough. It is at a new record high. Q4 2018 decline in this stock was actually bigger and tougher to recover from than this bear market. That’s because Amazon is taking massive share in retail.
AWS is in a relatively safe position. The company has a market cap of $1.14 trillion. Microsoft is the world’s biggest company as its market cap is $1.32 trillion. Its stock is up 27.74% from the bottom and it’s only down 7.9% from its record high. If Microsoft and Amazon crash, they will have a huge impact on the market because this bear market has dramatically expanded their share of the S&P 500.
Review Of Tuesday’s Action
Tuesday was a great day for markets as it wiped away Monday’s losses. An increase on Tuesday was more than we were expecting for the whole week. Nasdaq was up 3.95% as Amazon, Microsoft, and Apple exploded higher. Nasdaq is only down 6.34% year to date. 3 stocks just mentioned determine its fate. In other words, you can’t be bearish on them, while being bullish on the Nasdaq.
Russell 2000 was only up 2.09% because the banks had a terrible day. KBW index was down 1.62% as JP Morgan’s earnings hurt the sector. JP Morgan stock fell 2.74% as it reported 78 cents in EPS which missed estimates by $1.34. Its revenues were $28.25 billion which missed estimates by $1.2 billion. Normally, this type of report would cause a bigger decline, but it was mostly priced in already.
Best 3 sectors on the day were consumer staples, consumer discretionary, and tech which rose 4.23%, 4.19%, and 4.17%. Consumer staples were helped by Altria which was up 4.15%. Worst sectors were energy and the financials which fell 0.46% and rose 0.33%.
As you can see from the chart above, investors have decided to short high yield debt even though the Fed is buying it. Short interest in the HYG is near the March peak. We can understand the logic though. Oil prices are in the low $20s which is bad news for energy firms which dominate the high yield debt market. Retailers are also in trouble as JC Penny is considering filing for bankruptcy.
Fund Managers Are Skittish
In the April fund manager survey, managers were very bearish. That means they are chasing this rally to make up performance. As you can see from the chart below, cash jumped from 5.1% to 5.9% which is the highest level since the financial crisis. That would be a great bull sign if stocks hadn’t rallied sharply recently.
CNN fear and greed index increased 8 points to 45 which is neutral. According to the 50 and 200 day moving averages, stocks aren’t overbought yet.
COVID-19 Update
President Trump talked about some states opening on May 1st. That’s probably more realistic than his expectation for an opening by Easter. We been expecting a mid-May opening for a few weeks. The situation is improving. There were 26,945 new cases in America on Tuesday.
Bad news is there were 2,407 new deaths which is by far a record high. Previous high was 2,035 on April 10th. This is very sad news.
Good news is there was a decline of 128 net new hospitalizations in New York. That means there were more discharges than new patients. We need that trend to continue for a couple weeks before the situation gets back to normal for the hospital system. Only then can the New York economy reopen.
As you can see from the chart below, there have now been 8.9 COVID-19 tests per 1,000 people in America. Tests are in great shape as New York has 24.6 tests per 1,000. That’s more than South Korea which is at 10.1. Italy is at 17.7. There were 146,614 new tests on Tuesday in America.
There were only 2,972 new cases on April 14th in Italy which is the lowest since March 13th. At this rate, the economy will reopen in a week or two. We just need to people who have it to get better for the active number of cases to fall. It rose from 103,616 to 104,291. Also, Denmark reopened its schools on April 15th.