No Record High On Thursday: Small Cap Value Underperforms
The stock market delayed a new record high one day by falling on Thursday, but the hottest stocks continued to win. It appears small cap value’s outperformance streak ended at 3 days. This streak went from last Friday to this Tuesday. Every time small cap value outperforms, whether it’s in July or August, people call for the factor to start a multiyear long run of outperformance.
People keep expecting the large cap growth and speculative momentum stocks to fall, but these weak periods just end up being corrections. As you can see from the chart below, small caps have been underperforming large caps since 2013. Since the bottom, small caps have modestly caught up, but they haven’t come close to making up all their excess losses in the bear market.
No Stimulus, But Apple & Tesla Don’t Care
Specifically, the S&P 500 fell 0.2% and the Russell 2000 fell 0.22%, while the Nasdaq was up 0.27%. CLOU cloud ETF was up 2% as it extended its winning streak to 2 days following its recent correction. Alteryx and Fastly were up 2.4% and 5%. It’s very tough to call a top in this wildly speculative market.
Even bitcoin is catching a bid as the cryptocurrency is up 27.4% in the past month and is almost at its 2019 peak. If it rallies slightly more, it will be the highest since the 2017 bubble which peaked in January 2018. The chart of bitcoin is starting to look like the chart of the Nasdaq divided by the S&P 500 except its peak was in 2018 and the Nasdaq/S&P 500 peak was in March 2000.
Small cap value index was down 0.9% as Congress shows no sign of passing a stimulus this month. Congress might not act until bad economic data comes out which might not happen soon. Another aspect might be political as one side might think the voters will like if they compromise. Obviously, public opinion matters now more than usual since the election is in November.
Of course, Apple and Tesla were up. Apple was up 1.8% which was a new record high. It now has a $1.97 trillion market cap. When the S&P 500 hits a new record high in the next few days, Apple will surely reach a $2 trillion market cap which would be the cherry on top of this rally. Biggest catalyst for Apple is its new devices which are coming out in the next few weeks. They will have 5G which might spur upgrades.
However, it's possible that Mac and iPad sales growth will fall as less people work from home and the people who are working from home already bought their devices last quarter. This is like how Netflix had weak guidance because everyone already subscribed to them during the pandemic.
A negative catalyst for Apple is the lawsuit with Epic Games over its removal of Fortnight from the App Store. This one lawsuit won’t matter to Apple. It’s important because it might be the first of many as Apple’s handling of the App Store is being called anticompetitive.
Tesla is the hottest stock out there. It is the bitcoin of stocks. Shorts have been wrong about Tesla for about 7 years. Tesla stock was up 4.3% as it just missed reaching a new record high. Tesla is very likely to reach a record high in the next couple weeks and keep rising because of the hype surrounding its battery day on September 22nd.
Another hype is of course about the stock split which will occur later this month along with Apple’s split. Fact that anyone is excited about a split means we are reaching late 1990s level euphoria.
Smart & Dumb Money Love This Stock Market
Everyone loves this market. They have specific affection for the disruptive technology. There isn’t much love for the value stocks. Keep that in mind when you wonder how value stocks will perform if there really is a crash in growth names.
NAAIM exposure index got above 100 as it rose from 94.55 to 101.2 which is the highest reading since June 2018. The index has been above 90 for 5 straight weeks which is the longest streak since the one that started in September 2017 which lasted 7 weeks.
It’s far from a guarantee that stocks will correct now that the average money manager is slightly leveraged long. However, this has also been the best 100 day performance for the S&P 500 ever and retail investors are on board like nothing we have seen since the late 1990s. In other words, a crash is more likely now than it was in June 2018 or September 2017.
As you can see from the chart above, dumb money is very bullish as well. Retail traders are enamored with call options as they print money. This flux in individual stock speculation is unlike anything many have ever seen. People are discounting retail speculation because Robinhood traders actually caught the bottom. However, recognize the fact that their beginner’s luck is fueling the intense speculation we are seeing now. This is unsustainable.
Potential Election Season Volatility
VIX term structure shows the market is anticipating volatility this fall. As you can see from the chart below, investors see volatility peak in October right before the election. To be clear, just because investors see volatility doesn’t mean it’s coming.
It's actually comforting that investors aren’t ignoring this election. One poll called PredictIt shows Joe Biden has a 59% chance of winning and Donald Trump has a 43% chance of winning. Remember, in 2016 some polls actually showed Hillary Clinton with a 90+% of winning, so of course people are now very leary of polls.
Cyclical recovery that we can see playing out in August and September should help President Trump. If the number of deaths per day fall like expected, it should also help Trump. Average of national polls has Biden up by 7.4%.
