Small Caps Cheer On The Stimulus
Russell 2000 was up 1.56% on the premise that a stimulus is coming. Small caps will sell off hard if nothing passes. In the past, when the market rises in anticipation of a catalyst, when that catalyst happens, stocks won’t rally further. That’s rational, but it’s not always how the market works. Small caps will rally even further on the news of a deal. It’s definitely not totally priced in as many believe don’t believe it will pass. Everything is based on hearsay. We will know if a deal will pass within the next few days.
Originally, the House delayed a vote on its $2.2 trillion bill to allow Mnuchin and Pelosi to make a deal. House passed that stimulus later Thursday night, but it doesn’t matter because it’s dead on arrival in the Senate. It's highly doubtful the Dems will get everything they want. That’s not how compromises work. Mnuchin and Pelosi are crafting a deal. If they agree on something, there’s probably a 90% chance it passes.
Pelosi said the Dems and the GOP are “way off” but hopes for a deal. Most don’t think they are that far off. There is about a 65% chance something gets done. Good news is we will know soon. If nothing gets passed within the next week, we will need to wait until early next year for a stimulus. By then, the economy should be in good shape if COVID-19 doesn’t come back hard in the winter. Poor and lower middle class people need money now, not in 4-6 months.
Extreme Retail Speculation Continues
Thursday was a great day for the riskiest retail stocks. Nikola rose 17.7% which means it’s now up 34.8% in the past 2 days. It still doesn’t have a real business. It’s tough shorting speculative stocks in this environment. Just when you think they are down and out, they recover with a face ripping rally on nothing. Furthermore, the SPAC which has the ironic ticker SPAQ was up 4.2%, putting it up 15.8% since September 24th.
Online gambling stocks are on fire. It’s as if it’s impossible for them to fall. Their momentum is unlike anything we’ve seen besides the rally in Bitcoin in 2017. Penn National Gaming was up 1.9% which put it 29 cents from its record high. That stock is up 704% in the past 6 months.
Deutsche Bank called it an overvalued internet meme stock which I agree with. Draftkings was up 5.1% which put it at a new record high. It’s up 405% in the past 6 months which looks bad compared to Penn. However, it’s beating Penn in the past month as it’s up 55%.
The chart above contextualizes the extreme speculation we have seen in stocks this year. It really is the most euphoric market we’ve ever seen. As you can see, the number of stocks in the Nasdaq that rose more than 400% in the first 9 months is the highest since 2000. It’s even higher than 1999.
At their individual peaks in 2000, there were 60 stocks up at least 400%. About half of those must’ve fallen by September as the Nasdaq peaked in March 2000. It’s crazy how this market is more euphoric than 1998 and 1999. Only early 2000 compares to it.
You’d think that would mean the peak is close, but the Nasdaq’s correction didn’t stem the tide. Speculators are back and only slightly less ready to risk their money in meme stocks. Ratio of the Nasdaq to the Russell 2000 is almost as extreme as it was at the peak in 2000.
Details On Thursday’s Action
S&P 500 was up 53 basis points and the Nasdaq was up 1.42%. It was a great day for the social media stocks as Twitter was up 5%. In the first half of the year, Twitter was left behind. It was the ugly duckling of tech and media stocks. Optimism around user growth and the new board members (activist investors) has caused the stock to rise 61% since its bottom on June 26th.
This quarter’s earnings report is massively important because it needs to show signs of improvement or else it will crater like it has after every other time it has risen since its IPO in 2013. It hit a 5 year high Thursday. But it’s only up 12% in the 7 years it has been publicly traded. That’s with no dividend, making this a disastrous investment.
Speaking of disasters, the worst investment of the year got worse on Thursday. Energy stocks crashed as oil fell to $38.29. Energy sector fell 3.1% and ExxonMobil fell 3.5%. It’s clear that Exxon stock wants to re-test its March bottom. It’s down 39.5% since June 8th and only up 5.3% since March 23rd.
Exxon is practically the only company of significance in the energy sector. There aren’t many big cap energy names left. That’s why the chart below shows its weighting in the S&P 500 is at a record low. BP is the closest of the major oil companies to a new 2020 low as it’s up 4.5% from its bottom.
COVID-19 Hospitalizations Increase
COVID-19 crisis seems to always find a new region to cause problems. Latest hotspot is the Midwest as Wisconsin is seeing a spike in hospitalizations. These few hotspots caused the national hospitalization rate to rise to 30,742 which is about 2,000 above the trough.
Weirdly, it bottomed at the same level as it did in June. It had a double top and a double bottom as if technical analysis is working on a data point that doesn’t trade (this is a coincidence to be clear). There were 47,309 new cases on Thursday. Past few days have been problematic as the 7 day average of new cases has been rising and the 7 day average of new tests has been falling. Only good news is the 7 day average of deaths is low, but that will reverse if the number of people hospitalized continues to rise.