Range Bound Market (Cloud Falls)
The stock market fell again on Wednesday as it continued its correction from its euphoric level last week. With the 1.75% decline, it’s down 3.76% in the past 2 days. Perma bears won’t buy the dips presented to them. They didn’t take advantage of the March decline and haven’t taken advantage of the modest corrections since the recovery started in late March.
Another prediction is also coming true. Ever since early to mid April, we have been saying the market is range bound. S&P 500 is now down 0.95% since April 14th. That’s about a month of doing nothing. It's smart to warn investors not to buy when stocks rip higher. Buying after short term rallies only worked in late March and very early April.
The market is range bound, but there are plenty of opportunities outside of cloud stocks. CLOU cloud ETF is down 4.03% in the past 2 days. Anaplan, which makes software for collaborative financial planning, had its stock fall 7.15% in the past 2 days. ServiceNow, which reported an amazing quarter, is down 5.83% in the past 2 days.
You would think this correction would be enough to encourage me to buy. However, many don’t see it that way because the market tends to over-correct. Plus, many of these stocks are very hot. We can’t just go back to the extreme momentum that existed in the past few weeks.
Druckenmiller Doesn’t See A V-Shaped Recovery
The stock market is coming off an extremely overbought level last week. Another factor sending stocks lower is the negative rhetoric from billionaires. Personally, I ignore the billionaires because they only care about their own bottom line. They don’t care if they steer you the wrong way. They like to knock down the market so they can buy it lower. And they talk their own book.
Specifically, esteemed investor, Stanley Druckenmiller made extremely negative comments on Tuesday. He said the risk reward for stocks is the worst he has ever seen. That’s probably too negative. Clearly, stocks were riskier in February than they are now as they have less downside.
We didn’t know as much about COVID-19 then as we do now, but that’s the point. Negatives are largely known. Currently, market may not be a huge buy, but it’s certainly not about to fall 34% from here.
Druckenmiller stated, “The consensus out there seems to be: ‘Don’t worry, the Fed has your back. There’s only one problem with that: our analysis says it’s not true.” Fed took away the downside, so I disagree with his assertion. Of course, bulls aren’t only long because of the Fed.
Some investors went positive because of the Fed after the March 23rd bottom, but now we have re-openings to look forward to. To be clear, we can expect stocks to selloff modestly as the economy reopens.
He also stated, “I pray I’m wrong on this, but I just think that the V-out is a fantasy.” He doesn’t think a V-shaped recovery is likely. I agree, but that doesn’t mean stocks are extremely overvalued. If we have a staggered U-shaped recovery like I expect, stocks will eventually move higher over the next few quarters. Seems that he’s distorting expectations to support his bearish worldview.
Tepper Says This Is The 2nd Most Expensive Market He Has Seen
Tepper is extremely bearish as well. Headlines might have spooked traders on Wednesday. He stated, this “maybe the second-most overvalued stock market I’ve ever seen. I would say ’99 was more overvalued. The market is pretty high and the Fed has put a lot of money in here. There’s been different misallocation of capital in the markets. Certainly, you are seeing pockets of that now in the stock market. The market is by anybody’s standard pretty full.”
He can't really say the market is expensive by anyone’s standard. If everyone thought stocks were expensive, they would fall.
He thinks stocks will fall even though the bottom has been put in. If the market fell to the bottom, it would fall 21%. If he’s saying the market has less than 21% downside, that’s inconsistent with this being the 2nd most expensive market ever. Almost every bear market has stocks fall more than 21%. He’s being dramatic and then walking back the prediction.
So far, calls for a stable market with modest corrections have been correct. Many don’t see the extreme downside these billionaires see.
Details Of Wednesday’s Action
Stock market fell on Wednesday with tech doing poorly. Nasdaq was down 1.55%. Small caps had a terrible day as the Russell 2000 was down 3.32%. Banks also had a terrible day as the financial sector fell 2.96%. New poster child for fear is Wells Fargo as its stock fell 6.28%. Their stock is now below its bear market low, putting it at the same price as it was in 2009.
Personally, I disagree with panicking about Wells Fargo. This is just a poorly run bank that is underperforming. Now, I wouldn’t buy it, but also wouldn’t sell stocks because this bank is in trouble. It’s somewhere in between doing poorly and at risk of failure.
With the banks and the small caps doing poorly, it’s no surprise the small cap banks had a horrible day. KBW regional bank index fell 5.39% which means it’s only up 11.62% from its bear market low. Now it’s not overbought.
Top Heavy Market
Top 5 stocks in the S&P 500 have accounted for 24% of the S&P 500’s point gain since the March 23rd bottom as you can see from the table below.
When the top 5 stocks account for more than 20% of the gains, the S&P 500’s average return 3 months later is -9.2% compared to a 9.5% gain when they are less than 20% of the gains.
