No One Can Believe This
This market is unlike anything many have ever seen. Only people who invested from 1998 to 2000 have experienced anything similar. It’s like the 2018-19 marijuana bubble except it’s a much larger portion of the market. On Tuesday, the Nasdaq 100 was up 34 basis points; it’s on an 11 day winning streak.
That winning streak alone doesn’t make this a bubble of course, but it’s still impressive. The Nasdaq 100 is up 50.47% year over year and 44.69% year to date. That also doesn’t make this a bubble, but it adds to the argument.
Tesla, the poster child for the bubble in EV stocks, was up 1.27% to a $618 billion market cap. That’s a small increase, but it’s amazing when you consider the firm announced a $5 billion capital raise. You can hear people saying Tesla would be stupid not to take the money because the stock is so high. Then they also say the stock is a buy.
How could you think Tesla should sell, but then buy it? Tesla is the 6th largest company in America without having a business model. The firm is only profitable because of tax credits and its cars are ranked 2nd to last according to Consumer reports.
Tesla will be added to the S&P 500 on December 21st which means index funds will be buying in a week. The fun has just begun. It might pass Facebook in terms of market cap. As you can see from the chart below, Yahoo! being added to the S&P 500 almost perfectly marked its top.
When Tesla starts falling, it won’t stop. Yahoo lost over 90% of its value 3 years after being added to the index. The same thing will happen to Tesla.
Stimulus Hype
Markets are getting hyped again about the potential for a stimulus which is why the 10 year yield is 94.2 basis points. If one passes, it will get above 1% which would be bad for speculative stocks like Tesla. The only problem is the GOP and the Dems still disagree on the details of the deal. Mnuchin is calling for $600 in stimulus checks, but removing the $300 in weekly unemployment insurance in the bipartisan bill.
That’s why McConnell signed on to this. This bill gives $600 to people that have jobs. Pelosi definitely won’t sign on to this. The good news is McConnell backed off from liability protection.
We just need the two parties to agree to some more unemployment money. The inauguration is in 41 days, but that doesn’t matter if McConnell stays Senate majority leader. That’s why the 2 Georgia Senate races are so important. Those are on January 5th. They might change everything.
Bubble Trouble
Growth stocks are in a bubble beyond belief. I thought we were done with this bubble after the September 2nd peak, but they are back. Millennial speculators never go away. Not changing their mind is going to cause them to have massive losses once the bubble ends. The Fed won’t save them from a big fall.
As you can see from the chart above, U.S. growth stocks have a higher price to sales ratio than the peak in the tech bubble. This bubble is bigger than the 1990s tech one. The difference is we are coming out of a recession. We don’t think a 30% decline in the Nasdaq and an 80% decline in the SPACs, EVs, and SaaS stocks will catalyze a recession especially since the economy is set to reopen which should be great for small businesses. Furthermore, these hot firms don’t employ a lot of workers.
We are experiencing the craziest call buying frenzy since the dot com bubble. As you can see from the chart below, the 10 day average of the call to put ratio is the highest since the peak in 2000. It’s at about 2.1 and the peak in 2000 was almost 2.5. It will be interesting to see if the Nasdaq 100 can continue its streak.
Surely, the speculation in Tesla will help this ratio match the 2000 bubble. The ingredients are here. Investors feel impenetrable because of the March crash which wasn’t a real bear market.
We don’t mean to ruin the fun, but historically when the percentage of S&P 500 stocks above their 200 day moving average rises above 90% a correction ensues. As you can see from the chart below, the last time this occurred was in 2013. Only a 6% decline happened. When the momentum in growth stocks reverses, there will be a hard decline.
Details Of Tuesday’s Action
This was the first time since 1991 that the S&P 500 and the Russell 2000 hit new 52 week highs while the small cap index is up at least 25% in the prior 3 months. Small caps have been breaking out. The Russell 2000 was up another 1.4% on Tuesday. The S&P 500 and Nasdaq were up 28 and 50 basis points.
Tuesday was a good day for value stocks. The small cap value index was up 1%. That’s even though the regional bank index was down slightly. The market was led by oil again as the energy services index was up 2.7%. It’s up 78.7% since October 28th. It’s approaching the June 8th peak which should act as resistance. I think 2021 will be a great year for energy.
CLOU cloud index was up 1.69% to a new record high. Zoom was up 1%. Fastly was up 14.7% on rumors of it being bought out by Cisco. It’s up 54.3% from October 30th.
Snowflake had a massive reversal as it declined 8.6% from its intraday peak to close up 0.3%. The EV bubble stocks were helped by Tesla as Nio was up 3.2%. It’s still down 15.9% from its record high though. Arcimoto was up a massive 17.7%.