Very Mild Tuesday Decline
S&P 500 fell 1.08% on Tuesday in what could be described as an extremely mild decline. S&P 500 just tied the record for days with at least a 0.5% rally (5 days). Clearly, there is a great deal of momentum that needs to be reversed. A modest decline on Tuesday didn’t do the job.
Even with the S&P 500 very close to its bear market high, some still remained true to the call that the June 8th high would not be broken. It lived to stand another day as it has now been 1 month since stocks made a new bear market high.
Nasdaq Helped By EV Bubble
Prior to this mild decline, the Nasdaq had been up 18 out of the previous 21 days. That’s the highest winning percentage since November 2010. The previous best before that was July 1998. It’s amazing that this recent run was better than any period from August 1998 to March 2000 which is widely considered to be the hottest tech market ever.
You know this wasn’t a real correction because Tesla, Shopify, Arcimoto, and Livongo were up. After rising double digits, Tesla still managed to defy odds by increasing 1.3%.
As of Monday, Tesla’s 14 day RSI was 82.9. The Nasdaq 100 had a 70.2 reading. It was big news that Tesla rose on Tuesday because typically it’s a high beta name that underperforms to the downside. These EV bubble stocks are acting like safety stocks which is a huge mistake by the market. Arcimoto stock was up 6.7% as it is now up 193% in the past month. Niu Technologies was up 1.8% as it’s up 95% in the past month.
It's confusing why some EV stocks have done so well because if everyone is going to stay home, there is no need for a car. Arcimoto is different because it’s a delivery truck. That being said, it’s unprofitable. It’s a startup that’s relying on sentiment. The worst offender, Nikola, has cooled off considerably as it is down 49.5% since June 9th. That story stock is done.
Any cloud or EV stocks that aren’t doing well in the most speculative market since the tech bubble aren’t likely to do well when these industries go out of favor. It’s extremely difficult to make money off these stocks either way because the market is acting irrationally.
Breadth Thrust?
Investor speculation has gotten overheated. It’s a global phenomenon as the Shanghai Composite is up 7 days in a row in which it has gained 14.9%. Breadth of the rally in emerging market stocks mostly due to China is unlike anything we have seen in the past 16 years.
As you can see from the chart below, the percentage of emerging market stocks above the high end of their Bollinger Bands is the highest ever.
FAANG Is Impenetrable
Despite not agreeing to terms with the top advertisers on their site, Facebook stock rallied again on Tuesday as it was up 0.24%. It is just 0.57% from its record high. Some investors are saying these big companies left Facebook because they weren’t getting a good ROI. It's confusing how that’s good for Facebook.
That’s an even worse reason for the firm because that means even if Facebook improves the safety of the platform, they still won’t come back. As you can see from the chart below, as of Monday, the top 5 S&P 500 stocks were up 32.7% year to date, while the overall index was down 1.6% and the small caps were down 13.5%.
July 27th is a key date for the top tech firms because they will be appearing before Congress in an antitrust hearing. Apple’s Tim Cook, Facebook’s Mark Zuckerberg, Alphabet’s Sundar Pichai, and Amazon’s Jeff Bezos will be testifying. Biggest risk these firms face is antitrust.
With their valuations so high, if this doesn’t go well, these stocks can decline rapidly. We have rarely seen so many tweets about Amazon, praising it. This certainly is a great company, but if it spikes along with the speculative cloud stocks, it will decline with them. The same hot money that’s in Tesla and Shopify is in Amazon. We’ve seen many portfolios where Amazon is by far the largest holding. That’s dangerous. It’s a crowded trade.
Time To Go Defensive
Even though the story stocks are the ones that were overbought, the small caps dealt with the worst of the decline on Tuesday as the Russell 2000 fell 1.86%. We are far from February when the utilities were extremely expensive. They have lagged extraordinarily in the past month. The XLU ETF is down 19.75% from its February peak and it’s only up 26.77% from its March bottom.
S&P 500 is down 2.69% in the past month, while the utilities are down 9.34%. The sector fell 0.35% on Tuesday. As you can see from the chart below, utilities have a historically low PE ratio versus the market which is surprising because rates are so low. Usually, utilities love low rates because they pay high dividends which compete with treasuries.
On the other hand, the consumer staples were up 1.01% on Tuesday because of Wal-Mart’s big 6.8% rally. It was up on the news that it will launch Wal-Mart+ which is an Amazon Prime competitor. This follows the shutdown of Jet.com which was a huge mistake acquisition. Wal-Mart+ will cost $98 per year and include same day delivery of groceries and general merchandise, fuel discounts, and early access to product deals.
Conclusion
Personally I don’t think the correction is over, or that the S&P 500 will break the June 8th high this summer. A correction really hasn’t started yet because the story stocks rallied on Tuesday. We can expect at least a 40% decline in Tesla stock even if it reports a profit which will get it into the S&P 500. Retail traders will learn about the buying the rumor and selling the news.