Gold & Silver Explode
On Tuesday, gold, the S&P 500, bonds, and the VIX rallied. It was a bonanza. Europe passed a $2 trillion COVID-19 stimulus package which helped gold and silver explode higher. As you can see from the chart below, on Tuesday afternoon, the GLD had a 14 day RSI of 71.55 signaling it was overbought. This is already outdated as gold is now at $1,858 on the news of this stimulus.
Gold’s record high is almost $1,900 which it reached in September 2011. In other words, gold is at a hugely important technical level. This rally has been 9 years in the making. This week could be a historic one for gold.
Silver is finally catching up to gold as it rallied 5.4% in Wednesday’s early morning futures market. Precious metals are being helped by the decline in real rates and the overall speculation in markets. Almost all assets are doing well. Whether it’s growth or value stocks doing well, the S&P 500 almost always manages to go up as it recently surpassed its June 8th high and is now positive on the year. Next step is to break its record high.
Tuesday’s Wild Market
The market has been acting weirdly in the last 2-3 weeks even though the headline index hasn’t moved that much. Obviously, this has been a roller coaster year, but it appears to outside observers as if July has been calm. This has been the craziest sector rotation most have ever seen.
Last week was amazing for value stocks and bad for growth stocks. Big internet stocks had a huge turnaround on Monday. Then on Tuesday the value stocks rallied. It’s as if the market has no idea whether there will be a cyclical recovery, but it knows it wants to send something higher. Even when the big tech stocks fall, the S&P 500 hits a record high. Nothing can go wrong; the major index always goes up.
Specifically, the Russell 2000 value index rose 2.94% on Tuesday, while the CLOU cloud ETF fell 1.4%. Tesla and Shopify were down 4.54% and 5.6%. Tesla reports earnings on Wednesday after the close. This has been the most hyped/played down earnings report ever.
Earlier in July, the media and social media hyped up this earnings report as being hugely important because if Tesla has a GAAP profit, it will be added to the S&P 500. In the past week, this has been played down as reality has set in.
Bulls say even if Tesla doesn’t make a profit, it will get an exception and be added in. Bears say, it might not be added in even with a profit because there is some digression. To me, it looks like a GAAP profit is priced in. If Tesla doesn’t make one, the stock can easily crash 20% even though it might be added to the S&P 500 anyway. Stock doesn’t trade on fundamentals. It’s all hype. If the momentum reverses, it will drop considerably.
Another Scary Big Internet Chart
In my opinion, a competition has broken out among macro traders. It is who can make the scariest Nasdaq/big tech stock chart. Personally, I’m bearish on the big cloud names, but can see this onslaught of charts is getting ridiculous. It’s almost as crazy as the spike in tech stocks themselves.
The chart below is the latest spooky chart. Top 5 stocks in the S&P 500 make up more than 20% of the index for the first time in 40 years. As you can see, these 5 stocks have added 5% in market cap in the past year. That’s faster growth than in 2000 which was the peak of the tech bubble. Fact that the big tech stocks control so much of the market isn’t unprecedented, but the speed at which they have gained share is. Some are already bearish on the FAANG stocks, so this just confirms those prior beliefs.
Consensus Targets Look Dumb
Analysts have been chasing stocks with their targets like a dog chases its tail. Recently we saw an analyst with a $996 price target on Tesla with an outperform rating. Unless you think the market is going to fall 40%, that price won’t outperform as the stock is now at $1,568. This analyst is too scared to say it’s a sell even though the company is in almost the same position it was a few weeks ago when this target was made.
If you thought the stock was worth $996 last month, you can’t say the stock is now worth $1,600 or more just because it had a mild beat on Q2 deliveries. It’s tough to model for being added to the S&P 500 because that doesn’t help earnings. Plus, the multiple is already high, so analysts can’t just make that higher.
As you can see from the chart above, analysts have acted like a moving average on the S&P 500. They have always lagged it. These price targets are a joke. Analysts do good work, but they make bad price predictions. It’s common to see analysts try to manipulate the numbers so that the market is predicted to go about 5% to 10% higher. It’s similar for stocks. Most stocks are rated a buy or hold with price targets near the current price or a little bit higher.
Conclusion
Gold and the S&P 500 are at a record high. Silver is spiking and tech stocks are in a bubble. Treasuries are rallying incessantly as the ten year yield is at 0.605%. Forget the rule that stocks always go up; the new rule is every single asset class always goes up. Obviously, this can’t continue.
It’s an unusual rule for an unusual world. Value stocks still look good even though they have had a few moments of great strength this much. If a very cheap stock rallies 5% to 10%, it doesn’t become expensive. For example, Coke stock rallied 2.3% on its earnings report. The stock is still cheap though.