Hope Dominates The Stock Market

Is This What Euphoria Feels Like?

The stock market is expressing extreme hope that either the economy reopens in May or June without any trouble or that a treatment or vaccine are coming soon. At least there are a few ways for the bulls to win! We are probably not at a moment of extreme optimism or euphoria. The market is just reaching its 200 day moving average. 

We could see a pullback because stocks have risen quickly, but this isn’t euphoria. AAII investor sentiment survey shows there are 42.7% bears and 34.9% bulls. You don’t see more bears than bulls in a euphoric market. Furthermore, the CNN fear and greed index rose 2 points to 44 which is still fear.

Ultimately, this is a headline driven market. If there is more positive news about treatments, stocks will explode higher. A main thing that can bring stocks down is if the countries that are reopening see another spike in cases. Also, it would be terrible news if the drugs that are being worked on for treatment and the vaccines hit snags. 

We know that Oxford is working on a vaccine that could come out by September and J&J is working on one that could come out by next April. We’re hoping the official remdesivir data that comes out is promising. It’s somewhat insane that the stock market rallied on anecdotal information from a study that isn’t out yet. One person calling it a miracle shouldn’t make stocks explode, but it has.

On the other hand, after only a few people were found to have COVID-19 in America, the stock market plummeted. You can say this is the reverse of how stocks acted to sparse data 2 months ago. It’s notable that people won’t go back to normal if the economy is opened with no cure or vaccine. 

Investors are jumping the gun on everything as they are completely ignoring the 2020 economy and looking at the 2021 recovery. Looking ahead actually makes sense because 1 weak year doesn’t impact intrinsic value much. Of course, the company needs to stay in business for that to work out.

Everyone Is Hedged

There are more bears than bulls. NAAIM exposure index is at 28.71 which is up from the bottom of 10.65, but below 87.91 which is where it was on February 19^th. That works well with the chart below which shows total commercial hedges are at a record high. Hedging increases near bottoms. Pain trade is much higher. It’s painful because many investors were caught holding too much cash. They thought this bear market would last longer and that there would be a retest of the low. 

We are getting close to calling this bear market officially dead. Remember, the market likely won't hit a new record high until the economy reopens. And the rate of the increases will probably slow over the next few weeks. Amazingly, the S&P 500 is only down 11.03% year to date and the Nasdaq is only down 3.59%.

Amazing Friday Rally

The stock market exploded higher on Friday which is somewhat surprising given how overbought it already was heading into the day. Investors expected stocks to have some volatility and rise modestly this week (1% to 2%). We got the volatility, but it was a better week than expected as the S&P 500 was up 3.04%. That’s because it rose 2.68% on Friday. Russell 2000 was up 4.33% on Friday.

Nasdaq was only up 1.38% on Friday, but it rose a massive 6.09% on the week. At this rate, it will be positive year to date by next week. Personally, I’m bearish on the Nasdaq because I think some of the stocks that have rallied because more people are working from home are too overbought. 

Amazon was finally down on Friday as it fell 1.38%. Microsoft rose 0.88%. It’s up 31.34% since the bottom and 11.19% year to date. As you can see from the chart below, the top 5 largest stocks are 21.38% of the S&P 500’s market cap which is the highest since 1977. If I owned an index fund, I’d short Amazon to limit my exposure to this beast.

Zoom stock is a bubble. It’s up to $150.06 which is slightly below its record high of $159.56. Hottest stock in the market and potentially ever is Tesla as it is up 10 days in a row. No stock has ever done that according to Barron’s. It’s up 108.71% since its bottom and 65.88% in the past 10 days. It’s only down 17.82% from its record high. This situation is extremely interesting because virtually every bear on Tesla (there are many) thought that it would go bankrupt if there ever was a recession. 

And this recession has severely limited car sales, yet the stock is almost at a new record already. Also, it's a massive bubble stock with no relation to the fundamentals. Netflix is up 29.78% year to date, but it at least fell 3.69% on Friday. It reports earnings on Tuesday. It's likely to do extremely well, but it won’t rally because that’s priced in.

COVID-19 Update

Friday was a bad day for COVID-19 in America. There were 32,165 new cases and 2,535 new deaths. Worst part of this situation is the number of new cases isn’t necessarily done moving higher outside of New York and New Jersey. As you can see from the chart below, on Friday there were 20,752 new cases outside of those 2 states. That’s a new record high. 

If the national number hit a new high, stocks would have noticed. Good news is the model revised the total number of deaths in America down from about 68,000 to 60,308. It's surprising that it was revised down because of all the recent deaths. So far there have been 37,154 deaths in America which implies we are 62% through the total that will occur by August.