This Is A Bubble
There is a ton of euphoria in the market. Reopening stocks are on fire and the overall indexes keep hitting records outside of the Nasdaq which is 16 basis points from a record. This isn’t exactly how we expected this to play out as many were bearish on large cap growth and bullish on small cap value. Latter half worked, but all shorts have been a disaster this year unless they were quick trades during corrections or the March crash.
This is shaping up to be a solid year for markets despite the recession. S&P 500 is up 12.5% year to date. Investors didn’t even expect the market to go up this much without the recession. Speculative stocks in this market have gone insane, causing fundamental investors a lot of confusion.
They are in utter disbelief. Jim Cramer stated since he started investing in the 1980s, he has never seen such a strong market. Speculators never sell the stocks they love which is scary.
Let’s get through the November stats. It has been an amazing month. Dow is up 13% which is its best month since 1987. Russell 2000 is up 20% which is its best month ever. The chart above shows the Russell 2000’s monthly returns as of Monday’s close.
Energy sector is up 37% which makes this its best month ever too. Financials are up 19% which makes this their best month since 2009. Finally, the industrials are up 18% in November which is also their best month ever.
It Was Right: Now What?
Some investors who were bullish on energy, small caps, industrials, and banks heading into this month have been dead right. Their rallies will moderate and tech will likely fall more. Nasdaq 100 is only down 2.7% since its peak on September 2nd. This phase change in the economy is supposed to be bad for tech. CLOU index is only down 5.7% from its peak on October 13th.
We will see the winners of the COVID-19 economy crash in the coming months. Stocks most hurt by COVID-19 will rally. Most cyclical stocks will outperform, but not do amazingly. It will seem amazing for banks and energy to rally a few percentage points in the next few months because the Nasdaq 100 will fall over 20%. Investors aresticking to the prediction that it won’t hit a new record high for many quarters. It is being tested as the market explodes higher in the week of Thanksgiving.
We Have Euphoria
The stock market is due for a 5% pullback as the tech stocks start to get hurt. Tech has lagged in this rally, but it should be falling, not levitating higher. Obviously, we also have the very speculative small caps which in some cases have become large caps like Tesla. CNN fear and greed index is at 88 which is extreme greed.
As you can see from the chart below, in Evercore ISI’s survey about 62% of respondents stated the next 10% move in stocks would be up. So far, they haven’t been wrong, but it’s worth noting how much more optimism there is now compared to February which many observers at the time said was a frothy market.
Many thought the market was frothy at the end of 2019 and in January, and gave up right before the crash. Of course, it was very tough to predict the COVID-19 crisis.
Steeper Curve
Fund managers are almost all bullish on the economy and see a steeper yield curve as the chart below shows. However, they aren’t fully positioned that way as they are still long tech and underweight energy. We have seen a massive energy rally in November, but it’s not enough to change their positioning.
Energy stocks are still very under owned. We probably have a few more months of oil and gas stocks outperforming before the market is back to normal. It’s worth noting that managers aren’t always wrong about the curve steepening. It’s easy to just say the crowd is always wrong, but it isn’t.
We can also see a steepening curve with the 10 year yield getting to 1.5% in 2021. It is currently up to 88.6 basis points which has been enough to push Wells Fargo up 35.3% since October 29th. BP is up 46.7% since October 28th and the much-maligned Deutsche Bank is up 43.3% since September 25th.
Review Of Tuesday’s Action
Tuesday was another day where the reopening stocks won and Tesla exploded to a new record high for some crazy reason. Regional bank index was up 4.9% which put it up over 50% since its September bottom. The S&P 500 and the Russell 2000 were up 1.6% and 1.9% to new record highs. Lowly Nasdaq was only up 1.3%. That sounds ridiculous because it is.
Tech stocks shouldn’t rally on bad news for them. It makes no sense. CLOU index was up 16 basis points. It hasn’t fallen much on good virus news because euphoric speculators don’t realize the negative catalysts right in front of their faces. Let’s see how they react to poor earnings reports in 2021 when they have low growth.
Nio stock finally fell 3.6% as many of the speculative EV and fuel cell stocks crashed. FuelCell Energy was down 10.3% and Arcimoto was down 12.8%. However, the leader of the pack, Tesla, was up again. This stock has made Elon Musk the 2nd richest person in the world. It rose 6.4% on Tuesday which gave it a $526 billion market cap.
It should be able to surpass Berkshire Hathaway in a few days as Berkshire has a $549 billion market cap. This will be major news because Tesla still can’t make a profit without tax credits while Warren Buffett and Charlie Munger are two of the greatest business minds in human history.