Market Lives and Dies On Stimulus Talks

Market Hinges On Stimulus Hopes & Fears

You never truly know why the market moves in certain directions each day, but Wednesday probably had the most certainty as to what the market was trading off of. The stock market crashed briefly in the afternoon as there were some negative reports on the possibility of a deal which have been washed away for now. 

Meaning, a deal is becoming more likely. Specifically, from 2:20 PM to 3:20 PM, the small cap value index fell 1.7%. This group of stocks is the most vulnerable to a shift in sentiment on the possibility of a stimulus.

It’s an economically sensitive group of stocks that also prefers higher rates because there are a lot of bank and energy firms in it. Similarly, the S&P 500 fell 1.4% from intraday peak to trough in the afternoon. As of Thursday morning, the futures market rallied in anticipation of a deal. 

But everything can change during the trading session when news will come out. We can estimate that the small cap value index will rise 2% if a deal is set and fall 3% immediately if a deal isn’t made.

The market will next look at how COVID-19 is doing in America and Europe. Investors have been patiently waiting for 2 weeks for a massive spike in tests. So far, nothing is doing as there were 784,478 new tests on Wednesday which pushed the 7 day average down to 914,774. We have been anticipating 1.5 million tests per day by the middle of October if the antigen tests are included in that number. So far, that's looking painfully wrong.

Signs Of Tech/Retail Euphoria Are Still Here

Tech stocks are still very expensive because they are still the recipient of the flight to safety trade as they do the best in the new economy where people work from home and order more goods online. SaaS company Palantir Technologies did its direct offering on Wednesday. It increased 31.03% on the day. It actually fell 14.6% from its high on the day. Just what the market didn’t need, another tech IPO with a market cap above $10 billion.

There is so much equity supply that when COVID-19 goes away there will be a massive decline in these SaaS stocks that will rival the 2000s tech bubble burst. The chart above shows how unprecedented the current market is. Best performing sectors have beaten the worst performing sector by the most ever. 

Both the tech and consumer dictionary sectors are absolutely pummeling the energy sector. Exxon is down 51.6% year to date. That's not saying energy is a buy in the short term, but that one should strongly avoid the industries that are doing well in this economy because the shift is temporary.

It’s not just the tech stocks that have exploded though. Stocks popular with retail traders have done really well too. Retail traders are still here despite the 10% correction. Only the ones who got blown out on out of the money call options are gone. 

You can tell retail is almost all in by the action in Penn Gaming and Draftkings which are two bubble stocks. They are popular with retail because their services are popular with the same demographic traders are in. These are men ages 20 to 50.

Penn Gaming, Draftkings, & Nikola Rise

Penn National Gaming was up 4.7% on Wednesday as it nearly hit a new record high. It’s down 2.2% from its record on the 22^nd. Sell side analysts don’t care at all that the mania stocks are not in tune with reality. They continue to recommend them as they hope to scoop up fees when these firms raise more money. Penn Gaming already has issued shares recently. They will likely look to raise more money if the virus keeps the casinos closed.

Draftkings was up 5.6% to a new record high. The stock now has a $20.9 billion market cap which is bigger than any of the hot pot stocks last year and 2018. It makes sense this bubble is bigger because there are more retail traders involved. They want quick money. It’s a game of chicken. Whoever sells first will miss out on profits, but whoever sells last will lose most of their gamble.

Even the worst of breed stock Nikola rose sharply for some reason on Wednesday. The stock was up an enormous 14.5%. Negotiations with GM are ongoing. This is very interesting because GM just gained much more leverage now that Nikola stock lives and dies on this deal. 

GM wants Nikola to give it more shares. It’s such a confusing situation because if GM can add so much value in fuel cell technology, why don’t investors just buy GM stock? Why are they speculating with a company that has no technology?

AAII Sentiment Survey Doesn’t Shift Much

As you can see from the chart below, professional advisors got slightly more bearish in the past week. There are now 51.5% bulls and 19.4% bears. Bull bear spread fell slightly from 32.1% to 30.7%. Reverse was true for the AAII individual investor survey. 

It wasn’t much of a change, but the percentage of bulls rose 1.3 points to 26.2% and the percentage of bears fell 2.9% to 43.1%. Once again, there were more bears than bulls which extended that record streak. This streak of more bears than bulls is so silly, it makes the survey look broken. Maybe it is broken because it is surveying the wrong people.

Conclusion

The stock market will move based on the stimulus in the next couple weeks. If you’re worried about the intermediate term, COVID-19 is more important. If a stimulus plan doesn’t pass, the market could be set for a terrible run as it is up against the election and the winter where COVID-19 cases could increase. 

And the amount of stock supply being added to the work from home industry is so ridiculous that a crash is almost inevitable. Retail traders will get burned like they always do. It could happen this month or it could take another year, but it will happen.