Stocks Finally Fall
The stock market finally fell as the large cap growth stocks led the market lower on Wednesday. The headlines said the market fell because the stimulus talks hit a snag. That’s probably wrong because usually value stocks fall on that news not growth stocks. The 10 year bond yield wants a stimulus and it didn’t fall in reaction to this news.
Maybe, there is no news. It’s all hearsay in the sense that Congress is still working on a deal. Sometimes negotiations look the worst right before something gets done.
Massive Tech Bubble
Most experienced investors think the market is frothy. Anyone who has been investing since 1998 sees the comparison between the tech bubble and now. Back in the 1990s, there weren’t triple leveraged ETFs. Now we have retail traders investing in these relatively new products along with options. They have gathered together on Reddit to take insane risks. The reason this is a hot topic worth discussing is it has worked.
As you can see from the chart below, the 3X bull semiconductor index is up 1,625% in the past 5 years. That’s leverage upon an already amazing trade. Why buy Nvidia, when you can lever up and buy its options? Greed knows no bounds. Semiconductor stocks are very overbought. These indexes are adding to the insanity.
Besides leveraged ETFs, there are active ETFs. These are exchange traded funds in which a manager picks the stocks and their weighting. It’s intertwined with thematic investing which is picking a theme and then buying a basket of stocks that represents that theme. The leader of these two categories is Ark Invest which is known as one of biggest Tesla bulls. Tesla’s huge rally has been great advertising for the firm. Traders are chasing performance.
They have a great sales pitch. The idea is to invest in disruptive innovation companies that are changing the world and have a bright future. This is the speculative edge of growth investing. It’s like a riskier form of investing in stocks like Amazon and Netflix because these newer companies aren’t as proven generally speaking. In their ads, they make fun of old industries such as banking. This sounds a lot like the 1990s.
As you can see from the chart above, ARKK’s nearly 1 billion in volume is in the top 1% of ETFs. The ARKK ETF has $15 billion in assets under management. It traded more volume than Johnson & Johnson and Home Depot. Ark Invest will never pivot to value investing because that’s not their pitch. That will be problematic for them when fossil fuel and bank stocks do well in 2021 while Tesla falls back to Earth.
Facebook Lawsuit And DoorDash & Airbnb IPOs
Facebook stock fell 1.9% on the news it faced an antitrust lawsuit brought by the FTC and 48 states’ attorneys general for wielding monopoly power in its acquisitions of WhatsApp and Instagram. The fact that it didn’t fall more gives you an idea that investors don’t believe it will be forced to sell Instagram and WhatsApp. We can’t imagine that will happen because the firm already was allowed to do so. The government can’t go back and change its mind.
The problem for Facebook is both sides of the political spectrum don’t like the firm and it’s politically advantageous for them to penalize Facebook. This is a key long term risk for the firm. It’s ironic that Microsoft is the least at risk of antitrust legislation of the big tech firms since it was the most at risk in the late 1990s and still has high market share.
DoorDash was the latest IPO to take advantage of the speculative craze in growth stocks. The stock closed up more than 85% on its first day of trading which gave the firm a market cap of $60 billion. It only had revenues of $1.9 billion in the first 3 quarters of 2020. It’s no surprise the firm lost money as it lost $149 million in that period. It lost $533 million in the first 3 quarters of 2019.
The next big IPO this week is Airbnb. The firm sold shares at $68 which was above its range of $56 to $60 which gave it a $47 billion market cap. We all know the speculative craze will push this stock up hugely on Thursday. Unlike most IPOs, this one was profitable last quarter as it made $219 in net income on sales of $1.34 billion.
Sales were down 19% because of the pandemic. Unfortunately, it usually doesn’t make a profit as it lost $674 million in 2019; so far in 2020 it has lost $697 million. This is the type of disruptive innovator that this market loves. We all would be shocked if it doesn’t soon have over a $100 billion market cap.
Nasdaq 100 Falls
The Nasdaq 100 ended its 11 day winning streak as it fell 2.26%. The Nasdaq fell 1.94%, the S&P 500 fell 79 basis points, and the Russell 2000 fell 82 basis points. As you can see from the chart below, small caps have more than regained their relative losses to the S&P 500 since February 19th.
Small cap value stocks only fell 13 basis points which tells us the market didn’t sell off because of the stimulus hiccup. Banks had a good day as the regional banks index rose 0.39%.
The hottest SaaS and EV stocks had a bad day. Salesfoce.com was down 3.2% and Tesla fell 7%. Is this finally the top in Tesla? It can’t rise to an unlimited value just on S&P inclusion, right? The other EV stocks fell too as Nio fell 5.5% and Arcimoto fell 4.8% after rising 17.7%. These are stocks for gamblers. From its peak Tuesday to its trough on Wednesday, Arcimoto stock fell 16.9%.
This was for no reason, of course, because fundamentals are irrelevant. The CLOU cloud index fell 3% just after reaching a new record. Fastly fell 7% after rising 14.7% on rumors of a takeover. From its peak on Tuesday to its trough Wednesday, it fell 10%. These are major reversals which could signal we are at a top.