Nasdaq Beyond Extreme- Time To Get Out
The stock market had another modest rally on Wednesday; the Nasdaq outperforming was notable because of how extreme it is. It was up 1.44% as the cloud and electric vehicle stocks exploded along with the FAAMNG internet names. CLOU cloud ETF was up 2.74% which is an enormous move considering where it has recently come from. The index is up 18.1% since June 11th.
As of Tuesday’s close, the index’s 14 day RSI was already above 70. It’s in extreme overbought territory. Sea Limited stock was up 10.2% which put it up 40.5% since June 11th. Tesla stock sold off modestly, but Arcimoto stock was still up 3.91% which means it’s up 169.6% since June 11th.
It’s amazing that the stock was up considering it had a 14 day RSI of 90 heading into the day. We have never seen such a high reading on any stock or index. Nikola stock was up 34%. Many thought it was done, but it rose from the dead after falling 49.5% from peak to trough.
Even though Facebook still has worries about its top customers leaving its ad platform, the stock was up 1.1% which put it at a new record high. It's possible this situation is misunderstood. Bulls build a strawman argument that anyone who says this boycott is a negative thinks the stock will crash. It’s an incremental negative. That doesn’t mean the business will crash. It means it’s a modest negative that shouldn’t be ignored. And it’s far from impossible to imagine some companies not coming back.
As you can see from the chart above, the Nasdaq has outperformed the S&P 500 in the past 20 days by the most since late 2002. It’s notable that the S&P 500 is being dragged higher by the same companies the Nasdaq is. If you were to compare the Nasdaq to the bottom 495 S&P 500 stocks, the dislocation would be insane. On Wednesday, Apple, Microsoft, and Amazon alone accounted for half of the S&P 500’s 0.79% gain.
This was only the 2nd trading day since April 2009 in which the S&P 500 was up 0.75% or more, but fewer than 300 stocks in the index were up. Russell 2000 was up 0.81%, signaling the smaller companies didn’t underperform. It was broad based weakness within the S&P 500.
Amazon is now 44% of the consumer discretionary sector. It dominates the sector which makes sense because the other major internet stocks aren’t in it. This would be like if Tesla joined the utilities sector.
Extremely Heightened Sentiment
Some people are making a big deal about the fact that the stock market is so overbought while the VIX is still high. That just means the market has switched from a bear market to euphoria quickly. That information doesn't tell us anything we don’t know. CNN fear and greed index was up 5 points to 53 which is still neutral. This indicator was not useful in predicting the 7% correction last month.
As you can see from the chart below, the put to call ratio is extremely low. According to Y-charts, the put to call ratio on Wednesday was 0.4 which is the lowest reading since June 9th. The low prior to the June correction was 0.37 on the 8th. Nasdaq’s put to call ratio is even lower since it’s at its record high.
No one wants to bet on the strongest tech rally since the late 1990s ending soon. Even the very loud Tesla shorts have mostly covered their positions (it has about 10% short interest). Anyone who hasn’t covered by now, likely will never cover. They have taken unfathomable pain. If you had a 5% short position at the start of the year, you lost over 15% of your portfolio if you haven’t covered any of your shares.
We are in a unique situation with the AAII sentiment survey because there are more bears than bulls in the individual investor survey, but there is extremely positive sentiment in the advisory survey. It doesn’t make sense for there to be so many bears, especially among retail investors who are the most euphoric of the bunch.
Specifically, 27.2% were bullish which was up 5 points from last week. That’s still 10.8% below average. Number of bears fell 3.2% to 42.7% which is still 12.2% above the historical average. As you can see from the chart below, there were 57.4% bulls and 18.3% bears in the advisory survey which put the bull to bear spread at 39.4%. That’s the highest bull and lowest bear percentage since January which was a month before the bear market.
China Is Unbelievably Hot
Chinese stock market is more overbought than the Nasdaq. Media and individual Chinese investors are gearing up for another bubble. Since it’s so hotly anticipated, it's not likely that it will happen. This one will peter out within the next few days. Shanghai Composite index has increased 8 days in a row which is a seemingly impossibly long streak.
Once it ends, we can all bet this mini bubble pops. In that winning streak, the index is up 16.4%. As you can see from the chart below, 72% of CSI 300 (Chinese index) stocks have a 14 day RSI above 70. That’s a 12 year high. This beat out the past 2 bubbles since 2009. It’s very easy to have most stocks overbought if the index rises almost every day.
Conclusion
Nasdaq and the Chinese stock market are both in bubbles. SPAC, EV, and cloud stocks are due for at least a 30% decline in the American stock market. Put to call ratio and the advisory sentiment survey agree that the market is overheated. It’s common sense. Just look at the parabolic rises in stocks such as Arcimoto to determine there is something fundamentally wrong with the equity market.