Tech Leads The Market Higher
The stock market rallied sharply on Friday as big cap tech led it higher. A bubble in tech isn’t going to go away until interest rates rise and the COVID-19 crisis ends. It would help value stocks and potentially boost yields if a stimulus is passed. Personally, It's unlikely tha ta stimulus being passed is priced in even though it’s a possibility. Investors have recently become more optimistic on one passing, yet yields haven’t increased, nor have the banks rallied.
America has made significant progress on COVID-19 testing in the past week. 7 day average of tests per day has increased to 905,404 which is a record high. It can get to 1.5 million by the end of October. Don’t be alarmed if this causes a modest increase in cases.
On the negative side, the 7 day average of hospitalizations has stopped falling. That means the 7 day average of deaths per day might plateau at around 700-750. Increased testing is a slow event, while the trial results for treatments and vaccines will cause large knee jerk reactions in markets when they come out in October.
Tech stocks seemingly have more to lose than value stocks because they have done so well recently, but travel, banks, and energy will fall on bad news. If one vaccine turns out not to work and then a few days later the next vaccine shows promise, it would cause max volatility. We could have a 5% decline followed by a 10% rally in the small cap value index. Individual names would obviously move more. We could see Zoom Video falling over 10% in one day on good vaccine news.
Specifics Of Friday’s Rally
Nasdaq had a great day as it rose 2.26%. It’s still in a downtrend though, which we don’t expect it to escape. S&P 500 and the Russell 2000 were up 1.6%. Small cap value index moderately underperformed as it rallied 1.2%. Regional bank index performed in line with the market which probably won’t excite many bank investors because it underperformed when the market was falling.
Hot stocks all had great days. Zoom Video was up 6.7% as it nearly hit a record high. It's hard to understand what Zoom investors are thinking because demand is going to plummet after rapid testing becomes more prominent and vaccines start being given out.
We could be 1-2 months away from rapid testing being at airports and 6-8 months away from a vaccine allowing life to go back to normal. Since we don’t have the data, we can’t say how likely it is that the vaccines and treatments are effective, but we can all see testing increasing. There have been multiple rapid tests approved by the FDA. Most see almost no chance of testing not being mainstream by 1H 2021.
Shopify was up 5.8% which didn’t get it close to its record high. Once a hot stock has done nothing for almost 3 months. Some still foresee it crashing even though it has been in a sideways correction recently. Amazon was up 2.5% and Tesla rose 5%.
Tesla will be the stock to watch over the next few days as its deliveries will be released. This data is more important than its earnings. Consensus is for 141,000 deliveries; the range is from 123,000 to 161,000. There is a lot of chatter from the bears that it will miss estimates because of weak sales in Europe where it is losing market share. Bulls will point to this being a record quarter no matter what because the previous record was 112,000.
Tesla mentioned how it would have record deliveries on Battery Day which scared some investors because it’s obvious the firm will report a record. Even the lowest estimate on Wall Street calls for a record. Because the stock has done so well, it needs to come in near the high end of the estimate range to rally. Since we expect a modest disappointment, the stock will likely fall hard. And this stock could easily fall 10% in one day if deliveries are about 135,000.
SaaS Bubble
Remember, on Tuesday Palantir will do its direct listing IPO which will further increase the supply of SaaS stocks. This is the exact wrong time for that to happen. Unfortunately for private companies, it takes months to do an IPO, so they couldn’t catch the euphoria peak in August. A lack of supply in EV stocks is why Tesla did so well.
Even Nikola got a lot of attention even though the company has no technology worth investing in. Speaking of EV stock supply, the SPAC Tortoise Acquisition Group will vote to acquire Hyliion, the heavy duty electric truck company, on September 28th.
Since June 11th, the SPAC stock rallied 334% in anticipation of this move. We can expect an initial pop next week followed by a long march lower. This SPAC could hurt Tesla as EV stocks are propping up quickly to take advantage of the craze.
An increased supply of SaaS stocks isn’t just coming from IPOs. It’s also coming from stock-based compensation which is a massive issue in the tech sector. As you can see from the chart above, the median stock based compensation to revenue ratio for SaaS companies has been exploding in the past few years.
Investors are going to criticize this heavily after the bear market in SaaS stocks starts in earnest. That peak is likely already in. We just haven’t seen the bulk of the decline. How can anyone expect more people to work from home in 2021 than 2020?
CLOU cloud index was up 3.1% on Friday, but it’s still down 9% from its record. It's just hard to see people betting on work from home stocks with offices reopening next year.