Trend Continues
Tuesday was a continuation of Monday for the stock market as the stocks that benefit from a reopening of the economy rallied and the secular growth stocks fell. It is being called the ‘great rotation’. Some traders think it is overhyped. However, they are missing the situation at hand. The market will look past COVID-19 if it thinks a vaccine will save the day. Before the vaccine news came out, we were faced with rising cases and uncertainty over when it would end.
It looks like the market is forward looking to an extent. Before the vaccine, we could have been dealing with COVID-19 for a couple years. Now, that is highly unlikely. There are a few people acting like it was obvious a vaccine would work. That is patently absurd. This was a game changer. It shouldn’t be a surprise the market continued what it started on Monday. This is the start of a long term trend where software stocks underperform.
We could be looking at an over 30% drop in the Nasdaq 100. It might not reach its late summer peak for years. A vaccine changes everything. Don’t get distracted by the fact that it doesn’t immediately solve the crisis. The market is ignoring the next few weeks which will include a huge health problem for the country.
Crazy Long Bond Selloff
10 year yield has had a monster turnaround as the yield has gone from 77 basis points on November 5th to 97.9 basis points on Tuesday. Bond market is closed on Wednesday because of Veteran’s day. We will need to wait a bit longer for the 10 year yield to finally cross 1%. That’s despite the lack of a stimulus. There will be one early next year, but it won’t be as big as the one debated in October, let alone what the Democrats dreamed of.
Obviously, it would help families greatly if we got one now, but getting one in February won’t be a lifesaver. We should start to see the economy fully reopen in March. Hundreds of thousands of leisure and hospitality jobs will come back in the first few months of 2021.
In response to the rise in yields, Zillow fell 3.6%, putting it down 15.2% in 2 days. Speaking of junk, as you can see from the chart above, the junk bond yield hit a record low. This explains why we have such few triple A rated companies. Even junk yields are low. I think there is a certain status symbol to investors that a company is rated investment grade. You don’t hear firms bragging about being junk rated.
Worst Stocks Are In Trouble
Worst speculative stocks are starting to get in trouble. Nio finally fell as it was down 5.8%. Datadog fell 2.4% during the day and fell 6.6% after hours even though it beat earnings and sales estimates and gave good guidance. These stocks are falling even when they report good results because they are overvalued. Do not invest in companies that are fast growing money losers or ones with triple digit PE ratios.
Finally, Beyond Meat fell 16.9% which put it down 35.9% from its October top. It’s still up 65.3% year to date which only means it has more room to fall. The stock fell on its big sales miss. It is supposed to be a growth stock, but it only had 3% sales growth. There was a major controversy over whether it would be a supplier for McDonald’s new McPlant burger.
Truth is the company could be a supplier, but if McDonald’s chooses them, it would promote the Beyond brand like Pizza Hut is with its new sausage pizza. An issue with the company is its long term competitive advantage. Obviously, my taste opinion isn’t a huge determining factor for the stock, but many prefer Impossible products to Beyond.
Review Of Tuesday’s Action
Tech stocks underperformed as you expect given the coming bloodbath the sector faces in 2021 once people shop more in stores and work in offices again. The market knows the trend changed once the vaccine was proven effective. S&P 500 fell 14 basis points.
A difference can be seen with the Nasdaq and the Russell 2000. Nasdaq was down 1.37% and the Russell 2000 was up 1.88%. Digging deeper, the Nasdaq 100 was down 1.79% and the small cap value index was up 2.68%.
Small cap value is at a cycle high. It’s only down 7.6% year to date. Regional bank index was up 1.2% and the cloud index was down 3.5%. Cloud index is in big trouble as it is down 11.2% from its October high. Once it breaks through its November 2nd low, look out below. An October peak will likely be a multi-year peak. We knew this decline was coming. It’s finally here.
Amazon is down 8.4% in the past 2 days. It’s only up 2.7% from its September low. Once it breaks through that, look out below. Ultimate stock that will benefit from a reopening of the economy is Cinemark which is the move theater firm. It is up 50.5% in the past 2 days.
Tesla is down 6.3% in the past 3 days. This is the poster child of growth stock absurdity as it can’t earn a profit yet it is valued as the biggest automaker in the world. People think this will be a normal correction for the stock, but it is on a one-way trip lower. It can easily fall 50%. It’s down 17.7% from its peak.
Conclusion
Reopening trade continued on Tuesday. It will likely continue for a few months. We haven’t even started to see the weak quarters from the software stocks. ServiceNow is down 10.1% in the past 2 days, but is still up 92.8% from its April low. These stocks need to fall 50% or more. S&P 500 is 1% off its record. It’s in triple top territory still.