Wild Thursday Trading
There were major moves on Thursday as the stock market tried to shake off its September correction. Trading action was wild. The stock market started down, rallied into the afternoon, and then fell before the close. From trough to peak, the S&P 500 rose 2%. It closed up 30 basis points. Momentum tech stocks are still likely overvalued and the value stocks are cheap.
This correction made value stocks a better buy and took some of the near term euphoria out of tech. Story stocks have had a bad month, but this is nothing compared to what’s to come. When the 10 year yield rises to 1% and the odds of COVID-19 going away increase because of better treatments or vaccines, we will see a serious decline in stocks like Shopify and Zoom.
This COVID-19 crisis will be officially over when Zoom stock is down over 60%. Best catalysts for value stocks are positive information on COVID-19 and a stimulus.
Sentiment Shows Confusion
Ever since the beginning of September, sentiment has been neutral. Euphoria appears to be gone. As you can see from the table below, that continued this week as the NAAIM exposure index fell 4 points to 55.3. Most never check the deviation, but this week it was a major story. It was the 2nd highest ever and the highest since 2008 as it was 82.7.
It’s pretty simple; fund managers don’t know what will happen. We have a potential stimulus being worked on, COVID-19, a tech bubble, and an election. First presidential debate is next Tuesday. Biden has a 58% chance of winning, according to most already proven biased polls. Remember what these same polls showed in 2016.
Zoom & Penn National Gaming Fall Over 7%
In the midst of the back and forth action, the large cap tech firms outperformed as the Nasdaq increased 37 basis points and the Russell 2000 only increased 2 basis points. Small cap value performed in line with the market. This index has underperformed in this correction despite not being overbought before it started. It’s down 10.3% since September 2nd, while the S&P 500 is down 9.3%. Small cp value really needs a stimulus.
ExxonMobil is in the dog house unlike anything we've ever seen from a large cap stock with no negative news on it. Obviously, large caps can crash when they miss earnings or have a scandal. This stock is down 27 of the past 31 trading days just because oil prices are low and the dividend will be cut.
Investors can’t believe that they have gone without a cut for this long. The stock has a double digit yield. If oil stays in the low $40s, they will finally cut it before the next ex-dividend date in mid-November. Exxon is down 16% in the past month.
Nikola crashed again as it fell 9.7%. We’ve rarely ever seen a company with sentiment this negative where we're not even considering buying the stock. Even though it’s down a lot, the valuation in June made no sense, so it’s irrelevant. Paying $7.2 billion for a company with no technology is crazy.
Investors are curious if the company finds a bottom or if it goes out of business within the next few quarters. They certainly have a lot of cash to play with. A problem is finding business partners.
Penn National Gaming stock fell 7.3% after announcing a public offering of 14 million shares which could raise $1 billion. This company would be near failure without the Barstool Sports acquisition. The stock is down 14% in the past 2 days. Tesla had a huge reversal. Their stock was up 2% on the day and up 9.2% from the morning low.
We're all very curious to see how deliveries do. They will be announced either late next week or early in the following week. Finally, Zoom Video fell 7.1% which is good news because it means investors are optimistic on the COVID-19 front. It’s great to see over 1 million tests in a day. Goal is to double that shortly. Tests haven’t yet limited the spread of the virus.
SPAC Madness
We know the euphoria in the riskiest stocks isn’t gone yet because the SPAC madness is still here. Nikola’s crash hasn’t stopped the money grab. IPO issuers have taken in $91 billion this year which is above the peak of $84 billion in 2000. It’s amazing that the record in 2000 lasted so long when you consider the growth in the economy and stock market since then. As you can see from the chart below, $40 billion or about 44% of the money raised has come from SPACs in 2020.
Palantir is the latest IPO set to occur. It will be via a direct listing. It will value the company at almost $22 billion. They delayed the IPO from this week to September 29th. There is an extremely high supply of SaaS stocks which could cause a tech crash. This IPO came about a month too late. You can be very sure it won’t see the same pop as Snowflake as it isn’t as good of a company.
Stimulus Is Coming
Investors are starting to get more optimistic about the possibility for another stimulus. House Democrats are about to go with a $2.4 trillion stimulus which is about $1 trillion less than their initial plan. And the White House has a plan worth $1.3 trillion.
That's optimistic because Congress funded the government relatively easily and the Democrats just lowered their ask. If the GOP can support a plan near $2 trillion, we will likely have a deal.
If you had to guess, there is probably about a 60% chance of a deal being made. Congress has less than 2 weeks to get a deal done before it goes on recess.
Frankly, most don't think Congress made a good enough attempt at a deal in August as the 2 sides were very far apart. The stock market correction should motivate the GOP to forge ahead with a deal. Dems have supposedly given them nearly what they want.