Extreme Greed Again
This has been one of the best runs for stocks in recent memory as they continued to power higher on Thursday despite being very overbought. 14 day relative strength index was at 71.98 on Wednesday. With the 0.45% rally in the S&P 500 on Thursday, we expect it to be at least at 73. The stock market has been up 9 of the past 12 days. It’s now up 27.86% year to date.
As you can see from the chart below, it’s up 29.8% year over year which is the best performance since the end of 2013. Obviously, we are currently lapping the bottom last year. That was the start of this fantastic rally. This year there has been a great Santa Clause rally.
Investors are very optimistic now while last year they were pessimistic. The current situation isn’t fertile ground for another upswing. I expect weak returns in 2020. The biggest drawdown in 2019 was 6.84%. This year was slightly more volatile than 2017, but had better returns.
Average max drawdown is 16.3%. And the average is manipulated higher by a few terrible years. Therefore, although I see 2020 being volatile, it might not meet the average. However, it will definitely surpass the max decline this year.
We are finally seeing heightened optimism in the AAII investor sentiment survey. It's surprising that it took so long. But now that it’s here it’s fair to be a bit more cautious especially since stocks are getting expensive. In the next weekly FactSet earnings insight report, it will very likely show the S&P 500’s forward PE multiple is above 18. It’s almost 4 points higher than last year. I’m very cautious on stocks. In 2020, I expect a stronger economy with higher rates and very modest returns for equities.
AAII poll showed in the past week the percentage of investors that are bullish increased 6.5 points to 44.1% which is above the historical average of 38%. This isn’t euphoria, but it is concerning when combined with the other indicators. Percentage of bears fell 5.6% to 20.5% which is 10 points below the historical average.
NAAIM exposure index is the highest since mid-2018. Even the most bearish investor is net long and first quartile’s long exposure is 94.38% which is the highest since December 2017. VIX fell 8 basis points to 12.5 which is very low. It will be above 20 for a lot of 2020. CNN fear and greed index was up 3 points to 90 which is well into extreme greed territory. It’s very close to its peak in November. A very small correction a few weeks ago wasn’t enough. We need to see stocks fall almost 10% to get back to reality.
Thursday’s Action Explained
Nasdaq was up 0.67% and the Russell 2000 was up 0.32%. Apple has had an impossible to repeat year as the stock is up 77.32% year to date. It had about a 35% decline late last year. It’s not starting at such low levels next year. It will probably have a weak year based on how expensive it is. Only 2 down sectors were utilities and energy which fell 6 basis points. Best performers were real estate and communication services which rose 1.07% and 0.79%.
Treasury market sold off on Thursday. The chart below shows the 10 year yield when it briefly got above 1.94%. It seems to face resistance in the mid-1.9s. I think it will hit 2% very soon. It will probably rise quickly once it breaks that resistance. 10 year yield is currently at 1.92% and the 2 year yield is at 1.63%. Any differences between the two yields will rise a few basis points in the next few weeks.
There is currently a 48.9% chance of a rate cut next year. There’s now a 1.1% chance of a hike. That shows how far we’ve come. The bond market is starting to price in a stronger economy with more inflation. But there’s still more to be done to keep up with the stock market which has probably gone too far.
A recent rise in oil prices is helping the 10 year yield. It will hurt real wage growth. WTI was at $55.17 on November 29th. Now it’s at $61.13. I wouldn’t be surprised to see oil hit $70 per barrel next year on the back of the stronger global economy.
Not that Tesla needs another reason to rise as it is at an all-time high, but this increase in oil prices makes it more cost effective to get an electric car. The stock is up 58.65% since October 23rd mostly not because of the rise in gas prices. I’m expecting the launch of the Model Y to go well.
Reality is the Cybertruck will have little impact on the stock in the next year. It’s still far away from its launch. It would be nice for Model Y to launch into an environment with rising gas prices.
Democrat Debate Seemed To Have Been Good For Sanders
We won’t know who won the debate until after Christmas because the polls need to be tabulated and there won’t be much done during the holiday. However, initially it seems like Sanders did well and Buttigieg did poorly.
Buttigieg was attacked from the left from Warren and from the center from Klobuchar. I’m surprised the 4th place candidate faced so much scrutiny since there’s not that much candidates can gain from pushing him down. He’s leading Iowa by 2 points, but he’s only at 8.3% in the national polls.
A focus group of undecided voters mostly said Bernie won the debate. If he did, he could actually take the lead in the polls as he was only down by 7%, 6%, and 7% in the most recent polls. Personally, I think it will be Sanders or Biden who wins the nomination.
Buttigieg has become a long shot over the past few weeks as he has lost momentum. PredictIt has Biden at 34%, Sanders at 23%, Buttigieg at 16%, and Warren at 13%.