Huge Rally To New Bear Market Highs
It’s tough to quantify what we are seeing in markets. It’s a mixture of extreme euphoria and extreme pessimism. That makes no sense, but we are in unprecedented times. To further explain, almost everyone thinks the stock market is expensive, yet the action has been remarkably bullish.
Many indicators aren’t flashing oversold or overbought readings because we have seen a sharp decline followed by a sharp rally. That cancels out apparently. CNN fear and greed index is 46 which was up 4 points. It’s now neutral.
To be clear, the stock market is trading at a PE multiple of 21.6 versus this year’s earnings. Estimates are going to keep falling in the next week, but most of the decline has happened already. Hence, valuing stocks based on trough earnings is a fool’s game because we know earnings will be much higher in 2021.
On the other hand, the economy is barely showing signs of improving, yet the market is acting as if the recovery has already started. There is only a small inkling that the economy will get back to normal in a few months or quarters. Stocks are taking that and riding with it.
This isn’t completely unprecedented because this wasn’t a typical recession. This was an exogenous shock that is projected to go away in the coming months. Key here is the 4 horsemen. They are greater testing, antibody testing, a vaccine, and a treatment. Since many companies and teams are working on all 4 and some progress is being made, the market assumes a solution will be garnered within the next 12 months and possibly sooner.
As you can see from the chart below, Goldman Sachs is still clinging to the bear case for stocks even though it sees higher prices by year end. It sees stocks falling to 2,400 in 3 months and then rising to 3,000 by year end. Theory is economic reports will send stocks lower. However, I disagree. Everyone knows the economy is in dire straits. Personally, I see a modest pullback led by Amazon, Shopify, Tesla, and Zoom. But I don’t think the market will get anywhere near 2,400 potentially ever again.
Unbelievable Rally Continues
We are very close to me saying this is no longer a bear market. S&P 500 was up 2.66% on Wednesday which means it’s only down 9.02% year to date. It’s down just 12 basis points from last year. As you can see from the chart below, 87% of the S&P 500 was up. This week has seen amazing breadth as the market has moved towards liking retail and energy. That being said, the back half of this week, including Wednesday will be amazing for big cap tech.
Alphabet rose 8.74% on Wednesday because of its report and Facebook and Microsoft reported great results on Wednesday evening. Nasdaq was up 3.57% on Wednesday. It will likely hit a new record high this year. And it is only down 65 basis points on the year. It’s down 9.19% from its record high.
Russell 2000 was up 4.83% as the market had great breadth. Oil tankers had a terrible day as Nordic America Tanker stock fell 14.31%. These stocks had their day when oil was negative briefly. Now WTI oil is up to $16.77. That’s why the energy sector was up 7.35%. It’s rallying off extremely oversold levels.
On Thursday morning Royal Dutch Shell cut its dividend for the first time since the 1940s (it had 0 GAAP earnings). It was a 65% cut. Exxon is likely next to cut its dividend. It’s unsustainable. Essentially, this means the energy sector is in the worst shape since the 1940s. That’s a huge buy signal. Tech and communication services were up 4.22% and 5.05%, while utilities and staples were down 0.92% and 0.41%.
Elon Musk Curses And Rants
Tesla has been the biggest story on Wall Street for the past 5 years. Nothing is changing in 2020 even with a global pandemic. Short sellers have been attacking Tesla for about 7 years. Elon Musk gave them even more reason to do so as he cursed on the conference call. That’s a huge red flag.
Normally, if the leader of a company was discussing how great the quarter was, he wouldn’t curse. Tesla stock is up 122% since March 18th and rose 8.9% after hours. That doesn’t sound like a stressful situation which implies something is going on under the surface.
Elon Musk stated, “But to say that they cannot leave their house, and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedom.” He went on to say, “What the f---. Excuse me. It’s outrage, it’s an outrage. It will cause great harm not just to Tesla, but to many companies. And while Tesla will weather the storm there are many small companies that will not.”
Personally, I would never go long a stock that had management going on tirades on the conference call. Something must be wrong with Tesla that isn’t being discussed in the mainstream media. There could be a liquidity issue.
Specifically, Tesla reported $1.24 in non-GAAP EPS which beat estimates for a 36 cent loss. The firm had $5.99 billion in revenues which beat estimates by $90 million. This company will either change the world or be one of the most high profile bankruptcies in modern history, which is why it is so interesting. This report led to the most shocking update we have ever seen from a research firm.
Morningstar raised its share price target from $239 to $731. Long term investors using complex valuation models aren’t supposed to more than triple their estimates based on one quarter. The firm seems to have admitted everything they thought about the company was wrong. This situation doesn’t add up. We’ve never seen such a dramatic turn based on one quarter which didn’t reveal anything shocking.