Modest Thursday Selloff
On Thursday morning, the futures market looked grim as the S&P 500 was down over 2%. Investors didn’t understand what catalyzed that decline, and didn’t think the Fed was hawkish at all like some said. Sure enough, the S&P 500 bounced back in the futures session and closed down 0.84% in the cash session. Tech stocks are still in a bubble, but this was just general weakness. Tech underperformed again as it has most of the time this month. Value has beaten growth in September by the most since 2000.
As you can see from the chart below, the Nasdaq 100 is down 8.5% this month which is its worst month since December 2018. That’s pretty surprising since the S&P 500 fell 20% in the fall of 2018, while this decline hasn’t even registered as a correction for the big cap index.
We have had a lot of declines in the past 10 years where tech has outperformed. A decline in March and the subsequent rally has simply been a more extreme version of the action that has taken place for years. That’s what makes it a bubble that’s ready to pop opposed to a long term uptrend.
Details Of Monday’s Action
Russell 2000 fell 0.63%. This wasn’t a good day for small cap value stocks as they fell the same amount. Regional banks were down 55 basis points. Cloud stocks were hurt as the index fell 1.28%. Ironically, even though the CLOU index is down 13.5% from its recent peak, it seems like momentum tech is impenetrable. This has been such a normal correction. Tech has underperformed, but nothing crazy has happened.
Nikola is down 57.6% from its record high, but the company still has a $12.8 billion market cap which is remarkable for a firm that is outsourcing basically its entire production to GM and Bosch. This is not the bubble burst we expected before the market corrected. That being said, the major catalysts haven’t fully occurred.
They are increased COVID-19 testing, tougher comps combined with more competition, and more IPOs flooding the market with supply. We saw the Snowflake IPO hurt the tech sector on Wednesday. The stock fell 10.4% on Thursday as its valuation made no sense. It still doesn’t make sense.
Zillow Group was up 1.3% to a new record high. The stock is up an enormous 308% in the past 6 months and 9.2% since September 8th even though its home flipping business has been a disaster. That stock is expected to earn -9 cents in 2021. Lemonade is up 10% in the past 2 days even though it has a flawed insurance business model.
Anything that promises to change the world is gaining attention even in this correction. This wasn’t close to the bust people expected. It’s still coming, but we don’t know when that will be. Shopify has been one of the losers of late as investors are speculating on new companies. The stock is down 23.2% since September 1st. This is nowhere close to a bargain even after that decline.
Tesla was down 4.2% even though Piper Sandler raised its target to a ridiculous $515. Last year, Tesla was hated. Now it is loved. Frankly, we've never seen a company with worse fundamentals loved this much. As projected, the stock seems to have peaked about a week before Battery Day.
The fun starts next week when we can expect a sharp decline in the stock. Apple fell 1.6% to a new correction low as it is down 17.8% from its September 1st peak.
Penn National Gaming was up 7.6% as its price target was raised from $47 to $85 which is one of the craziest things we have ever seen a research firm do. The firm stated, "Although the valuation might appear stretched when evaluated against historical norms, we view PENN as a ‘story’ stock at this point, and thus find valuation less important to our overall investment thesis.” That’s scary.
They didn’t even try to say why the stock should go to $85. With the stock at $73, $85 wouldn’t be a shocker, but when this comes tumbling down, it will fall more than 60% from the peak. Draftkings was up 4.1% in sympathy as its stock is up 366% in the past 6 months.
Neither Overbought Nor Oversold
As you can see from the chart below, the market is in neutral as there aren’t many overbought or oversold stocks. Stocks in the real economy can’t sell off much more than they already have unless we get bad vaccine news. These stocks are mostly cheap or fairly valued.
A decline in tech can continue because those stocks need to fall dramatically to be fairly valued. In tune with this chart, the NAAIM exposure index rose slightly to 59.3. It’s done with its extreme euphoric run, but that doesn’t mean momentum stocks still can’t crash.
Software Not A Bubble
Software stocks aren’t expensive if you compare them to the biggest bubble in financial history. The industry’s relative forward PE ratio is 180% above the market. It peaked at about 240% in 2000. It’s way above the average bubble. It’s notable that if the economy gets back to normal, software earnings estimates are way too high.
They will come down with their multiples sometime in the next few months. We just don’t know when that will happen. Even though value has done great this month, my thesis hasn’t come true yet.
Conclusion
Value has beaten growth by the most in 20 years, but I’m still disappointed with this decline. Stocks like Zillow, Penn Gaming, and DraftKings are at record highs. Tesla is still wildly overvalued. Nikola still exists. This hasn’t been a real selloff in the risky stocks.
Speculation is still here even though some stocks such as Apple and Shopify have come down solidly. Those aren’t bargains, but it’s nice to see some of the air come out of those bubbles.