Chinese Bubble
We are in an unusual period where the Nasdaq is up 14 of the past 16 trading days, yet the American market isn’t the most overbought equity market. China takes the cake as its 3 major indexes all have 14 day RSIs above 80. It’s very rare for the S&P 500’s RSI to get this high. China is more volatile, but this is still scary/impressive.
Another scary aspect is the Chinese government is pushing for a healthy bull market. The government should not be pushing stocks to move up because it ends in disaster every time. This is not a healthy move higher; it’s a parabolic bubble.
On Monday, Chinese stocks had a $460 billion spike in market cap. Including Tuesday’s action, the Shanghai Composite index is up 6 straight days in which it gained 14% as of early morning on Tuesday in China. As you can see from the charts above, the initial spike in Chinese equities is at a quicker pace than the prior 2 bubbles.
The fact that the media picked up on the possibility of a bubble combined with its speed makes us think it will end much quicker than the other 2. Chinese stock market led the U.S. market higher on Monday, but that can reverse. The Nasdaq is very overbought. We could easily see a Nasdaq correction/bear market catalyze a bear market in China.
5th Rally In A Row
Monday was a relatively normal rally in some respects and other respects there are signs of extreme euphoria. Some select stocks were up modestly. It’s entirely possible that stocks in the utility and consumer discretionary sectors don’t fall at all when the tech bubble bursts this summer.
S&P 500 was up the 5th straight time as it increased 1.59%. It inched closer to its June 8th peak. It's unlikely that it will surpass that. Nasdaq rallied 2.21% which is fairly extreme since it was already overbought heading into the day as it reached its 2nd straight record high.
Biggest sign of euphoria is that the S&P 500 has increased at least 0.5% for 5 straight days which is tied for the longest streak since inception. It seems almost impossible that the S&P 500 rallies significantly on Tuesday, but it has been a crazy year where anything has been possible.
Put to call ratio fell to 0.42 which is the lowest level since June 9th which was right after the peak in the market since then. As you can see from the chart below, the 2 month average put to call ratio is almost exactly at the trough during the February decline. It has very rarely been lower in the past 19 years.
Tech Bonanza Led By Tesla
As of July 2nd, the Nasdaq’s 14 day RSI was at 65.38. Monday’s rally likely got it above 70. Nasdaq is the most overbought we’ve ever seen since the late 1990s. Russell 2000 was up 0.77%. The chart below shows the Nasdaq divided by the small cap index (S&P 600) is the highest since the tech bubble.
It seems like whatever you compare the Nasdaq to, it’s at a record. If you compared the Nasdaq to a weak asset like emerging market stocks, it’s probably even more extreme. American stocks are destroying the rest of the world because of the giant internet firms.
FAAMNG names did amazingly on Monday. Facebook stock was up 2.94%, Netflix was up, 3.55%, and Amazon was up 5.77%. Facebook investors are completely ignoring the boycott. It’s not a good time for large companies to leave Facebook because small firms are struggling from the weak economy.
As you can see from the chart below, the consumer discretionary sector to staples sector ratio hit a record high because of Amazon. That’s not entirely fair because Amazon is being powered by AWS not discretionary purchases. It’s really a tech company.
Surprisingly, many of the bubble stocks underperformed as all the money went into the big cap internet names and Tesla. CLOU cloud index only increased 0.81% as Nikola and Shopify crashed. Obviously, Nikola isn’t a cloud stock, but it is a bubble just like Shopify. Nikola fell 14.5% and Shopify fell 4.2%. The Chinese battery company Nio was up 22.7%. It’s up 67% in the past 5 days.
EV bubble stock Arcimoto which focuses on last mile package delivery with zero emissions was up 5.6%. It’s up 175% in the past month. This is a 3 wheeled vehicle without any doors.
Tesla has gotten so large that it can lead the entire Nasdaq higher. That’s impressive for a company that hasn’t even had enough profitable quarters to enter the S&P 500. Hype surrounding the stock is that the company will be profitable this quarter which will allow it in the S&P 500.
Some strongly believe Tesla will be added to the index, but would sell that news because it’s already more than priced in. Pretty much all the speculators think Tesla being added to the index can’t be priced in because these index buyers are going to buy it no matter what. While it’s true they definitely will buy it, if euphoric speculators buy it in anticipation of this move, it can be more than priced in.
Buying in the past few weeks far exceeds the buying from the indexes. The stock was up 13.5% on Monday and is up 44.4% in the past month. It has officially gone vertical. Most of the hottest stocks have been on a tear in the past 5-6 days following a period where they had already done well.
To me, this looks like the final phase of the bubble. It’s tough to short the bubble because if you are wrong by a couple days, you can lose huge amounts of money. Stocks rise the quickest at the end of bubbles. Almost all of Tesla shorts have covered their shares.