Correction Nearly Hit (Tesla Crashes)
With the S&P 500 falling 2.37%, it nearly hit correction territory as it is down 9.6% since its peak. In the near term, the market is oversold, but there are still bubbles in the tech sector. There was significant weakness in tech on Wednesday as Apple fell 4.2%. It’s now down 20.2% since its peak a few weeks ago.
Now that investors are actually looking at valuations, the stock can fall further. We can see a greater than 50% in total. Since the tech sector hasn’t gone into full meltdown mode, there's no doubt this stock can fall further.
Only story stock that has melted down is Nikola which fell 25.8% on the news that BP backed away from a potential partnership on hydrogen stations. The stock is down 57.7% since September 8th. It took the founder retiring and a report that the company faked a truck commercial to get the stock down. We’re far from true negativity in the EV industry.
Tesla stock fell 10.3% on Wednesday because the Battery Day presentation was a major disappointment. Since this stock lives on hype alone, it faces a huge problem. There’s nothing left to look forward to. Split and Battery Day have already happened. Model Y was released.
Next product launch, the Cybertruck, isn’t coming out until next year. And the next news event that will impact the stock is its deliveries announcement. Most are expecting a big disappointment.
Investors Aren’t Fearful Yet
Two markets appear to exist: tech and value. One of them involves the tech story stocks and there are the actual profitable companies which mostly haven’t done well in the pandemic economy (which won’t last). There is no fear among tech investors and yet intense fear among value investors.
In fact, there is so much fear among value investors, it has turned into outright panic almost as bad as the bottom in March. There are more growth stocks in the overall index; this equates to modest concern. That’s less than normal for a nearly 10% correction. Usually, there is more fear.
As you can see from the chart below, in the past 25 years, there has always been more fear after 10% to 15% corrections as measured by the put to call ratio. S&P 500 might not be done falling. Even though tech was weak on Wednesday, this correction has hit value stocks way more than expected. S&P 500 could end up falling 20% if growth stocks crash further from here and value stocks moderately increase.
Retail investors buying weekly calls in Tesla have obviously lost money, but not enough to change their perspective. This is the most optimism retail traders have had in stocks since the late 1990s. They aren’t going down without a fight. As you can see from the chart below, small trader call buys versus put buys has only fallen down to the peak before the COVID-19 crash. There is still too much euphoria.
It would probably take Tesla falling over 50% to get rid of the hype. One of the most owned stocks by retail traders is Penn National Gaming. This stock fell 7.2% on Wednesday. It needs to fall over 70% before retail traders fully realize their mistake in buying into the hype.
On the other side of the coin, the AAII investor sentiment survey showed the percentage of bulls fell 7.1% to 24.9% and the percentage of bears rose 5.6% to 46%. A record streak of bears outnumbering bulls was extended. Even though these investors see a bubble in tech, they actually got more cautious after tech had a correction. Nasdaq 100 is now down 12.75% from its peak.
Real Pessimism
This may have been the biggest tech correction since the bull market started, but speculators don’t care about these losses because they are up so much this year. Only 2 ways actual fear will come are if COVID-19 goes away, allowing for less reliance on technology or if interest rates rise. 10 year yield is still only at 67 basis points. There is nothing to worry about on that front.
However, there is more to worry about on COVID-19 as the results of the treatments and vaccines are coming within a few weeks. Furthermore, Abbott’s tests are set to be put in use very soon. In over 20 states, officials aren’t releasing complete data on antigen tests or distinguishing between the types of tests in the data they report. It might take a few weeks before antigen testing is shown fully and separated from molecular testing.
If you want to see real fear, look at the small cap value stocks and energy. Small cap value index fell 3.2% on Wednesday, putting it down 10.6% since the September 2nd high. It’s marginally losing to the S&P 500 which is terrible because it underperformed to the upside.
Regional bank index is in crash mode as it is down 9.8% in the past 3 days and 11% in its 5 day losing streak. It’s down 17.7% since August 11th. Furthermore, ExxonMobil is in disaster mode. This stock has done so badly, no one wants to admit they own it. It’s down 19 of the past 21 days. As you can see from the chart above, it has about the same market cap as Zoom. It’s down 37.2% since June 8th.
Zoom Is The Most Important Stock
Most important stock in the market is no longer Apple, Tesla, or Shopify (which was down 3.7% on Wednesday). It is Zoom Video which rose 1.6% on Wednesday to another record high. This stock is a sentiment check on what the market thinks of the COVID-19 crisis. Investors want it to fall because we all want the virus to be solved. That stock is up 42.7% since September 8th, signaling the market may be gearing up for another wave of COVID-19.
This stock is only a conduit for investors betting on COVID-19. No one cares about the valuation. It has a 541 PE ratio and a 92.7 price to sales ratio. That’s despite its mediocre 0.9% EBIT margin.
Optimists say to ignore valuations because they don’t account for the ramp over the next few quarters. It's likely the first half of 2021 will be its earnings peak for the COVID-19 cycle. It’s all downhill from there.