Another Big Rally
The stock market is starting to look overheated as it reversed Tuesday’s selloff on Wednesday, closing at a new bear market high. Stocks are due for a correction. CNN fear and greed index rose 5 points to 53. Neutral is the new extreme greed with the economy still in flux.There’s no reason for the S&P 500 to hit new lows. But it has gotten ahead of itself given the economic and COVID-19 uncertainties let alone the 2020 election.
As you can see from the chart below, the put to call ratio is near where it was in February before the bear market. When this type of excitement occurs, it usually leads to pain. Retail investors are all in. We're ready for another 5% correction.
2ndLargest 40 Day Rally Ever
As you can see from the table below, this has just been the S&P 500’s 2ndbiggest 40 day rally ever. That’s with the 2 biggest cities in the country still locked down, uncertainty about another spike in COVID-19 cases in the 2ndhalf, and the highest unemployment rate since the Great Depression. Some investors are all for buying stocks when the labor market is weak, but improving. However, the rally has gotten too hot. As stocks rise, many get more afraid of the exuberance retail traders are showing.
Personallyl, I care deeply about valuations. They are starting to get too hot. That goes against the findings in this table which shows the median gain in the 6 months following such rallies is 3.6%, with 72% showing positive results. Only greater 40 day rally was the 2009 rally following the end of the bear market.
This situation is a bit different. Cloud stocks remind me of the oil and fertilizer stocks in 2007-2008 which rallied while the rest of the market was weak. Difference here is tech stocks can power the whole market higher because they are a larger percentage of the market than those momentum stocks in 2007-2008 ever were.
Already An Average Year Even Though We’re In May
S&P 500 has had a plus or minus 1% move in 57% of trading sessions year to date. It has been a volatile year which has brought about a lot of opportunities. You had to act quickly in late March, but I think there will be future corrections which will be great buying opportunities.
As you can see in the chart below, the total number of days where the S&P 500 moved more than 1% is already above the long term average and we’re only in May.
2ndhalf of the year will be less volatile than the first half, although, that prediction will be wrong if a 2ndwave of COVID-19 occurs. Fact that stocks ramped so much higher on Monday makes me think the bear market is alive and well. You see strong moves like that in bear markets, not bull markets. Moderna information was nice, but it’s not even close to a guarantee. It’s just early positive news.
Review Of Wednesday’s Action
Stock market roared higher on Wednesday as it more than made up for Tuesday’s losses. S&P 500 was up 1.67%. The big tech companies roared higher. I think we are near the end of this momentum trade. Nasdaq was up 2.08% as Amazon rose 1.98%. Amazon is up 31.61% year to date, yet almost everyone loves the stock.
It’s funny how you hear most investors saying the market is too high, yet they love a stock that has vastly outperformed the market. It’s up 48.99% since its March bottom.
Microsoft has been on a similar run as its stock is up 36.53% since the bottom and 15.59% year to date. Shopify was up 3.25% as it is up 141.4% since March 16th. Some might argue that these companies are doing well. At a certain point, even if a company is doing well, it’s stock can still crash.
Just because the big tech stocks are widely followed, doesn’t mean they can’t fall. When everyone is invested, there isn’t fuel for a further rally. Personally, I’m more negative on these big firms than I ever have been.
Russell 2000 was up 3%. That’s my favorite index because it includes the most beaten down firms. A drop in Urban Outfitters stock was surprising because everyone knew clothing brick and mortar retail was a disaster. Apparently, these results weren’t baked in.
Traffic in America was down 65% and sales fell 50%. New online customers were up 65%, but the firm lost 55 cents per share. The firm guided for a 60% drop in comps in Q2. It's impressive that the company came out with guidance. They predicted the worst-case scenario. That makes me constructive on the stock.
Every sector moved higher on Wednesday. Worst was healthcare which was up 0.12%. Healthcare has been underperforming and will likely continue to do so in the coming months. If Joe Biden calls for left leaning healthcare policies and does well in the polls, the health insurance stocks can crater.
Best sector was energy as it has led the market higher ever since the March bottom. It was up 3.82%. Many are heavily invested in the sector. 2ndbest was communication services as Facebook was a huge winner. Facebook was up 6.04% as investors grew more excited about its partnership with Shopify as the firm pushed further into e-commerce. Shopify is also partnering with Pinterest.
Shopify doesn’t just have stock momentum; the company is genuinely improving. It’s simply too high. If the stock prices in perfection, good news shouldn’t push it higher. Wedon’t think Facebook is priced for perfection even though it hit a record high and is up 57.5% from the March bottom. The company has a wide moat, strong growth, and a reasonable multiple. That being said, if the big tech stocks fall, it will decline with them.
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