Economics

June 8th Peak Was Significant

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Big Wednesday Selloff

The stock market sold off hard on Wednesday as there were the 2nd most new cases of COVID-19 ever; a few cities in the south and the west are near their breaking point in terms of hospital capacity. It’s looking more and more like the June 8th top will be very significant. 

Significant defined as the market won’t surpass that level for at least 2 months. Since it has already been 3 weeks and the market is down 5.63% from the peak, it would take a strong rally to get to a new high in about 5 weeks.

The market’s tone has shifted. For a brief moment in early June, there was no concern for risk. Now, risk is a big deal. The market has normalized in the sense it is starting to price in the increase in COVID-19 cases, the high valuations, and the coming election. Even still, the Nasdaq and tech stocks outperformed on Wednesday. It’s only a matter of time before we see a sharp selloff in the cloud stocks. 

Some investors correctly called for the volatility due to COVID-19, yet some in the media are blaming the decline on Biden’s rise in the polls. That’s weird because Biden has been leading by a significant margin for a few weeks. YouGov came out with a poll showing him up by 8 points. However, he was up by 8 points in this same poll 2 weeks ago. This poll likely didn’t cause stocks to selloff, if the market starts to price in higher corporate tax rates, we will see more declines.

S&P 500 is down 5.63% from its June 8th high. I think it will fall below the June 11th low and 3,000, but some are not extremely bearish on the short term like we were a couple weeks ago. If this ends up being a 10% correction, we are halfway done with it. 

Personally. I’m still extremely bearish on the Nasdaq which is only down 1.1% from June 8th (because it made 2 new records on Monday and Tuesday). If the Nasdaq falls 15%, it has barely completed any of its correction. In other words, it has much more room to fall than the S&P 500.

Nasdaq Overbought

Obviously, we know the Nasdaq is overbought. It ended its 8 day winning streak on Wednesday. As you can see from the chart below, the Nasdaq has had the longest streak of consecutive closes above its 20 day moving average since October 2006. In just a few more days, it will reach the longest streak since the runup to the peak in the tech bubble in the late 1990s. 

Nasdaq is due for a correction and it’s due to underperform the overall market. Some are calling for at least a 15% correction in the Nasdaq this summer.

Nasdaq is dominated by the major tech names. These stocks won’t fall dramatically when the tech sector corrects, but if you think they won’t fall double digits, you are very wrong. They have all had massive gains since the March 23rd bottom. As you can see from the table below, Apple, Microsoft, Amazon, and Google have had $1.8 trillion in market share gains since the bottom. 

They face regulatory issues in the next few years; there is no question there are risk factors being ignored. Apple likely has a bubble level valuation, while the others are just modestly too expensive. Netflix is the only FAANG name that doesn’t face antitrust issues. However, it burns free cash flow and has the narrowest moat.

Valuations Matter

It’s extremely common to hear investors say that it’s more important to focus on which company you buy than valuations. That’s true, but ignoring valuations has become too common. Value stocks have been thrown away. It’s good always look at valuations when you make an investment. Obviously, the overall market is expensive. 2 weeks ago, the ValueLine median PE ratio hit a record high which was 21.5.

As you can see in the chart below, it’s now in the 98th percentile. Median stock is more expensive than in the 1990s bubble. This data goes back to 1973 which means it includes a lot of data when rates were much lower. We don’t anticipate this percentile falling to 50 anytime soon unless there is a major negative catalyst. 

As you can see, at the bottom, the market got to almost the same percentile it reached at the bottom in early 2009. Problem is stocks have rallied so much they are expensive again. Let’s not fool ourselves into thinking another 30% decline is coming just because of valuations. If the COVID-19 stocks that the retail traders were buying drop considerably, it will likely shake a lot of froth out of the market. Many are expecting stocks to fall about 5% from here.

Wednesday Details

On Wednesday, stocks fell sharply as the S&P 500 fell 2.59%, the Russell 2000 fell 3.45%, and the Nasdaq fell 2.19%. Tech stocks outperformed once again. Whenever stocks fall because of COVID-19 worries, traders buy cloud stocks. Eventually, this bubble will unwind. 

CLOU cloud index was only down 1.95%. Obviously, that’s a significant decline, but it was less than the S&P 500, signaling the bubble is still alive. These are high beta stocks trading as if they are safety stocks. When the market rallies, they outperform and when the market declines they outperform. This insanity can’t continue for much longer. So far, I have been wrong for about a month. It’s nearly impossible to time tops. We might see this industry rally for another few weeks. No one has a crystal ball.

Best stock on the day was Kroger as it was up 2.2%. Worst stock was Norwegian Cruise Line which fell 12.4%. This stock is down 41% since June 8th as Dave Portnoy’s stocks have ended their rally. This stock is only up 103% from its bottom which is terrible because it had been up 246%. 

Every sector fell. Worst 2 sectors were energy and industrials which fell 5.54% and 3.51%. Boeing was down about 6%. 

The post June 8th Peak Was Significant appeared first on Theo Trade.

Source: First Rebuttal

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