Another Miss Of The June High
It’s tough to say if it matters that the S&P 500 keeps missing surpassing the June 8th high. Every day that it doesn’t make a new high, the more important that high becomes. And the market was up 0.28% which put it just 24 basis points away from the high. It’s down 19 basis points on the year.
The market will be volatile this coming week because of earnings season and the stimulus talks. 2020 has been an unpredictable year, so anything on politics, the Chinese trade war, or vaccines could shock traders. That doesn’t mean stocks will necessarily crash. We could just as well see a big rally.
Russell 2000 was up 0.39% and the Nasdaq was up 0.28%. Tech stocks had a rough week like we have been anticipating for a while. As you can see from the chart below, the Nasdaq 100 underperformed the S&P 500 this week by the most since 2009. Since the S&P 500 had a good week, this underperformance wasn’t that big of a deal.
If the oversold big internet names use this decline as a lunching pad for a rally after they report (outside of Netflix which already reported bad numbers), we could see the Nasdaq 100 outperform again. CLOU cloud ETF is down 5.72% from its peak on July 9th. Arcimoto, the 3 wheeled electric car firm, has seen its stock fall 28% since July 8th.
Let’s not claim victory yet. Everyone knew the tech stocks were due for a pullback. If you owned tech shares and didn’t sell, you probably still aren’t feeling bad that you didn’t sell at the peak. Long term holders aren’t concerned with minor declines in volatile stocks. They would need to pay big tax bills if they took profits in anticipation of small declines.
Question still remains if this was a substantial reversal or if it was a garden variety pullback. Many are not expecting a 2000 style decline, but have been calling for a mini bear market/large correction in the Nasdaq.
Big Tech Earnings Dates
Let’s quickly review the earnings dates for the big tech names outside of Netflix which already reported. Amazon, Alphabet, and Apple are reporting on Thursday, July 30th. Microsoft is reporting on Wednesday July, 22nd. Facebook is reporting on July 29th.
Tesla is reporting this coming Wednesday in what will be the Super Bowl for traders. Tesla is the most controversial stock in the market.
If it reports a profit, it will be added to the S&P 500. Some are saying it doesn’t matter if Tesla reports a profit because S&P Global will grant an exception because of the pandemic. They could say Tesla would have been profitable under normal circumstances, so it should be included.
This has been the most hyped addition to the S&P 500 most have ever seen. New traders who had no clue how companies were added to this index are suddenly putting all their money in Tesla to take advantage of that bump. Of course, in the long run this is irrelevant. It’s amazing to watch the short termism these shareholders are exhibiting because they always say they don’t care about near term results.
Another Scary Nasdaq Chart
We have seen many scary Nasdaq charts in the past 4 weeks. That’s because it has been on a rampage. It seems like the media is making a big deal about a possible big decline which could indicate it’s overblown. Interestingly, the media claimed the Shanghai Composite was about to go into another bubble, but its rally recently fizzled. The index is down 6.85% since July 9th. Obviously, it’s possible for the index to spike again though.
As you can see from the chart above, the Nasdaq’s 50 day daily sentiment index is at the top 4% most overbought level in its 20 year history. It’s in the top 1% since 2011. Only 17 days in the past 9 years has it gotten this high. These past 3 warnings signs flagged the biggest declines in that period.
We have the short VIX blowup in early 2018, the late 2018 mini bear market due to recession fears and Powell saying the balance sheet unwind was on autopilot, and the COVID-19 crash this year.
It took the longest for the indicator to be right this year as it gave the warning sign in late January. Markets can stay overbought for weeks and even months, while markets usually don’t stay extremely oversold for long. That’s because markets rise less than 1% many days in bull markets, while they fall as much as 5% per day in bear markets. That level of increases can keep going indefinitely, while those declines can’t.
Investors Love Europe & Tech
Fund managers actually are reacting to COVID-19. That’s why they are long Europe which has better dealt with the virus than America. The chart below shows investor positioning in Europe rose about 9 points in July. It’s also why they are long tech as that positioning was up about 5 points.
Investors were already long tech in June, which is why it’s considered the most crowded trade in history. Banks and value stocks were hated at the time of this survey as bank positioning fell about 10 points and value over growth fell about 11.
Value stocks just had a great week as this was a reverse indicator. Value stocks have been underperforming for many years, which is why this one week is meaningless. Value stocks need the stimulus to spike growth in 2021 to outperform for the intermediate term.
Value stocks are very cheap compared to growth stocks, but they still need rates to rise and COVID-19 to go away to do well. We don’t see rates rising that much, but do see COVID-19 cases falling in August. We all hope a vaccine will come next year. There are over 100 being tested, but that obviously doesn’t guarantee success. We will get more information on Oxford’s vaccine this Monday.
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