Extreme Optimism Continues
Surprisingly, the stock market rallied on Monday even though it’s extremely overbought and there are riots in the streets. We are close to a correction. A tense situation on the streets is escalating and stocks are due for a correction anyway. This reminds me of February where markets completely ignored COVID-19. We need to see a reaction from markets.
Investors are as excited to see the NAAIM investor positioning survey this week as we were in March. An obvious difference is this week’s reading is going to be very high and March’s reading was low. Usually, when the index is above 90, it’s a problem. It was 81.65 last week. The reading comes out on Thursday with data from Wednesday. Some predict it will be in the low 90s.
CNN fear and greed index finally reached greed for the first time since February as it rose 6 points to 58. This isn’t a sell signal. A Twitter user tweeted a survey where he asked if the S&P 500 would finish the year positive or negative. 57.4% out of 1,235 users said positive. Only 42.6% said negative. With the S&P 500 down 5.4% year to date, the bullish investors are predicting nearly a 10% annualized gain even with the negative headlines coming out.
The stock market has never been down 30% and finished green for the year. This would be a historic turnaround if it happened. The chart below is very scary for U.S. bulls. As you can see, the net percentage of fund managers who are overweight U.S. equities is almost 25%. Emerging markets are near zero. Japan is near negative 10%. Eurozone is near -20% and the U.K. is less than -30%. Going long America versus other countries is a crowded trade.
Not Everyone Is Bullish
Not everyone is bullish obviously. Anyone who looks at the S&P 500’s PE multiple is bearish. A problem with looking at the forward PE multiple is stocks are pricing in 2021 earnings already. Even based on them, the stock market is expensive. The forward 1 year EPS estimate is about $140. Estimates are for 28.2% EPS growth in 2021. That’s about $180 in EPS which is where estimates peaked before the recession.
Even based on those earnings, the market isn’t cheap. The PE multiple is 17. Essentially, the market has already priced in a full EPS recovery way before it has happened. The bottom which will be in Q2 hasn’t even happened yet. It took 6 years for the stock market to recover the last bear market’s losses. If the market fully recovers this year, this bear market will be very similar to the Q4 2018 crash and the 1987 crash.
CFOs are in line with those following multiples as they are bearish too. CFOs were asked if the Dow will get above 29,000 or fall below 19,000. 33% of North American CFOs said above 29,000, while 47% said below 19,000. Rest of the world was even more bearish. Maybe North American CFOs are biased or maybe global CFOs are more aware of the current risks. They could be aware of the risks because their markets have lagged America’s equity market.
Review Of Monday’s Rally
The stock market had an amazing day when you consider the negative headlines and how much it has rallied recently. S&P 500 was up 0.38% as it cannot be stopped. This rally is different from other moments of strong momentum because this is occurring during the worst news events of our lifetime.
It is much different from the rally in 2019. The economy wasn’t strong in 2019. But we were still in a low growth environment. At worst, there was the potential for a mild recession. We are now in the deepest recession since the Great Depression and riots are breaking out across the country. S&P 500 is up 8.36% since May 13th. This explains why many are saying nothing can take the stock market down. The rally seems impenetrable. When the market seems the strongest, it’s the best time to take profits.
Nasdaq was up 0.66% and the Russell 2000 was up 0.81%. Small caps have been on fire recently. Since May 13th, the index is up 13.96%. It’s curious why the index was down 0.6% in the last 15 minutes of the session. It is more volatile than the S&P 500, so this may have been nothing. And, it seems like every night the futures market rises at the same time.
Futures market increases around 2AM. It’s impressive, predictable, and is almost as if the market is broken. This is the exact opposite of March when the futures market would limit down every day. We have come full circle. Riots have the potential to cause excess volatility. We previously expecting a small 3% correction, but now see a 10% decline occurring. This is a new negative catalyst that’s being ignored for now.
Every sector was up except healthcare which was down 1.01%. Best 2 sectors were real estate and energy which rose 2.1% and 1.68%. A big winner on the day was Tesla which rose 7.56% to $898.1 which is about 2% from its record high. Many bet it hits a new record high this week. The stock rose because the successful SpaceX rocket launch adds to Elon’s brand image. The launch was a big marketing event for Tesla. It’s amazing because Tesla doesn’t pay for advertising. Elon Musk provides a bounty of free advertising via his social media and other companies like SpaceX.
We’re at an extreme moment for markets as the economy is a disaster while stocks are going straight up. While investors know that stocks price in the future, tell that to the rioters. The economy may have gotten so bad that it won’t be as easy to recover from the weakness as the market thinks.
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