A number of talking points today. Lets drop the preamble, and get right down to it. My conclusions are at the bottom.
- The market ain’t cheap: Currently, the S&P 500 trades at 29.4 trailing earnings – as seen on the chart below. Its at 25.9 x current year estimates, and finally, at 20.5 x 2021 projected earnings. From an historical perspective, this is high; Raymond James research notes that it is in fact it is more than two standard deviations above the mean. “Stretched valuations should give investors pause as history often suggests buying into an expensive market limits future gains.” says the crew at RJ. Chart below is courtesy of multpl.
- A tale of two cities: The S&P 500 is up something around 5% on the year. Sounds good, right? But wait…Of the 505 companies making up the index, 314 of them, representing 62% of the companies in the index, have had negative returns for 2020!! That’s just shy of 2/3rd s of the market being down!!The cap-weighted indices seem to me a lot like a slight of hand magicians trick… the art of illusion! AAPL is up 52%, MSFT +31%, AMZN +68%, FB +24%, and GOOG +11%. They weigh in at over 20% of the capitalization (i.e. the influence on the returns) of the S&P 500. Can you say…narrow breadth, kids? The chart below compares the SPX (black line) to the broad market (NYSE composite). Were it not for the few big names in the SPX cap-weighted index – the SPX would be well below its highs. The question remains: Does the average non-speculative investor hold a portfolio similarly weighted to the SPX in the FAANG’s/etc? Next question…Should they?
- Irrational exuberance: As I noted on this blog, small options traders net speculative activity is the most extreme since 2007. According to Sentimentrader, when premiums are considered, it is by far the most extreme ever. Similarly, smart money/dumb money (courtesy www.sentimentrader.com) is getting to dangerous levels that typically preclude a market correction. Same with the Put/Call ratio.Its well into “sell” territory.
- Speculation abounds: I noted the rampant rise of the FAANGS (noted above). Even crazier, Testla is up 390% in 2020. I guess GM. Toyota, Honda, VW etc are obsolete and incapable of ever building quality electric cars that will ever get meaningful market share…or…its a TSLA bubble. One or ‘t-other. TSLA is 136% above its 200 day (40 week) SMA. I don’t like to see stocks move much more than 10% over their 200 day SMA’s, and tend to get very concerned by moves more than 20% above the average. This move by TSLA reminds me of Bitcoin. Back in November of 2017 I correctly began pounding the table that Bitcoin was massively overbought and due to crash and burn. Here’s the blog with that call. Admittedly, Bitcoin had hit about 280% above its 200 day SMA when I made that bearish call. Could TSLA get even more goofy? Well, perhaps. But the players in this stock are gambling on goofy getting goofy-er. Like I did with Bitcoin in 2017, I’m callin’ you out Tesla! You may last a few more rounds in the ring, but you goin’ down sooner rather than later, Holmes!
- Stand six feet away: US COVID numbers might be improving. That, along with vaccine news starting to trickle in may be encouraging for the economy in 2021. I copied this from David Chapman’s “Technical Scoop” newsletter.
- Its an election year: The charts below present the returns of the SPX in the months (mid August to November’s election) leading into an election. The gold line represents election years, while the black line is all years. Note the decline on the gold line (election years) in the fall vs. the relatively lesser decline on the black line (all years). Chart below taken from Brook Thackray’s monthly newsletter. Brooke notes that there’s always the chance of the Fed becoming less aggressive with monetary policies leading into the election given perceptions of appearing supportive of any political leader. If easy money is what drives this market, what happens if that slows?
Progress in containing the virus spread may be the only potential silver lining here. An overbought, expensive market driven by speculation in a handful of stocks is hard to be too excited by. Add into that the uncertainty coming into any election, not to mention the potential for seasonal weakness from mid-August through October. That might be the recipe for a fall correction. To me, a much needed pause that should help markets remain healthy. We shall see. I continue to focus on value, dividends and cash, with a dash of gold and other commodity plays to diversify.