I wanted to take this opportunity to wish you and your families a very very Merry Christmas and share my hopes for a very prosperous and safe New Year for you and your loved ones.
Over the past couple of weeks, I have discussed why was positioning portfolios to participate in the traditional year-end “window dressing” “BS” rally. The Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven-day trading period the last five trading days of the current trading year and the first two trading days of the New Year and unfortunately for the Bad-News-Bears, the statistics are compelling. The stock market has risen 1.3% on average during the 7 trading days in question since 1950. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period.
Whether optimism over a looming new year, holiday spending,
traders on vacation, institutions squaring up their books before the holidays
(funds marking them up) or just the holiday spirit the bottom line is that
bulls tend to believe in Santa Claus and bears believe Santa is delivering coal
😊!
Please remember (please put those thought hats on) remember that at the beginning of 2020 the indexes posted a negative January effect/return following an incredible rally in 2019. More like 2013, the market’s extension was extreme with a near-record number of stocks above their 200dsma. The market needed to correct before continuing its advance to all-time highs in February. January 2021 has a lot of similarities to both 2013 and 2019. With the FED continuing QE and a near-record number of stocks above their 200dsma, and an extreme bullish bias, the risk of a correction looms heavy. A King-Trump government shutdown, stalled stimulus bill, or a surge in virus deaths could be the catalysts.
As I have spoken about much of the equity rally this year has been supported by the decline in the USD. Currently, foreign inflows into U.S. equities are near a record, along with net-short positioning on our precious greenback. Such is the perfect stealth type of environment for a sharp reversal in the dollar from deeply oversold conditions. Notably, over the past few days, we have seen a slight positive turn in the dollar. While still too early to definitively say a turn has occurred, this is something to watch very closely.
While I expect the “Santa Claus” rally to materialize over the next few trading days, there are risks heading into January. As there are occasions when investors have received a “lump of coal.” With current market dynamics more similar to 2013 and 2019, this may be a year investor wind up on the “naughty boy/girl” list.
I have shared data showing the more extreme overvalued conditions in the market. As quite often sentiment and valuation go hand-in-hand. One impacts the other and creates a self-reinforcing loop until something happens to break the vicious cycle. Over the past 40+ years, there have never been more severely overvalued firms within the SPX-500.
With the “Santa Claus” rally officially kicking off this coming week, I am maintaining our long bias with reduced hedges at the moment. Once we get into January, depending or a definitive answer on the state of the stimulus bill, potential government shutdown, and market technical levels, I will likely begin reducing risk and hedging portfolios with index SHORTS and inverse leveraged funds accordingly. As hard evidence is mounting quickly that the economy and earnings will likely disappoint very overly optimistic projections currently. Ans I believe that investors, in general, are way too far over-confident. Historically, such has always turned out to be a witch’s brew for a continued bull market advance in the near-term.
No question, 2020 has been a horrific year for the health of Americans during the Covid-19 crisis and the economic toll it has taken on society. But for technology and so-called disruptor investors, it was sheer bliss.
software stocks have gained on average 79%, in 2020, driven by low interest rates, and massive tailwinds from the change in basic assumptions about needing to work from home, and the lack of real decent alternatives for growth investors. As a bonus, firms with rising subscription revenues tightened their belts (layoffs) on expenses, helping margins. The Nasdog has rallied 46%, year to date, almost triple the return on the SPX-500. Chip stocks have vaulted 54%, cloud software stocks have gone parabolic returning 72%, within technology, almost everything worked out sweetly (I just wish I had held longer).
I hope that the bulls have thoroughly enjoyed the run in
2020) as 2021 will be a different outcome. As we have seen that interest rates
have begun crawl higher and growth stocks historically underperform when rates
rise. I believe the Covid-19 vaccines, in addition to reopening the economy, could
drive demand for commodities and add fuel to rising rates. There are certainly
areas of the global economy that have secular growth trends, and that will not
change. As we look to the continued adoption of cloud computing, the rollout of
5-G, and the battery electrification of vehicles.
But “valuations are extremely rich,” especially for the kind of “herd-mentality” stocks that populate far-far too many growth funds. The so-called great reopening trade premise could push investors to leave technology for cheaper opportunities elsewhere.
The IPO market will likely grow as I noted last week, 2020 was the biggest year for IPOs since 2014, and that’s not including special purpose acquisition companies, a suddenly extremely popular alternative manner to go public.
According to Renaissance Capital, the average initial public
offering in 2020 returned 75%, the best performance since the late 1990s dot-com
bubble years. Renaissance counts another 71 firms that have selected bankers or
filed paperwork to go public.
And there are several potential behemoths waiting in the wings: Renaissance sees post-IPO valuations north of $50 billion for Flipkart the Indian e-commerce leader now owned by Walmart and the payments company Stripe. Also, possible: IPOs for Instacart, the grocery delivery company; stock-trading platform Robinhood; and Compass, the real-estate brokerage firm.
Remember all these offerings will likely suck liquidity out of the
markets
Cloud-based software companies have fantastic, asset-light business models, with predictable revenue streams, big growth, and gigantic addressable markets. But the prices...folks are paying for these players are NUTS! Morgan Stanley’s Weiss recently noted that enterprise value-to-sales multiples for software stocks now stand 85% above their five-year average. Valuations will contract in my opinion significantly (look at “ZM” as a recent example).
Open for business, or are
we Now, that vaccines are here, it is really time to consider
reopening bets. (INTU), (YELP), and (GRPN) should all
benefit as conditions normalize for small businesses. Expect gains at online
travel firms (BKNG) and (EXPE), which are both cheaper
than (ABNB) business, which was buoyed by the quarantine, could be a
burden in the recovery.
Investors shifted course at the beginning of November,
trading away from the Covid-19 helped darlings after the election results and
the announcement of positive clinical data for the Pfizer and Moderna vaccines.
The reopening stocks, including airlines, hotels, cruise lines, traditional retail, and industrial firms, rallying in anticipation of renewed activity in their operating environments (folks hoping and praying for the economic light-switch to turned on). The other Players on a rampage are the latest so-called technology disruptors, most of which have recently gone public, including TTD, SNOW, PLTR, MDR, CRWD, QS, to name a few “primarily software firms” that provide a unique way and/or system to store, sort and utilize information, often for specific industries. One look at the near-parabolic price charts of these illustrate how hot this chase and speculative type of market has been.
I have previously written about the surge in retail trading (Robin hood type), which has been a major force behind this phenomenon, especially among younger folks for whom stock trading seems to serve as a surrogate for unavailable leisure activities and sports gambling. Public.com, a social-networking site, created for small dollar-dominated trading and first-time traders were fostered so many could learn about stocks from each other.
In terms of how extended some of these investor favorites have become, I compared the number of stocks valued at over $10 billion that trade for more than ten times revenues for 2021 and I found over 150 such players; according to FactSet...there are 5-6 times more stocks in this over the extended category now than at the close of 2018. Some of this can be explained by significantly depressed interest rates thanks to the FED’s intervention and overt speculation and yearning to participate in the parabolic-rise to-the-right an incessant trend where all dips are bought is also a likely bullish factor. This parabolic rise of the aforementioned technology names reminds me plenty of the Greenspam dot-com bubble.
Please let us not forget that a high percentage of the stocks rising parabolically into thin air on most traders apps will face new potential entrants with new novel technologies, crowd appeal, and their luster will fade.
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