NASDAQ: Technical Divergences, Einhorn on The Fed, Inflation, GME and the $100 Million Deli
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While the NASDAQ closed Friday at 14,052, only 43 points shy of its All Time Closing High, beneath the surface there are significant divergences. As you can see in the first tweet from Jonathan Krinsky, while the NASDAQ itself moves higher, the number of its components above their 50 DMAs has declined from greater than 80% at the February highs to 42% currently. In the second tweet, Mike Moses shows something similar with regard to the NASDAQ’s Advance/Decline Line which has been trending downward since the February highs. Brian G shows the same thing with respect to the NASDAQ-100. The explanation is that Mega Cap Tech is carrying this market higher overshadowing weakness among many of the smaller stocks on the NASDAQ which have rolled over since February.
As for the Fed, it fundamentally changed its framework last August. It no longer seems to care that monetary policy works with a lag. Actually, it has embraced an asymmetrical inflation policy: The Fed wants to be ahead of the curve on the downside to protect
the stock market and corporate bondholdersthe economy. Behind the curve is fine on the way up no matter how frothythe stock marketthe recovery. Now, it says it is only going to react to actual inflation that exceeds its 2% target for a period of time.Furthermore, the Fed has indicated that it believes any abnormally high inflation will be transitory. We wonder, how will the Fed know? Do price increases come with a label that says “transitory”? Our sense is that no matter how hot inflation gets in the coming months, the Fed will continue with zero interest rates and large-scale asset purchases. After all, the U.S. Treasury has a lot of debt to sell and it isn’t clear who, other than the Fed, can absorb the supply (David Einhorn, Greenlight Capital 1Q21 Letter To Investors, April 15, 2021).
With inflation already percolating, economic reopening just around the corner and a Fed disinclined to do anything that might hurt financial markets, inflation is almost certain to continue to increase and the Fed almost certain to be behind the curve in facing up to it. Whether it can put the genie back in the bottle when it finally does get around to facing up to inflation is unclear. Volcker did in the late 1970s and early 1980s but at the cost of a major recession. Is the Fed willing to pay that price this time around? If not, the result could be a complete economic meltdown with inflation spiraling out of control.
Einhorn on the Gamestop (GME) episode:
Finally, we note that the real jet fuel on the GME squeeze came from Chamath Palihapitiya and Elon Musk, whose appearances on TV and Twitter, respectively, at a critical moment further destabilized the situation. Mr. Palihapitiya controls SoFi, which competes with Robinhood, and left us with the impression that by destabilizing GME he could harm a competitor. As for Mr. Musk, we are going to defend him, half-heartedly. If regulators wanted Elon Musk to stop manipulating stocks, they should have done so with more than a light slap on the wrist when they accused him of manipulating Tesla’s shares in 2018. The laws don’t apply to him and he can do whatever he wants.
Einhorn on the $100 million deli:
Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next to the deli. The pastrami must be amazing.
10 Year Yield Drops 11 Basis Points, NASDAQ on the Verge of New ATHs, Precious Metals on the Move
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As you can see in the chart of the iShares 20+ Year Treasury Bond ETF (TLT) above, yields had been rising quickly in 2021 (bond prices and yields move inversely) until finding a bottom a couple weeks ago capped off by yesterday’s monster 11 basis point drop in the 10 Year Treasury yield to 1.53%.
On Wednesday morning, I argued that “Yields And Inflation Are Driving Everything”. The key chart in that blog was in a tweet by Schwab’s Chief Investment Strategist Liz Ann Sonders which showed that the move out of Cyclical Reopen names and back into Growth/Tech coincided with the stabilization of interest rates about a month ago.
Well that held true yesterday as the NASDAQ continued to lead the market higher (+1.31%). The S&P advanced 1.11% led by Tech (XLK +1.72%). The NASDAQ closed at 14,039 – 56 points below its All Time Closing High of 14,095 from February 12. (The horizontal blue line in the NASDAQ chart above represents the index’s All Time Closing High). With upside momentum as strong as it is right now, odds are that we make new All Time Highs in the days ahead.
For Top Gun, the most important action yesterday was in the precious metals and their miners. I have massively over weighted the miners in our portfolios via the following four ETFs: GDX, GDXJ, SIL and SILJ. Those ETFs were +4.14%, +4.14%, +4.04% and +4.98%, respectively, yesterday resulting in the best single day return of my 14+ year professional investment career. This is just the beginning of a massive move in the precious metals and their miners IMO.
Bank Earnings, Gold Vs Bitcoin
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Yesterday (Wednesday) 1Q21 earnings season got off to a strong start with reports from JP Morgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS). Let’s take a look at each in turn.
Let’s start with the biggest JPM (Market Cap $465 Billion). JPM reported a 10% increase in Revenue and 19% increase in Net Income to $4.50/share from $3.79/share compared to the 4Q20. While the former is solid, the latter was aided by a $5.2 billion release of provision for credit losses which works out to $1.28 per share. It was probably for this reason that JPM’s report was the least well received of the three with shares off 1.87% yesterday.
Now let’s take a look at WFC (Market Cap $175 Billion). Revenue was +1% and Net Income +64% to $1.05/share from 65 cents/share compared to the 4Q20. They released $1.571 billion in provision for credit losses or 28 cents/share pretax. Non performing assets as a % of total loans was 0.95% at the end of the quarter. The report was quite well received with investors sending shares up 5.53%.
Lastly let’s turn to GS (Market Cap $121 Billion). Their numbers were phenomenal with Revenue +51% and Diluted EPS +54% compared to 4Q20. Investors sent shares up 2.34%.
Overall this was a strong start to earnings season as all three companies appear to be firing on all cylinders.
Coinbase (COIN) went public yesterday and investors are piling into Bitcoin which hit an All Time High above $64,000 yesterday. Meanwhile, the traditional hedge against paper money devaluation and inflation, gold, languishes well off its August 2020 highs as investors pull money from the sector to invest in cryptocurrencies.
Personally, I prefer gold which has a much longer track record than Bitcoin as money in human history. With sentiment negative and the metal and its miners well off their August 2020 highs, I also perceive a lot more value here than in the beloved and overheated crypto sector. Lastly, gold and its miners are starting to perk up and show signs of life.
Yields And Inflation Are Driving Everything, Market Internals
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Tuesday’s market action was a microcosm of the larger picture. It started with the slightly hotter than expected March Consumer Price Inflation (CPI) number at 8:30am EST. But the decisive event was a strong 30 year Treasury auction at 1:00pm EST that resulted in a significant drop in interest rates which caused the NASDAQ and stocks in general to find a bottom and rally into the close.
In the chart of the day, Schwab’s Chief Investment Officer Liz Ann Sonders laid bare the larger context. As you can see yields have been driving everything for the last month. From November through February, we saw a rotation from Growth/Tech into Cyclical Value as the announcement of Pfizer’s COVID vaccine on Monday morning November 9 caused investors to start to position themselves for economic reopening. However, the Reopen Trade may have gotten overdone and, as yields have stabilized over the last month, investors have rebalanced out of it and back into Growth/Tech.
However, while the S&P and NASDAQ continue to go higher, all is not well beneath the surface. The market is being led by Mega Cap Tech which is masking weakness in the overall market. In another great chart from yesterday, the technician Andrew Thrasher showed how Cyclical Value stocks are not participating at the moment. Even though the S&P was +0.33% and the NASDAQ +1.05% yesterday, NYSE + NASDAQ Decliners (3,882) outnumbered Advancers (3,579).
Sentimentrader also highlighted the internals yesterday in their Daily Report blog [SUBSCRIPTION REQUIRED] after the market close. Even though the S&P was +0.33%, 279 stocks in the index declined compared to only 225 that advanced. In fact, yesterday was only the twelfth time the S&P has advanced more than 0.25% to a new high with net decliners greater than 50 in nearly 100 years! As you can see in the table, the S&P was down a month later in eight of the previous eleven instances including the last six.
Combining weak breadth with the extreme valuation and sentiment I wrote about yesterday morning puts investors in a tough spot. Sentimentrader said it best yesterday morning: the market is risky for late buyers but it’s also risky to bet against the momentum! I am managing this tension by being extremely overweight the precious metals miners with a significant allocation to defensive stocks and am not even considering shorting at the moment.
Extreme Valuation, Extreme Sentiment, Bank Technicals Ahead of Earnings
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We’re heading into 1st quarter earnings season with stocks showing relentless technical strength but valuation and sentiment are major red flags. Any way you look at it, stocks are beyond expensive. If you look at the first tweet from Callum Thomas, it shows that the S&P’s overall Price to Sales ratio is 1/3 higher than it was at the Dot Com peak while the median stock is 75% more expensive than it was then.
If you look at Callum Thomas’s second tweet, you can see that the Blended P/E, using the CAPE, forward and trailing P/E, is 33x – just shy of the Dot Com peak of 34.8x. The S&P 1500 Composite CAPE, or the P/E using average earnings over the last 10 years, is at 37x, twice the historical average and just shy of the Dot Com peak of 44x though higher than the 1929 peak of 33x. Gene Goldman, Chief Investment Officer at Cetera Investment Management, is asking the right question: “Is all the good news priced in?”
We’ve never really seen such a large and protracted tension like this, with the suggestion continuing to be that it’s risky for late buyers, and also risky to bet against the momentum – “With stocks surging, investors give up on hedges” [SUBSCRIPTION REQUIRED], Sentimentrader, Monday April 12
With stocks only going up, investors have thrown caution to the wind and given up hedging in the form of raising cash, buying puts, buying inverse ETFs and mutual funds, selling short futures contracts and buying credit default swaps. Sentimentrader’s proprietary Equity Hedging Index takes all of these into account and last week registered a reading of 9.7. In the almost 20 year history of the indictator, there have been only nine other weeks with readings as low. And in the 7% of the time that the index has been below 20, annualized returns are -4.0%.
First quarter earnings season kicks off in earnest tomorrow (Wednesday) morning with JP Morgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) followed by Bank of America (BAC) and Citigroup (C) on Thursday and Morgan Stanley (MS) on Friday. From a technical standpoint, with the KBW NASDAQ Bank Index running into resistance in the form of a couple of downtrend lines on the chart of its relative strength versus the S&P, the great technician Carter Worth is a seller here.
The Fed Is Buying Stocks
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Very suspicious final hour yesterday (Friday) with the S&P rallying 21 points on no news in the final 46 minutes that was reminiscent of two Fridays ago (3/26) when the NASDAQ was breaking down only to rally 259 points (~2%) in the final hour and 9 minutes on no news.
In my fifteen years of professional investing I have never seen such bizarre moves into the bell on a Friday afternoon. Whereas two Friday’s ago was an obvious place for the Fed to step in to bail out a market that was on the verge of breaking down, it’s harder to fathom what their reason might have been yesterday afternoon though one can speculate.
Perhaps they want to acclimate investors to these types of moves so they’re less suspicious of them. Perhaps they want to punish short sellers into a long weekend to make them think twice about shorting this market (the action the last hour and 9 minutes Friday March 26 got me to cover all our shorts at the open on Monday March 29). Whatever the reason, this is unnatural buying in my opinion and, though I can’t prove it, I believe this is the Fed buying stocks with the intent of pushing the market higher.
What this means is that though this is by far the greatest bubble in financial history, it is probably unshortable at the moment as I talked about in “The World According To Top Gun #60: Shorting The Bubble After Friday” (Sunday March 28). In that video I discussed how I was giving up shorting this bubble for now because I believe the Fed is buying stocks and I will instead focus on being long high quality, defensive stocks that will do well in a bad market but won’t be punished by the Fed’s stock buying and the precious metals and their miners who are beneficiaries of the Fed’s explicit and surreptitious interventions in the market but also won’t be hit if they decide to intervene to move the market higher to bail it out or just on a whim.
Big Tech Continues To Lead Market Higher, The Case For Gold Now
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Yesterday (Thursday) the S&P rose 17 points (+0.42%) to 4,097, breaking out of the range it had traded in since the first hour Monday morning of 4,068 to 4,086. The move was once again led by Big Tech with the S&P Tech Sector ETF (XLK) +1.44%.
The move in Big Tech has been so powerful that the QQQ was 11% off its All Time Closing High on Monday March 8 but is now back to within 41 basis points of it. You can see this in the chart above with the horizontal blue line showing the All Time Closing High of $336.45 from February 12 (QQQ closed yesterday at $335.08).
Facebook (FB) is a great example of the kind of bounce back we’ve seen in recent weeks. From a closing low of $254.69 on Thursday February 25, FB has bounced 23% in the last six weeks closing yesterday 7 cents off its All Time Closing High from Wednesday at $313.02. You can see this in the chart in Grayson Roze’s tweet above.
The concern with Big Tech, as discussed Tuesday morning, is valuation. At that time FB was sporting a 29x Enterprise Value / 2020 Diluted EPS multiple. It’s now 30x and FB has a $905 billion market capitalization.
Next, I want to make the case for buying gold, and the precious metals generally, now. One big reason can be seen in the tweet above from Macro Charts. The two main gold ETFs, GLD and IAU, have just experienced the second largest outflows in their history. In other words, investors are taking their money out of gold to invest it elsewhere. When this reaches a certain level, everybody who wants to sell has sold and there are only buyers remaining creating the conditions for a bottom.
Second, gold has been acting well in recent days seemingly finding support at $1700 (see Yuri Matso’s tweet) and forming a double bottom (Kahn tweet). Brian G has a different perspective and is not interested in the GLD which is now running up against its declining 50 DMA. We’ll see how gold handles its 50 DMA but the precious metals and their miners have been showing life in recent days.
The question arises naturally from Mark Ungewitter’s tweet showing the Gold/SPX ratio since 1965: Why buy gold over stocks when the latter have have outperformed the former over most of the last 10 years?
This is where fundamentals come in. Take a look at the two tweets above from Holger Zschaepitz showing the Fed and ECB balance sheets. They have absolutely exploded higher in response to the coronavirus as the two central banks have pumped massive amounts of freshly created money into financial markets to prop them, and the economy, up.
As I’ve written about many times, if and as this money finds its way into the real economy, it will be inflationary, potentially massively so. I would argue that this is already happening as represented by rising commodity prices and interest rates. Further, the reopening of the economy as the coronavirus is contained by vaccination will lead to a large pick up in economic activity and this will boost inflation even further.
Inflation is gold’s number one fundamental as it a store of value against paper money devaluation. If my analysis is correct, the fundamentals for gold, and the precious metals generally, has NEVER been better.
While gold’s fundamentals are incredible right now, I would argue that stocks are in a bubble. As economist Daniel Lacalle points out in his tweet above, stocks are moving higher mostly due to multiple expansion from all this new money being pumped into financial markets, not earnings growth.
To sum up: While the technicals for gold are starting to look better, a pure technical approach would have to prefer stocks over gold presently. However, if you take a look at the fundamentals, I would argue that the reverse is actually the case with gold being the far superior investment at the moment.
Price: Chopping Around, Internals: Bad Breadth, No Volume
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Since Monday morning’s gap up, the S&P has gone nowhere. In fact, we’ve been trading within a narrow 50 basis point range between 4,068 and 4,086. Tom Hearden characterized Tuesday as a “snoozefest” and yesterday was more of the same with the S&P +0.15%, NASDAQ -0.07% and Russell -1.60%.
Big Tech continues to lead the market with the S&P Tech Sector ETF (XLK) +0.53%. Because it is the biggest sector in the S&P at ~27%, strength here can cover weakness in a lot of other areas. And the biggest of the big were even stronger than the sector as a whole with Apple (AAPL) +1.34%, Amazon (AMZN) +1.72%, Microsoft (MSFT) +0.82%, Google (GOOGL) +1.35% and Facebook (FB) +2.23%.
If we dig into market internals, we see bad breadth once again and no volume. NYSE + NASDAQ Advancers to Decliners Wednesday were 2,693 (35% of all securities traded) to 4,762 (62%). In addition, Wednesday was the lowest volume day of the year for stocks according to @Not_Jim_Cramer.
Stocks Consolidate In “Snoozefest”, Precious Metals Show Life, Gun Background Checks and Sales Continue to Soar Amid Civil Unrest
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Stocks entered Tuesday’s session extremely overbought after two big up sessions on Thursday (4/1) and Monday. 89% of S&P components were trading above their 50 DMAs at the open yesterday. So it’s no surprise, in fact it’s technically healthy, that yesterday was a low volume “snoozefest” with the S&P -0.10%, NASDAQ -0.05% and Russell -0.25%.
One asset class that has caught a bid in recent days is the precious metals and their miners. The Gold ETF (GLD) was +0.80%, The Silver ETF (SLV) +1.08%, The Gold Miners ETF (GDX) +1.69%, The Junior Gold Miners ETF (GDXJ) +2.55%, The Silver Miners ETF (SIL) +2.57% and the Junior Silver Miners ETF (SILJ) +3.53% yesterday. As a result of this recent strength, they are all starting to look technically healthier (see “Precious Metals Finding Support and Eyeing Breakouts”, BeSpoke, Tuesday April 6).
Another data point from BeSpoke I found interesting yesterday was that gun background checks continue to surge (see “Another Record in Gun Background Checks”, BeSpoke, Monday April 5). Gun sales at the two leading publicly traded gun manufacturers, Sturm & Ruger (RGR) and Smith & Wesson (SWBI), are surging as well (Top Gun is long RGR and SWBI). Why? Because of all the civil unrest we’ve seen during the pandemic i.e. Black Lives Matter, The Capitol Riot, etc.. However, the stocks continue to be held back by fear of gun control legislation from the Biden Administration.
Risk On I: Big Tech Is Back, Risk On II: Frontier Markets, Caveats: Bad Breadth and Valuation
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The market followed through Monday after last Thursday’s breakout session with another explosive move higher. The move was once again led by Big Tech with QQQ +2.00% and the S&P 500 Technology Sector (XLK) +2.07% compared to +1.44% for the S&P overall and +0.49% for the Russell. Some of the biggest of the big technology stocks were up even more than that with GOOGL +4.19%, FB +3.43% and MSFT +2.77%, all closing at new ATHs.
Also breaking out yesterday was the Frontier Markets ETF (FM). With net assets of only $436 million, this ETF isn’t important in and of itself but for what it says about risk appetite, like Alphonso Depablos tweeted. This ETF’s country exposure is 19.2% Kuwait, 15.4% Vietnam, 10.8% Morocco, 8.3% Romania, 8.3% Kenya, 7.8% Nigeria, 6.9% Bahrain, 6.3% Bangladesh, 4.3% Kazakhstan and 3.6% Oman. I doubt more than a handful of American investors know much at all about the economies and stock markets of any of these countries so you know they are feeling good when they’re putting their money into these dicey areas of the world.
Despite the incredibly bullish market action, there are a couple of caveats. To continue with technicals, the Russell lagged yesterday, up only 0.49%, and so did NYSE + NASDAQ breadth with 4,593 Advancers (59% of total issues traded) versus 2,908 Decliners (38%). It’s surprising to see less than 60% of stocks advancing and almost 40% declining on such an explosive move higher by the major indexes. What it means is that, like in the first stage of the move off the March 23, 2020 lows, the biggest of the big stocks, Mega Cap Tech, are once again leading.
But investing in Mega Cap Tech carries its own risks because valuation here is getting out of control. Let’s just take the three stocks I mentioned earlier, MSFT, FB and GOOGL, each of which outpaced the market yesterday and closed at ATHs. MSFT is now trading at 36x 2020 Diluted EPS even after deducting its $71 billion in net cash from its market cap. FB’s equivalent multiple is 29x (excluding a 31 cent/share tax benefit in 3Q20) and GOOGL’s 36x. There is very little case to be made, in my opinion, that these multiples are not stretched.
More broadly, about 200 of the top 1500 stocks representing $2 trillion in market capitalization are unprofitable in each of the last three years, a level rivaled only by the top of the Dot Com Bubble.
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