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For the second time this week (Tuesday was the first: See “Tech Bounces Hard”, Top Gun Financial, Wednesday March 10), on Thursday Growth trounced Value reversing a trend that began nearly a month ago. The S&P Growth ETF (IVW) was +1.90% while the S&P Value ETF (IVE) was +0.05% and faded throughout the day.
As for the major indexes, the S&P was +1.04%, the NASDAQ +2.52% and the Russell +2.31%.
The bounce in the overall market and especially Growth that started last Friday morning has undone some of the technical damage from the previous three weeks. The S&P actually closed at a marginal new All Time Closing High (3,939) yesterday (the previous high was 3,935 from Friday 2/12).
The NASDAQ snuck back above its 50 DMA though it is still about 5% off its All Time Closing High of 14,095 from Friday 2/12.
The leading ETFs of the bull market, QQQ, SMH and ARKK, are all still below their 50 DMAs and 5.47%, 8.71% and 17.82% off their All Time Closing Highs, respectively.
Taking all of this together, it still looks like just a bounce for Growth/Tech rather than a resumption of its leadership to me for now. And because Growth/Tech is so much larger a part of the major indexes than Value, if this interpretation is correct the bull market is topping.
Greg Rieben explored the question of the interpretation of the rotation from Growth to Value in an excellent blog post Thursday morning (“Is It Too Late To Rotate?”, Greg Rieben, March 11):
Have you heard about the “sector rotation” going on?
Growth stocks (technology) were once the leaders but over the last month, they have been under pressure. Meanwhile, value (energy, financials, and materials) continues to trend higher. How long will this last? Should you dump your growth/tech holdings and position in value?
It’s difficult to tell how long this trend will persist but with energy and financials underperforming for such a long time, many investors lack exposure and this could continue to add fuel to this trend.
Does this mean you should rush out and sell your technology holdings and shift into value? That’s not an easy question to answer and it’s not really a fair question either as there are many factors to consider.
Value is breaking out and that’s bullish. But, growth has had an incredible run and a correction or pullback was to be expected. It’s still early innings and it’s not easy to say how long this trend will persist. It’s only been about a month since we’ve been seeing this rotation.
The next few days and weeks will clarify which interpretation (Growth/Tech Bounce or Resumption of Leadership) is correct and that will have implications for if the bull market is still alive.
Because I believe this is just a bounce I used yesterday to exit our 10% long ARKK position from Monday (see “How I’m Playing The Bounce”, Top Gun Financial, Tuesday March 9) and flip short ARKK (15%), QQQ (7%), SMH (7%) and IWM (7%) midday.
Now that we’ve reviewed the technical picture, let’s turn to Docusign (DOCU, Market Cap $45 Billion) and Ulta Beauty (ULTA, Market Cap $18 Billion) earnings from yesterday afternoon to see what light they might shed on our understanding of the overall market.
DOCU reported Revenue +57% and Non-GAAP Diluted EPS of 37 cents. If you do the calculations on the line item guidance they gave for 2021 in the earnings release, I get $1.28 Non-GAAP Diluted EPS. Using DOCU’s current premarket price of $213.80 – down about 5% – gives a Price to 2021 Guidance ratio of 166x.
I divide the current market into four categories: Mega Cap Growth, Speculative Growth, Reopen Value and Defensive Value. With that forward multiple, DOCU sign falls squarely within the Speculative Growth category. It’s no surprise that it’s the 15th largest holding at 2.02% of the portfolio of Cathie Wood’s Ark Innovation ETF (ARKK).
While bouncing ferociously Tuesday and Thursday, Speculative Growth as exemplified by DOCU and ARKK still have a lot of technical damage to repair before they start looking healthy again. DOCU looks poised to test its 200 DMA today.
Let’s turn now to ULTA, a leading beauty retailer and therefore a member of the Reopen Value category. It reported Comps -4.9% and 2021 Diluted EPS Guidance of $8.85-$9.30. At its current premarket price of $315.60, giving it credit for its $1 billion net cash position, ULTA has an EV to 2021 EPS Guidance multiple of 33x. This is representative of the Reopen Value Category as a whole that has been leading the market higher in recent months but may have gotten ahead of itself by already pricing in a full recovery that is not yet here.
In sum, while the technical picture is mixed, the fundamental picture is not. Mega Cap Growth, Speculative Growth and Reopen Value are all extremely overvalued. (All of Top Gun’s stock holdings fall into the Defensive Value category). These valuation levels are certainly high enough for a market top. Whether that is in fact what we are seeing is to be determined.