Wednesday's Market Minute: Bulls Are Losing Their Touch

The powerful rotation trade that’s been raging since September finally hit a speed bump this past week thanks to anxiety around Europe’s reliance on the AstraZeneca plc AZN vaccine and some hiccups in the reopening here at home. Crude oil’s faceplant upon passing the $60 mark last week was the first sign that maybe this market is just running too fast for its own good. The S&P 500 is only 2% off its record, but there are some very real threats to the bull market taking shape.

The first, of course, is that big tech hasn’t been the same since the 10-year yield blasted through economists’ year-end expectations about 10 months ahead of time. In fact, if there’s one good thing about yesterday’s selloff it’s that the Nasdaq and Treasury market finally broke apart in a noticeable way. Unfortunately, it didn’t break in the direction most investors would hope, with bonds firm as the Nasdaq declined with the rest of the stock market. It’ll be important to see, whenever this hurdle on the virus front is cleared, if tech can take part in a market snap-back -- even if it means yields resuming higher. Because that’s what we should assume is going to happen; yields resuming higher. Until the price action tells us otherwise, economic recovery and higher yields are the new normal.

If tech can’t take part in whatever bounce-back happens next, it means the pressure on valuations from the bond market is likely here to stay. But there may be an even bigger issue at hand, and that is one of simple exhaustion. Readers of this newsletter will know I’ve been waiting for the VIX to break its yearlong floor of 20 as a sign that fervent call-buying is fading. Indeed, with VIX trading multiple sessions below that level, options data also show a slowdown from the rabid speculation at the start of the year. It’s no coincidence that Tesla Inc TSLA and other favorite frothy growth trades are in technical bear markets.

The problem we’re learning these last few days though, is that the beloved reopening stocks are probably also overheated. Why were Gap Inc GPS, L Brands Inc LB, and Live Nation Entertainment, Inc. LYV trading way above their pre-COVID levels? Get this: the P/E of the SPYV value ETF is 37.5. The P/E of the SPYG growth fund is 38.7. ARKK may have a negative P/E because of all the profitless stocks in it, but the PEJ consumer services fund trades is at 100! The U.S. stock market was running on valuation expansion long before COVID. It doesn’t need a reason to drop; all it needs is bulls to blink. How will we know if that’s happening? I’ll be watching my favorite thing in the investing world, the purest barometer of risk-taking and the most high-frequency sentiment gauge out there; bitcoin. If it breaks its current uptrend with conviction, watch out.

Photo by Hans Eiskonen on Unsplash