Wednesday's Market Minute: Sorry, I'm Still Bearish – Unless This Happens

Speculative frenzy has seemingly gripped markets again. The S&P 500 is back at all-time highs. Tesla, now a trillion-dollar company, is swinging more wildly than 9-year-old me trying to get onto first base in T-ball. Earnings growth is stabilizing the price-to-earnings ratio of the market but measured by sales, it’s still the most expensive stock market in history. I’m getting email pitches from PR people asking if I need an expert on the Dogecoin vs Shibacoin wars. Newsflash: no such person exists. If I need a fundamental analyst on the matter, I’ll ask my cat, Donald. OK, he says dogs suck. Short both.

What is going on? Is it 2020 again?

Indeed, the best analog for recent market moves is almost exactly one year ago to the day. I pointed this out in this column two weeks ago by highlighting bitcoin’s unique outperformance against the stock market. Correlation between /BTC and the Nasdaq flipped deeply negative coming into this month, a rare event that recalls its run-up to the 20,000 level last October. My point was that the two would not stay disconnected for long, and that bitcoin is the more accurate indicator of risk sentiment. Sure ‘nuff, stocks caught up in a hurry. Now what?

Bitcoin’s big breakout last year was an early tell that investors were about to get exactly what they wanted: a massive amount of stimulus. Stocks caught up to crypto just as they’re doing now, and nerves around the presidential election quickly gave way to euphoria over the massive money drop that arrived with the second batch of stimmy checks. Every asset under the sun mooned.

I don’t know what the expectation is this time.

Earnings are doing great, but big tech growth rates have peaked and the most impressive gains are being made in sectors that are less important to the broad indexes. Perhaps we’re front-running stimulus again, but I don’t see how it compares to last year. The next round of spending will be smaller and more targeted than the helicopter COVID Cash; money spent on infrastructure is a lot different than shipping YOLO bucks to everyday folks. The timing of this latest rally on the back of CPI and Fed Minutes suggests the market’s moved on past taper fears, but I have trouble with this, too. It’s looking more and more like taper will imply near-future rate hikes. Stocks moved in sync with the expansion of the yield curve since Day One of the recovery last March, and now are going skyward as the yield curve gets annihilated – not something typically associated with an explosive economy.

It looks to me we’re in the most egregious phase of our COVID bubble yet.

Yes, you’ve heard this story from me before. I’ve been too cautious since bear-ing up my coverage in April. But if there’s one thing I’ve learned the past four years here at the TD Ameritrade Network, it’s that price trumps fundamentals – it’s fine to have a theory for “why,” but always give yourself an out. This is my out: if bitcoin finds support at 60,000 and rips higher, it means the framework I’ve been relying on that connects stimulus to speculation and valuations is wrong. My personal view is that it won’t happen. But if it does, the Nasdaq will almost certainly follow, and that would mean the Fed’s reversal to tightening is in fact not a tech-killer. If that’s the case, we could be headed for the most spectacular phase of this mania we’ve seen yet. You probably don’t want to know what I think it means if that doesn’t happen.

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