Active Investors Chased The Market Higher

Investors Got Too Positive On Wednesday

It’s pretty obvious investors were euphoric on Wednesday, April 29, to any observers of the market. Even if you are bullish like me, you know the market got ahead of itself. Nasdaq was almost positive year to date. Now it’s time for a pullback. We started the decline on Thursday, April 30, with the S&P 500 falling 0.92%. We are set for another decline on May 1, based on the futures market.

Some of the good earnings news from the big tech companies, and the good news on states reopening is giving traders a reason to sell. This is the old strategy of buying the hope/rumor and selling the news. To be clear, I think this will be a modest correction of near 5%. 

Bears who missed the entire rally from the bottom will miss this buying opportunity again because they will look for the market to retest its lows. Stocks won’t go that low again because that drop was caused by a lack of liquidity. Plus, at the very least, we have much less uncertainty now on COVID-19 than we did one month ago.

An AAII investor sentiment survey showed the percentage of bulls rose 5.7 points to 30.6%, which is still below the long term average of 38%. The percentage of bears fell 6 points to 44%, which is still above the average of 30.5%. This doesn’t support the thesis that stocks got too high, but it does support my point that this won’t be a big correction.

The chart below should cause the bulls to worry more. NAAIM active investor positioning index increased from 45.34 to 78.55 this week. Last quarter average was 53.34. This is the highest reading since the third week of February, which was the market’s peak. Obviously, the market isn’t near a major peak like then, but it does signal active investors have chased the market all the way up. They are quite long. 

A 33 point increase in the NAAIM index is one of the largest ever. This chart has red dots for when active investors went long the market when it was in a downtrend. It happened in January and May 2008; that didn’t work out for the bulls. It happened in January 2019, which did work out (at least for the next 13 months).

Facebook Had 18% Revenue Growth

Facebook (FB) reported earnings on April 29, which caused its stock to rise 5.42% on April 30. It had $1.71 in EPS, which missed estimates by 4 cents. Revenues were $17.74 billion, which beat estimates for $17.41 billion and represented 18% growth. There were 1.73 billion daily active users and the average revenue per user was $6.95. Its family of apps had 2.99 billion users, which was up 100 million from last quarter.

Its other revenue was up 80% to $297 million. That’s likely because its Portal video chatting device sold out. As I mentioned in a previous article, Facebook is working on a video chat feature that can host as many as 50 people at once. Obviously, people are spending more time on social media, but ad rates are falling. The fact that the company saw stabilization sent the stock soaring. 

Personally, I’m bullish on Facebook long term because, unlike other companies that are pulling back on investments, the firm is doubling down on investments for the future. Mark Zuckerberg stated, “I’ve always believed that in times of economic downturn the right thing to do is to keep investing and building the future.” The company has a strong enough balance sheet to do so.

Microsoft Stock Is Near Its Record High

People worry about the top five big tech stocks controlling the index, but in the long term, it’s difficult to worry about Microsoft (MSFT)’s share. This is by far a favorite big tech stock. It rose 1% on its earnings report and is only down 5% from its record high. The firm stated, COVID-19 “had minimal net impact on the total company revenue.” 

Some people predicted the cloud stocks would be hurt by a recession because high multiple stocks usually fall in bear markets. That was a big mistake because these companies are recession resistant. No company is going to stop spending on mission critical aspects of their business. Companies need to invest in digital transformation.

Microsoft had $1.4 in EPS, which beat estimates by 14 cents. It had revenues of $35.02 billion, which beat estimates for $33.66 billion. Net income was up 22% and revenues rose 15%. Azure’s revenue growth was 59%, which fell 3 points from last quarter, but is still way higher than Amazon (AMZN) Web Services’ growth. Microsoft’s Teams and Azure are seeing increased usage because people are working from home.

Tesla Stock Plunges

Even though Tesla (TSLA) reported good numbers, its stock fell sharply on April 30. Yes, the market fell, but this was much worse than the market. Companies like Microsoft and Facebook were able to rise despite the weak market. It was an amazing fall for Tesla stock because it opened much higher. From the peak to the close, it fell 9.19%. It was down 2.33% on the day. The company has had three straight quarters of profitability. 

If the company was to report profits in Q2, it would have a long enough streak to be in the S&P 500 index. COVID-19 came at a bad time for the firm because it will cause it to lose money in Q2. It also has substantially hurt the launch of its Model Y, which is the most important car in its history. Maybe that’s why Elon Musk cursed on the conference call.

Conclusion

Prepare for a modest correction. This is a buying opportunity, not a time to run away. Many big time bears are calling for massive corrections. When the stock market falls 5%, they will double down on their bearishness, just like when they were bearish at the trough in late March. They keep missing great buying opportunities because they are dogmatic. Stay open to opportunities and buy the dip.