Stocks Reach Euphoria As Election Hedges Unwind

Insane Euphoria

The stock market reached a euphoric stage on Thursday. On Wednesday, tech dominated the market. On Thursday, small caps joined the fun in what could only be described as extreme euphoria. Election hedges were unwound leading to big gains this month. 

That's not saying stocks won’t eventually go higher in the next year, but in the near term we are due for a correction. Maybe we will get a horizontal correction with sector rotation. Direction of the rotation depends on whether we get positive vaccine data later this month.

Vaccines will be distributed starting in December if Pfizer’s (PFE) phase 3 trial shows good results. Eli Lilly (LLY) is waiting on an EUA for its treatment for those with mild to moderate symptoms. Basically, it’s for early treatment to prevent it from becoming severe. 

Lilly agreed with the US government to supply 300,000 vials of antibodies by the end of the year. This is a good combination to stop COVID-19 in its tracts by the end of the winter. Either we will know COVID-19 will be solved in 2021 this month or we must wait on the other treatments and vaccines to be successful.

4 Straight Big Wins

It appears the stock market is experiencing euphoria. We are now bumping up on the levels it failed at twice this year. Could we be in for a triple top? Some are quite bearish on big tech and I think the market needs to calm down in the near term, but not calling for a major top. 

As you can see from the chart below, the S&P 500 had its 4^th straight day of greater than 1% gains. That’s the first such streak since 1982. Longest streak ever is 5 days. It's highly doubtful that we will get a big rally on Friday. There have been big rallies after such streaks as the market rose 27% in the year following that streak in 1982. That’s just food for thought. Quite frankly, most are not expecting such a gain.

AAII survey is the new source of bullish sentiment. That’s a major difference from the summer where it had a record long streak of more bears than bulls. Percentage of bulls rose 2.7 points to 38% which is the exact average. And percentage of bears fell 3.8 points to 31.5% which is slightly above average. 

This doesn’t signal euphoria, but it didn’t before the early September peak either. NAAIM investor exposure index actually fell from 77.87 to 69.2 as of November 4^th. Clearly, this latest swath of euphoria has occurred in the past 4 days. Not including the last 2 days explains why this didn’t increase.

Details Of Thursday’s Big Rally

This is an unwind of hedges. It’s an illogical rally. Stocks have risen too much too quickly. An interesting wrinkle in the latest news is that if the Dems win the Georgia Senate runoff, they should get control of the Senate after all. That means there could be a blue wave which would be bad for tech and good for value stocks. That’s a crazy twist of fate no one expected on Wednesday.

S&P 500 (SPX) rose another 2% which is unheard of. It’s funny how we’re discussing a streak of 1% gains because most of the gains have been much more than 1%. Market is up 7.35% in 4 days. That’s almost the returns in a typical year. The market is 2% off its September peak and less than 1% off its October peak which means there is a lot of resistance here. 

Nasdaq rose 2.59%. Russell 2000 rose 2.78% after vastly underperforming on Wednesday. Nasdaq 100 (NDX) is up 9.28% in the past 4 days. This time, small cap value did well as the index was up 3.2%. Regional bank index rose a whopping 4.8% after it had its worst relative performance ever.

Nio (NIO) is the hottest stock we have ever seen. Electric car bubble is one for the ages. This Chinese company never turned a profit, but it was up 12.3% on Thursday, bringing its monthly gain to 104.9%. It’s up 1,038% year to date. Penn Gaming (PENN) has recovered recently as it is up 23.4% in the past 3 days. Cloud index was up 2.7% which brought it within 3% of its record high in October. It will crash hugely on good vaccine news.

COVID-19 Is A Major Crisis Again

COVID-19 is a major issue again as hospitalizations and positive cases have been exploding. As you can see from the chart below, the positive test rate is at the same level it peaked at in the summer and shows no sign of peaking. Some analysts think the number of people hospitalized will pass the summer peak of 60,000 this month. There are now 53,322 people in the hospital. There were a whopping 116,255 new cases on Thursday. 

America became the first country to have over 100,000 in a day. Clearly, there is a lot of testing going on, but that is doing nothing to stop the spread. The only good news is the 7 day average of deaths is 869 which is still below the summer peak. Some think it will get to 1,000 by the end of the month. 7 day average of new cases in Wisconsin rose from 4,839 to 4,990.

(Click on image to enlarge)

Uber Loses A Ton of Money

Uber (UBER) is a terrible business. Even in the perfect situation for ordering food, the firm still lost a ton of money. It is structurally unprofitable. It lost 62 cents per share which beat estimates by 3 cents. It had $3.13 billion in sales which missed estimates by $70 million. 

It lost $1.09 billion on a GAAP basis which only was an improvement from $1.16 billion. At that pace, it won’t be profitable for years. Their stock fell 1.9% after hours. This stock trades at 97.6 times 2022 estimates (which are probably too optimistic).