Are We In A Correction?

It sounds silly to ask if we are in a correction because the S&P 500 is 22 basis points off its record high with its decline on Tuesday. However, it's not asking if we are in a correction in large caps. It's asking if we are in a correction in small cap growth stocks. The small cap growth index was down 2.25% on Tuesday, putting it down 3.39% in this 3-day losing streak. The index is still up 8.48% in the past month.

This correction could be caused by it being overbought rather than any macro changes. Small cap value had been avoiding the decline until Tuesday when it fell 1.68%. It was at its recent high on Monday. The index is now up 1.28% year to date. With the rally in the fall, this has no longer been a disastrous year for small cap value, but it has still underperformed most factors. Stitch Fix SFIX fell another 2.33% on Tuesday, putting it down 13.85% in the past few days.

Some might wonder why it's worth it to discuss this name often. Some feel it is a bubble because the stock doubled on 10% sales growth instead of 8%. That’s not much growth for what is supposed to be a disruptor. Net revenue per client actually fell 4% yearly. Its adjusted EBITDA margin was 1%. It's hard to understand why anyone would invest in a cash-burning business with slow growth. The stock was up because of a short squeeze similar to GameStop.

Getting back to the original question of whether we are a correction, the answer is no. Some don’t see this as a correction, but as low volume trading where people are making final adjustments to their portfolios before the year ends. The year will start with a bang because the election is on the 5^th and there will be increased scrutiny on the way the vaccine is distributed. 

If the vaccine distribution gets botched before January 20th, we may have new leadership pretty soon anyway. The market hasn’t expressed any worry about the vaccine’s distribution. Whether America achieves herd immunity by March or July doesn’t really matter to investors, but of course, it matters to the health of the country.

ARK Genomics

ARK’s genomics fund ARKG took a big hit on Tuesday as a holding that has a 2.17% weighting fell 54.17%. The decline in Arcturus Therapeutics ARCT was even bigger than the after-hours move on its vaccine data release. As you can see, the ARK genomics fund had one of its worst days ever as it fell 6.64%. It’s down 10.8% in its recent 4-day losing streak. We won’t declare victory in any bearishness because everyone expects volatility in biotech stocks that are not profitable.

This needs to fall well over 50% and we need to see retail outflows before we can say this euphoria is over. Some are bearish because retail investors who don’t know anything about biotech are banking on Cathie Wood’s success in stocks like Tesla to predict a winner again. 

The logic behind investing in this fund over the others is stronger because it’s easier for retail traders to understand what Roku does than genomics. However, this is a high stakes game because these are profitless stocks with a lot of hype. That usually ends in disaster.

Bitcoin Crash Incoming

Bitcoin is an extension of the speculation in risky stocks without profits. Amazingly, bitcoin is up 51.7% since December 11^th. It now has a market cap of $521 billion which is almost as much as Tesla. The entire crypto space has a market cap of $744 billion. This reminds us of late 2017 when crypto and stocks were seeing euphoria. We had a peak in both in early 2018. 

This time bitcoin makes up a bigger share of the crypto space especially with Ripple’s recent crash. However, that doesn’t matter much. The point here is we likely see an over 50% correction in this space early next year. It is like an out of the money call option on the triple leveraged Nasdaq 100. It is the ultimate “risk on” trade. 

Cramer’s Top Internet Stocks In 2000

This is not to criticize anyone’s stock picks in hindsight because there’s no point to that. However, it's good to look at Jim Cramer’s top internet stock picks to show how the bubble stocks did after the Nasdaq peaked. The results are not pretty. As you can see, these 10 stocks are down an average of 81.55%. The Nasdaq eventually came back, but stocks like JDSU and Yahoo didn’t.

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The only good company on this list is Verisign. If you bought it in the past few years, you have done very well. Even this winner was a bad buy at the top. Intel also hasn’t recovered all its losses since the tech bubble burst. Everyone likes to focus on Microsoft because it is one of the few winners. It’s going to be tough sledding for these hot SaaS and semiconductor names in 2021. 

Watch for Cramer’s top tech and alternative fuel stocks to see which names will make up the next post-crash list. Again, it's not trying to criticize anyone’s picks. Investors are trying to find the hot stocks to avoid. Some of these names include Shopify, Stitch Fix, Cloudflare, and Zoom.

Conclusion

Small cap growth stocks have fallen recently, but it's unlikely that we are in a correction yet. January will be action-packed as we may potentially get a new president, the balance of the Senate will be determined, and the vaccines will start to go out quicker. Some think of December as a warm-up for 2021. 

No one expected the distribution to be at its peak this month. My expectations are much higher for January. We could see value stocks fall if it goes really badly. ARK’s genomics fund and bitcoin are the riskiest trades someone can make. In the next few quarters, we will see the top alternative fuel and internet stocks crash like Cramer’s top internet stock picks did in 2000.