Thursday Night Futures Spike

Let’s start with the most important latest news. The futures market exploded to the upside. Stat News came out with a report that the early signs of the drug remdesivir seem to be positive. Obviously, if a drug that treats COVID-19 comes out, people can go back to their normal lives. The article states, “The University of Chicago Medicine recruited 125 people with COVID-19 into Gilead’s two Phase 3 clinical trials. Of those people, 113 had severe disease. All the patients have been treated with daily infusions of remdesivir.” 

Kathleen Mullane of the University of Chicago stated, “The best news is that most of our patients have already been discharged, which is great. We’ve only had two patients perish.” The results of this trial will come out in a week. Every day we get more data on treatments and vaccines. That’s the opposite of March, when every day we would get news of another event or government closing.

Obviously, we all want this treatment to work because this about saving lives, not making money in markets. However, Gilead Sciences (GILD) stock was up 16.41% after hours on this news. Personally, I’m not a fan of chasing stocks that do well in this pandemic like Zoom (ZM), Netflix (NFLX), or Amazon (AMZN). It's better to just buy the stocks that sold off, since this situation won’t last longer than a few more months. 

President Trump came out with a plan to reopen the parts of the country that weren’t hit hard by the virus. That also helped stocks in the after-hours session. As of Thursday evening, April 16, the S&P 500 mini futures index was up 74.75 points, and the Dow mini was up 714 points.

Amazon On A Rampage

Obviously, Amazon isn’t just a stay at home play. It has a burgeoning advertising business and dominates the cloud. It is a PAAS (Platform As A Service) play. Microsoft’s (MSFT) Azure is catching up though. Amazon stock is way too high in my opinion. In terms of its valuation, it is fairly valued as Morningstar (MORN) has a price target of $2,400 which is $8.19 below its current price. A main issue is its parabolic rise. These names are very tough to short because you can lose money quickly if you are wrong by a day. 

A good thing about shorting Amazon is it can’t rise that quickly because it is so huge. It is up 33.21% in the past month, and 43.63% since its bottom in March. And it can’t rise that quickly now that its market cap is $1.2 trillion. Charts like the one below coming out are a signal this has gotten out of hand. 

As you can see, the S&P 1500 is up 101.9% in the past eight years. Amazon is up 1160.1%, while the death by Amazon (Amazon’s retail competitors) index is down 7.2%. It's not wise to invest in a stock that directly competes with Amazon (besides Microsoft & Alphabet). That’s why many are skeptical of Etsy (ETSY) and Roku (ROKU) (Amazon Fire stick).

Stocks Underperform Treasuries

Clearly the stock market is overbought. According to Sentiment Trader’s short term optimism index, there is excessive optimism. This index is at 98; it only needs to get above 80 to show extreme optimism. A recent 15-day change in the S&P 500 was 27.2%, which was the best gain since May 1933. This has been an amazing rally. 

It won’t continue at that pace, but it will be likely increasing over the next three months as we get closer to an economic reopening and life returning to normal. After the S&P 500’s small increase of 0.58% on Thursday, the CNN fear and greed index rose just 1 point to 42. It’s on the top edge of fear.

Even though the stock market has been on an amazing run recently, the S&P 500 has just posted its worst performance versus ten-year treasuries since 1983. That’s a great signal for stocks, and a bad one for bonds. A worry is that if rates rise, that could compress multiples. Ten-year yield likely won’t increase enough to hurt stocks. 

After all, the utilities and high dividend yielding stocks are off their highs anyway. Ten-year yield can rise to 2% when this recession ends. That’s not exactly huge competition with most dividend yielding stocks.

COVID-19 Update

President Trump has previously mentioned as many as 29 states can reopen soon. He said some of them are “in very good shape.” On the other hand, Cuomo announced the shutdown in NY would last until May 15th.That’s not unrealistic because the number of new cases per day is plateauing, not declining rapidly. In the entire country, there were 29,567 new cases on Thursday, April 16.

To use a market term, you can say the number of new cases per day is range bound, with the lower end of the range being 25,400. We need to see a new low before I get optimistic about a reopening soon. A few states can likely reopen within a week or two. However, the major cities that drive the economy will be shut down for another month.

As European economies begin to reopen, it’s important to see how they do. Italy had a spike in new cases from 2,667 to 3,786, which is the most since April 12th. Good news is deaths fell from 578 to 525. There have now been 3.42 million tests in America, and 551,000 tests in New York. Let’s be realistic here. There is no way everyone will get tested. 

We have a better chance of there being a treatment or vaccine by the end of the summer, rather than everyone getting tested. We can continue to focus on drug trials and vaccine tests. Keep in, mind stocks are overbought, so don’t get too enthusiastic when good news comes out.