Another Rally In Regional Banks

The stock market rallied modestly on Thursday with the small caps doing the best because of the financials. S&P 500 rose 52 basis points, the Nasdaq was up 19 basis points, and the Russell 2000 rose 1.65%. Despite tech lagging. Snap (SNAP) exploded again. The stock rose 7% to a new record high. It’s up 40% since October 6^th. 

A rise in yields hasn’t stopped this speculative money losing firm. We haven’t seen much of a decline in the speculative tech stocks yet. On the other hand, we have seen the banks rally.

Regional bank index was up 4.75%, putting up an enormous 23.8% in the past month. This entire market is a duration trade. If you think rates will rise, you must buy energy and banks. As you can see from the chart above, we are getting a small inkling of a potential reversal where the financials actually beat the S&P 500. We may be at the beginning of a new trend where the banks are the hottest stocks in the market. We are inning 1 of that trade.  

Yield curve is steepening and long rates are rising. As you can see from the chart below, real yields are the least negative since mid-July. They’ve been negative for many months. We can expect them to go positive at some point in this bond bloodbath. TLT long bond ETF is down 8.5% since early August. 10 year yield hit 86.6 basis points on Thursday which put it within striking distance of the June high.

A difference between the 10 year yield and the 2 year yield hit 70 basis points which matched the spike in March. And the yield curve is going to steepen because the Fed isn’t going to hike rates and the economy is going to recover. There are so many things that can go right. There will be a fiscal stimulus and COVID-19 will be resolved. Even in this tough environment the economy is slowly improving. The writing is on the wall. Rates are headed higher in 2021.

Sentiment Check

Finally, after a few months the AAII individual investor sentiment survey shows there are more bulls than bears. That might be because some of the tech stocks have cooled off since August. That being said, their decline isn’t near its completion. As you can see from the chart below, the FAAMNG stocks have a higher market cap than the French, German, Italian, Russian, and Polish indexes combined. They have a long way to fall before they become fairly valued. 

Specifically, the percentage of bulls rose 1 point to 35.7% and the percentage of bears fell 2.7 points to 33%. That’s close to normal. Investors in this survey fought the bull run the whole way. In commentary, they said there is a tech bubble. Amazon is down 10% from its September 2^nd peak for example.  

NAAIM fund manager survey shows exposure to the market fell modestly this past week. The index fell from 102.93 to 87.07. Frankly, it was shocking when it went that high last week. Maybe cooler heads prevailed this week. It’s good for the bulls that sentiment isn’t extremely high. Stocks don’t do badly when this index is high, but most would still rather exposure not be above 100 if one was a bull. 

Review Of Thursday’s Session

Cloud stocks underperformed on Thursday as the index was flat. Zoom (ZM), which isn’t in this cloud index, was up 1.4%. It seems like the spike in COVID-19 cases recently hasn’t been a huge boon to the stock. It’s almost like investors know this spike won’t last and a solution to this crisis is around the pike. 

Better treatments and vaccines are coming within the next few months. Cloud bulls are flying too close to the sun by investing at this stage of the game. We are in the 8th inning of the COVID-19 crisis. Generally, stocks anticipate events. Energy stocks had a great day as the XLE energy index was up 4.1% and ExxonMobil (XOM) was up 5.1%.

Intel Disappoints Investors

Even though Intel actually beat estimates on both the bottom and top line, the stock fell 9.4% in the after hours session. Specifically, the firm had $1.11 in adjusted EPS which beat estimates by a penny. It had $18.24 billion in sales which beat estimates by $40 million. 

Plus, the firm raised full year guidance to $4.9 in EPS from $4.85 and $75.3 billion in sales from $75 billion. Last quarter, the stock crashed because it announced it was delaying its next gen 7 nanometer chip until late 2022.

This stock crashed to the same level this time because data center sales disappointed investors. Its data center group had a 7% decline in sales to $5.9 billion which drastically missed estimates for $6.21 billion. On the other hand, client computing sales were up 1% to $9.8 billion which beat estimates for $9.09 billion. 

A problem is PC sales aren’t going to maintain this pace. When the spike is over, the firm will be left with its weak data center business to help cushion the blow.

Conclusion

Reflation trade is heating up as the yield curve is steepening and the long bond is selling off. This is causing tech to underperform and the banks to rally. The writing is on the wall. A cyclical upturn is coming as a result of COVID-19 vaccines and treatments and a massive stimulus. 

No stimulus is coming before the election, but we will get one early next year. A prediction for the 10 year yield to hit 1% in 10 months looks good now.