Small Thanksgiving Eve Decline (Tesla Rallies Again!)

70% of the time stocks rise the day before Thanksgiving, but they didn’t on Wednesday. Some investors don’t make anything of this decline. The market is overbought and few speculative stocks are dramatically too high. This decline doesn’t mean the market will regain its sanity. In fact, the most insane stock of all, Tesla (TSLA), rose again on Wednesday.

Tesla is a throwback to the 1990s tech bubble. Cisco (CSCO) peaked at a market cap of $599 billion in March 2000. Remarkably, we have found one metric Tesla is behind in as the firm has a market cap of $544 billion. Tesla is way behind on an inflation adjusted basis and as a percentage of the equity market.

It’s barely behind Berkshire’s market cap though as Berkshire Hathaway (BRK-A) has a market cap of $547.5 billion. Some can’t believe this is happening. Tesla’s cars were ranked 2^nd to last in reliability while Berkshire is a collection of great businesses organized by Munger and Buffett. 

They are among the top few business minds in American history. Tesla is the 2^nd most popular stock on Robinhood. Elon Musk is richer than Bill Gates.

All these anecdotal points lead to the fact that Tesla is a massive bubble. Its stock was up 3.4% on Wednesday. It’s now up 40.7% since November 16^th. It’s up 567% year to date. Best guess is it tops before the S&P 500 inclusion. When it finally tops, the decline will be ugly. It will probably fall over 80%. Speculators buying the stock are dancing at the edge of a cliff.

Retail Wins 2020

With 11 months of the year over, I can safely say, retail investors with the least knowledge and the largest propensity for risk have won big this year. This was a great year for people who never invested. A problem is they won’t keep their winnings because they don’t know how to invest in a normal market. Rules will change. Now things are good though.

As you can see from the chart below, hedge fund VIP stocks have destroyed the market, but retail favorites have done even better. Hedge funds love growth stocks. Retail traders love story stocks. Retail traders are moving markets as there are a lot of them and they have made a lot of money. Even a small investor becomes big when he/she makes 10x on a stock like Tesla. Big gains have been had on stocks like Penn Gaming and Nio.

When you add in the speculation on cryptocurrencies, we are in the golden age of retail investing. This is one of the best times ever to be an individual investor. Back in the late 1990s, you needed to buy an expensive computer and wait for webpages to load. Now, you can trade from bed. It’s very tempting to trade without risk parameters or due diligence. It’s easy to just tap buy and sell. Options are all at people’s fingertips.

However, that reckless process can’t last. Only people who do the proper due diligence will win because a gambler’s luck always runs out. Jim Cramer said this market is like a slot machine that always puts out winners. He is right, but when stock supply overwhelms demand, the entire house of cards will crash.

The chart below is a great example of a market bubble. We’ve all heard of the tulip bubble. This chart shows the bicycle stock bubble in the late 1890s. As you can see, that index tripled and then fell below its starting price after the bubble burst. Right now, traders who do no research are being rewarded and investors who do research and care about risk are underperforming.

Smart investors know it’s ok to underperform when the market is frothy. In fact, you should be underperforming the speculative stocks. Your portfolio shouldn’t be up more than 500% this year like Tesla. If you are up that much, you are likely taking way too much risk. 

This vertical rally looks just like many EV stocks. We are just waiting for the right end of the chart to occur. There might be bargains in the tech and EV industry within 12-18 months when the dust settles.

Wednesday’s Action Reviewed

S&P 500 (SPX) fell 16 basis points, the Nasdaq (NDX) rose 47 basis points with help from Tesla, and the Russell 2000 (IWM) fell 46 basis points. Oil (OIL) rose 24 cents to $45.95, but energy stocks were actually the worst group because of profit taking. Energy sector fell 2.3% and the oil services stocks fell 1.4%. Energy has been on fire in the past few weeks.

As you can see from the chart above, 52% of global energy stocks have a 14 day RSI above 70. That’s the highest percentage of overbought energy stocks in at least 15 years. Reality is there aren’t as many energy stocks as there once were because of bankruptcies. 

Oil prices are about to skyrocket in the 2^nd half of 2020 as production won’t be able to keep up with demand because so many projects have been canceled.

OPEC won’t be able to make up for this decline elsewhere. Oil would have stayed above $100 if it wasn’t for fracking. American unconventional drilling isn’t going away. It can’t go away because global demand is going to increase until at least 2040 according to OPEC. We will see a correction, but the trend for energy stocks in the next few years is higher.

Regional bank index (KRE) was down 1.5% as traders took profits. 10 year yield is now at 88.6 basis points. It's quite surprising that it hasn’t broken out above its recent high of 96.4 basis points on November 10^th. Inflation and real growth are headed higher. 

Maybe bond investors are waiting for a stimulus. There is no need to wait because the economy is set to reopen in the spring. There will be massive demand for experiences that were canceled. And there is pent up desire to attend concerts and sporting events. GDP growth will have a 2^nd spike higher.