Apogee

Elon Musk must be a happy space cadet today.

The visionary iconoclast is now the world's fourth richest man, courtesy of yesterday's rocket-fuelled surge in TSLA.

Tesla stock price has apparently achieved a weightless state and is likely near it's apogee. But bull markets are often like that, driven by spaced-out thinking. Remember, I said check your brain at the door during this easy money rally.

Simply by dividing the same pie into more slices, an additional $85Bn of market cap has magically appeared for our dear Elon's company. The stock was propelled by an analyst's target increase that was not based on better sales or earnings prospects. No - this time it was the honored "met my target - raise my target" thinking that often dominates bull markets in their final stages. Zoom and Nvidia are getting the same treatment this morning and more should follow.

A 22% short interest in TSLA didn't hurt the bull case either. Naysayers ( not me - I'm not shorting this market!) are being taken out to the woodshed and flogged by a relentless upward bias to asset prices, propelled by the most risk-free monetary backdrop in history.

As we await the much heralded, but as yet elusive 'rotation' to large cap value stocks, something more interesting has been happening underneath the hood of this growth-crazed market. Small Cap is outperforming. After a three year parabolic rush into large cap stocks reached relative strength highs during the depths of the correction in March, small cap stocks have begun to outpaced their larger brethren.

Russell Large Cap/Small Cap ETF Ratio

The reasoning behind can partly be explained by the drag produced from the woeful performance of heavily weighted Financial and Energy stocks. Combine that with a few notable duds like Boeing, GE and Berkshire Hathaway, and large caps have understandably lagged. It could also stem from the higher intrinsic growth rates of small caps, a factor often cited as a long term competitive advantage over large mature companies.

Either way, the rally in smaller stocks is an important indicator of the underlying resilience of this market and is reflected in the persistently bullish breadth readings of the S&P 500. It supports the notion that, despite the massive dislocations in the economy as a result of Covid, the businesses are somehow muddling through.

This morning's twin monster earnings reports from Home Depot and Walmart reflected the now-spent stimulus cheques of Q2. This surge in consumer spending can't be expected to be replayed in the current quarter due to the hissy fit now playing out in Congress. Both stocks failed to rally meaningfully on the news.

But, somehow a papering over the income cracks by "Executive Order" seems to have placated investors who are seemingly unfazed by the coming fiscal downshift . More importantly the Housing Starts number this morning - also a blow out- may do even more to dispel the notion of a double dip recession.

And don't forget my thesis for this bull run - bad news is good news. It's keeping the Fed friendly for now, reducing the prospect of rising long term rates. Last week's back-up in the 10Yr bond yield was supply induced, for the most part, and the bid to bonds has been restored this week. Bulls can always point to the 'glass half full' prospects of an eleventh hour stimulus deal in September. Watch long term yields carefully for any expectations of a more durable economic reflation. Only then will we see a meaningful challenge to equity prices, currently inflated by low discount rates.

I have been cautious about the market given the headline grabbing mega cap mania exemplified by the likes of Tesla. Quietly, underneath all the ballyhoo from the talking heads foaming at the mouth and raising investor expectations to unreasonable heights, the markets are finding other, better places to put their capital.

Small is beautiful I guess.

Risk Model: 2/5 - Risk Off

The two sentiment gauges in the Model are saying very different things. The VXV and AAII Survey in the 'Bomers/Decker' Model couldn't be more at odds. The 'expected' implied volatility of the market ( as measured by the 3 Month Forward VIX) continues to recede nicely. Meanwhile, the AAII survey, admittedly a bunch of older rich investors, still continues to expect a worsening future for equities, on balance. I guess I should have been looking at "Robinhood account openings" for a sentiment tell instead, since they are the ones driving equity market inflows now.

Interestingly, the lagging AAII gauge is now poised for bullish break-out after plumbing the depths just two weeks ago. We just need a bit of confidence (a positive vaccine trial announcement?) to change the mindset of these more cautious participants and a wall of unrisked cash could come flooding into the markets. They will most likely start with value-rich financials, creating a massive rotation if that happens. Stay tuned.