Double Counting

The bubble continues.

Last week, I called for readers to switch to value stocks. Although one week is not a big sample statistically, second thoughts are starting to creep into my wizened head. How can I explain the last week to a novice investor? The Robinhood market is still dominating the tape as reflected in yesterday's move in Tesla, a company valued higher than all other global car makers combined, yet with a 1% market share for it's products. Today's fanboy fav is Zoom. When will it end?

But seeing the ten year U.S. Treasury currently trading at 142 times realized yield, I guess the stocks seems cheap. So novice investors can seemingly keep the momentum going. But I have only myself to blame, after having laid out the road map for this frothy growth stock mania. Here's a list of some of my recent observations and their status:

"Stocks are a monetary phenomenon"

- Record levels of easing by global central banks.

"The stock market is not the economy"

- Weak employment numbers vs new market highs

"Check your brain at the door"

- Just read the twitter posts on popular stocks

"Trifurcated market - "LUV"

- "V" shaped candidates are primarily Growth stocks

"AAII Investor survey signal is flawed"

- Millennials increasingly dominating the market conversation

Like many others, I feel like I've missed the boat. It's a bit like a gambler playing the penny slots while listening to the shouts of joy from the $50 tables on the other side of the casino.

Bull markets are like that. History has many examples but just saying it doesn't help us time the "top". What gives?

Right now we have the "double counting effect". A prime example is the aforementioned Zoom - symbol $ZM - which reported fantastic earnings last night. The stock beat revenue forecasts by about 23%. The current market has the stock up 35%. What's the problem?

The problem is, as asset prices are forward looking, it had already priced the 'beat' in. ZM trades at over 50 times trailing... wait for it ... REVENUE. This is the essence of double counting.

For the stock to justifiably rise on 'surprisingly' good news, it should have been caught napping. Hardly the case at such nosebleed valuations. But as i said last week, this is what makes the top so hard to find. We know there are emperors without clothes in this market, we just don't know when the little boy will speak up.

And the voting machine is still dominating the weighing machine, in the absence of a clear path forward from the economic calamity wrought by Covid. The political impasse in Washington, that I believe will eventually break, is still keeping the reflation trade at bay.

I have been looking for signs of a durable rotation out of the growth driven phase in the bond market. The commodity markets are now providing that signal. The charts below are suspiciously similar. They are heading in the same direction but currently are hesitating while fiscal cliff fears circulate.

10Y - 2Y Treasury Yields

Industrial Metals Prices

Inflation expectations have been rising thanks to the Fed's easy money. (chart, below) This, despite the spate of bad news from the economic data. It has helped put a floor under the cyclical parts of the market but is no match for the positive news flow from delirious day traders who have exclusively played momentum trades like AAPL, NVDA, TSLA and ZM.

University of Michigan Inflation Expectations

The tricky part of this market is deciding when to place a bet on the rotation trade. Does the fiscal cliff get papered over by politicians anxious to remove the threat of having to explain their failure in their Zoom stump speeches? Or will the hissy-fit mentality of the entrenched zealots on both sides scupper the deal? And when will the now highly anticipated vaccine arrive? More importantly, will that arrival mark the biggest 'sell on news" in history? Don't the Covid beneficiaries, the Growth stocks that benefit from the shut down, and who have dragged the markets kicking and screaming to new highs, have the most to lose?

Stocks are vulnerable to any reversal of sentiment however that may be caused. Especially now that we have double-counted for the good news.

Risk Model: 5/5 - Risk On

For now, I guess.

A pullback for stocks has dropped the RSI back into a positive signal below 60. The AAII sentiment indicator gave its first positive reading since the Covid crisis began, albeit from a severely oversold reading. Copper has trounced gold and reinstituted the buy signal as the red metal is being hoovered up by China in a effort to restock low inventories, while Covid-related mine shutdowns reduced production in Q2. All seems right with the world except... Volatility is now rising. (chart below)

3Mo Volatility Index

Combined with a low level of the Put/Call ratio and the makings of a correction are present.

September sell-off? Keep some dry powder.

CBOE Put/Call Ratio

Ultimately, the market is a weighing machine, and using volume studies to corroborate price action speaks to that. It has always helped me make better investment timing judgements. The volume data (below) has not confirmed the recent highs on the 'winning trade'. It argues for a degree of caution here to say the least.

Momentum ETF - Chaikin Money Flow(10w, 30w)