S&P Closes Week at All-Time High, Correction Now Unlikely
The S&P 500 closed last Friday at 3,714.24 and closed at 3,886.83 this afternoon. That’s a 4.6% gain. Wow, what a difference a week and the biggest institutional de-leveraging event since March 2020 can make. The S&P 500 put/call ratio got to its highest point since the panicked selling early in the pandemic; it was only about 5% below this one year high, but then it subsequently collapsed quickly.
The current level of nearly 30% off the highs does not support the conclusion that markets are overstretched either, rather it suggests indexes are poised to move higher. When investors are anticipating a crash one is much less likely to happen. There is a lot of downside protection which means when there are downside moves the profits from those moves to those holding protection are swift and often re-invested long. This softens moves downward and helps the market hold key levels.
As my colleague Tom Lee will discuss below, the extraordinary events of last week have resulted in a significant change to our base case and we are calling off the mid-bull market correction we predicted between February and April. We are relieved that the distractions of the last few weeks have subsided, and that volatility has returned to more normal levels. Aside from sensational and very ‘clickable’ headlines, there are some undeniably positive fundamentals developing on the healthcare and economic front. My colleague Tom Block will discuss the rosy prospects for the passage of $1.9 T in new stimulus. That will provide extra fuel to consumers, who already are saving for economic normalization, to unleash a torrent of pent-up demand.
While there is happy news on the equities front, we do have some sad news to report. Our Head of Technical Analysis Strategy, Rob Sluymer, will be departing our firm. Rob has been an integral part of our team, has provided timely and industry-leading analysis regularly to our institutional clients and retail subscribers and is a true gentleman of the highest character. Please join our team in thanking him for his tireless work on your behalf and wishing him well in his future endeavors.
We have been recommending Energy as one of our top three sectors for 2021. It went up quickly this week as volatility collapsed. In that vein be sure to check our Signal From Noise this week. We highlighted a single-stock name this week from the sector we highlighted last week. The stock we highlighted is also one of the newest additions to our ‘Granny Shots’ list, Exxon Mobil (XOM). Our Vice President of Digital Strategy, Leeor Shimron, also did a fascinating interview with the mayor of Miami, Florida.
These last couple weeks have been a wild ride. There are also a lot of new investors in the market and we noticed misinformation on markets seems to be plentiful. As professional equity analysts, we could not help but notice some of the more ridiculous and sensational commentary we heard going around recently. One item we wanted to directly refute was that P/E ratios were made up by Wall Street to sell stocks. Valuation doesn’t matter we heard over and over again in the mass media.
However, we do understand that investors can sometimes get overly reliant on fundamentals alone. They are only one piece of the valuation puzzle. We wanted to explain briefly, with the help of John Maynard Keynes why it is so hard to value equities, and why diligent research can result in overperformance.
A lot of people get tripped up on valuation because they examine 10-Ks or fundamentals and decide what a stock is worth it or isn’t. They then buy or sell. We say this is only one piece of the puzzle because the other piece is how many people will be willing to buy what you’ve purchased at what price in the future? That’s a mouthful. It can also get complex pretty quickly. John Maynard Keynes devised his famous Keynesian Beauty Contest. A behavioral economist named Richard Thaler ran a test in the Financial Times to illustrate the concept Keynes was referring to.
Readers pick a number between zero and one hundred. The winner is the contestant with the number closest to 2/3 the average of all numbers entered in the contest.
Since the number has to be 2/3 of the number selected, we can deduce that it is lower than 67 since if everyone picked 100, unlikely as it may be, any number above 67 doesn’t meet the criteria of a winner. Since you know the participants are rational and have same info as you could assume they will likely not pick 67 since it’s the highest permissible number. So maybe 2/3 67 which is 45 then? But wait how smart are the other contestants? That might be too high, maybe you should do 30 which is 2/3 of that. But how are you supposed to know what the other will guess?
The average of the numbers received in the 1997 Financial Times exercise was 19. The winning number, which is 2/3 of that number was 13. You see, this is what we are trying to do at FSInsight. We are trying to help you get to thirteen. Our knowledge of institutional investors gives us an edge in knowing what other market players will ‘guess.’ We know the market participants and have the analytical firepower to give you an edge in this process.
It’s not a case of choosing those which, to the best one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest… We devote our intelligences to anticipating what average opinion expects average opinion to be.
-John M. Keynes
