Stocks consolidated for the 3rd day in a row with fractional moves in the major averages. Ten years ago, a 300+ point Dow Jones Industrial Average daily trading range would be a 3% move. After this massive bull run, it is less than a 1% intraday move now. Long bull markets will do that! By the end of the day, the Dow was down a grand total of 7 points, or 0.02%.
Cyclical stocks suffered the biggest declines, with Energy, Industrial and Financial sectors as laggards. There have been tremendous rallies over the past few months in these sectors. The Russell 2000, a small cap Index heavily weighted towards these reflation stocks, bounced 50% since November. Range – bound movement from here would be quite normal for that group. A digestive phase before the eventual (hopefully) move higher could occur until we get confirmation that reopening efforts reach optimistic targets from a vaccine and spending standpoint. In bull markets, consolidations and corrections don’t last too long though.
Another Reddit fueled rally also fizzled out, this time in cannabis stocks. Once it became clear the Democrats were taking control of DC’s legislative agenda, bullishness arose on the prospect for making cannabis a legal substance. Many states and other countries have already done so. You can guess what they have their eyes on, taxes. There are billions of dollars in sales that are untaxed today. Decades of law enforcement hasn’t slowed the use to any real extent. It has put many in prison though. The House of Representatives already passed the MORE Act (Marijuana Opportunity Reinvestment and Expungement) in December in a somewhat bipartisan vote with five Republicans joining. The Act simply decriminalizes the substance. That would be step one towards making it federally legal.
Cannabis stocks took off recently and attracted the attention of WallStreetBets followers, the same group that started the GameStop phenomenon. Yesterday’s profit taking knocked down some huge winners in another lesson to day traders. Tilray, one of the largest distributors in Canada where cannabis is legal, dropped nearly 50% during the session. Amazingly, it is still up 300%+ this year. The market giveth and the market taketh away.
Upside action was most prevalent in the semiconductor space. President Biden continues his torrid pace of Executive Orders, with another coming in a few weeks aimed at reviewing supply chains for critical goods, including semiconductor chips. It is estimated the auto industry alone is missing out on $60B in sales this year stemming from a chip shortage caused by production and supply issues. One of the few areas both sides of the aisle can agree on has to do with our fragile supply chain. Relying upon China to be a friendly trading partner is proving foolish. Onshoring, or bringing factories back to the US, is one of the major pieces of Trump’s agenda most can agree on.
Intel#, Qualcomm# and Advanced Micro Devices, among others, are asking Biden for “substantial funding” incentives to help build more factories at home. They don’t necessarily need the money as demand is already rampant, but when trillions in stimulus are being created, they will be all too happy to take it. Free money to build a new plant helps their balance sheets as well.
From an economic perspective, this makes great long-term sense. Over the years, too much stimulus has been earmarked for short-term projects that fizzle out. Building factories in a growing industry will produce many long-term jobs and have a multiplier effect. Whatever town gets a new factory sees a jump in demand for homes, restaurants, hotels, retail stores and so forth. More infrastructure plans like this go a long way towards building a sustainable economy as opposed to $600 stimulus checks or cash for clunkers. In total, the semi index bounced 3.5% yesterday alone and has advanced 160% from the March lows.
Speculation is becoming more and more a part of this year’s trading days. Semiconductor stocks may have gone too far, too fast recently but the future is bright. Look at everything we do and touch today. Everyday items are becoming massive users of chips. Keyless cars, refrigerator displays, thermostats, Bluetooth lights, wireless headphones and even children’s favorite toys all have more and more need for analog or digital chips. This isn’t just a flash in the pan sector anymore.
The real speculation still exists in SPACs, cannabis, electric vehicles and cryptocurrencies. There will be many winners in these buckets but the rising tide of liquidity is keeping a lot of companies alive that shouldn’t be. It’s also creating a volatile trading environment. The GameStop issue leaked into normal companies but that was short-lived. Who knows what the next catalyst may be.
Acceleration and rapid change are typically a precursor to speculative bubbles collapsing. Look at the market today from a stock selection standpoint:
Too much money has been flowing into companies with negative earnings. So far, it has been working out brilliantly. We know how this ends though. Over the long-term, sticking with world class, industry – leading operators has worked out with a lot less volatility. The former is ripe for caution, while the latter has plenty of wind at their backs looking ahead with numerous bullish factors in play.
Marvel’s Thanos actor, Josh Brolin, is 53 today. Basketball star Bill Russell turns 87. The stock market is closed on Monday in Honor of President’s Day. Abraham Lincoln was born on this day back in 1809.
James Vogt, 610-260-2214