A friend recently remarked that he had heard it said that Steve Wynn, the Las Vegas casino operator, had never met a gambler, who was not a loser.
It is well known that this country is afflicted with a population prone to addictions to prescription medications, cocaine, heroin, meth and other illegal narcotics, which unfortunately are readily available. Added to this list of drug related addictions can be added gambling, which has been growing in the United States, but also internationally in places like Macau. When our conversation turned to the stock market, my friend remarked that during the pandemic casinos had been closed, and sports gambling of all types had been reduced essentially to near zero. This has left global stock markets as almost the only game in town for those needing a “fix” for their gambling addiction. And, unlike the casinos, where the odds are always in favor of the “house”, these legions of new “investors” actually have a chance to win with stocks, and have been winning by placing their bets on the names they know. You know household names like APPL, MSFT, AMZN and FB, which these days are counted among the “Magnificent Seven” largest big cap stocks.
Gamblers on winning streaks tend to place ever larger bets until they overstay their good fortune, and then go bust. One must wonder if the “just buy the Magnificent Seven” (an echo of the Nifty Fifth perhaps) strategy so popular with gamblers may be nearing a reversal after the following quote appeared in a popular market commentary this past week. “Jason Goepfert of Sentiment Trader.com pointed out that Apple is not only the biggest stock in the U.S., but nearly the entire world. At the end of June, the value of Apple alone was nearly 80% of the market capitalization of the entire Russell 2000 index. Goepfert points out that as of today, it’s nearly 90%. In the past 40 years, no single stock has come close to dwarfing the value of so many other companies; not IBM in 1979 or Microsoft in 1999 or Exxon Mobile in 2008, when oil was near its peak.” The stock market has rallied to close to all-time highs on the backs of the “Magnificent Seven”, and a few other big cap stocks, and if these begin to stumble then the implications for the cap weighted indexes could change quickly. Compliance officers warn investment professionals all the time that “concentration” is dangerous for client portfolios, ditto for stock indexes.
This past week the S&P-500 continued to rally, and began to fill in its last gap just below the all-time high set in February, as the impotent bears once again failed to take out ratcheting higher and higher support levels. I suspect the addition of millions of global gamblers turning to the stock market to satiate their addictions may be contributing at the margins to the continuing firm bid under the market. However, while the stock market can “stay irrational longer than one can stay solvent”, the extended and overbought condition of the “Magnificent Seven” would seem to imply a very high level of risks, making the stock market more vulnerable than usual to disappointment and uncertainty.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-366 in yellow with the S&P-500 overlaid in read and blue candle chart format.
TATY broke above its down sloping dark blue negative divergence trend line this week as the price pushed the S&P-500 to a new recovery high. There are numerous reasons to respect the notion that the recovery rally is likely a bear market rally, and a potential trap, but nonetheless the price still enjoys a very firm bid, and as a result the bulls have managed to continue to establish higher and higher support levels, and new highs for the recovery rally. New all-time highs could now be achieved in a matter of hours, unless the bears regain their strength, and begin to take out support levels beginning with the 3300 level.
THE BOTTOM LINE
In spite of a high degree of bullish sentiment, global uncertainties, signs of weakening demand, high valuation, and fewer stocks participating in the rally, the bulls powered by unprecedented liquidity courtesy of the Administration, the Congress, the Fed, and perhaps huge additional liquidity previously enjoyed by the gambling industry, have powered the recovery rally into a position marginally below new all-time highs. If the markets were driven by the news, then the price would be in a death spiral given the spreading pandemic, prospects for future earnings, global medical and political uncertainties, racial strife, and the most unemployment since the Great Depression. This disconnect between the real world and the stock market is a product of borrowed liquidity, and the belief that the debt chickens will never come home to roost. A relatively modest move higher in nominal interest rates would likely create a crisis level situation at corporations, and government at all levels, which have gorged themselves on debt. There really is a huge and unprecedented financial bomb out there, but how long is the burning fuse is the critical question for investors.
Please stay safe!
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