We hope everyone had a great and safe Thanksgiving Holiday! November was one of the best months ever for the market. The November rally broadened quite dramatically the small cap and mid-cap stocks. It was just a great month for the market. The market already had its Santa Claus rally in November.
But the market just keeps going up anyways, and no matter how much you try to look at it fundamentally, we think the fact is there is so much liquidity with interest rates so low, it will continue to drive the market higher. Covid-19 damaged the service and leisure industries, but the unprecedented digitization across the board made many parts of economy working, perhaps worked even better under Covid-19 pandemic. That’s why we have had a two-stock market and two-economy since March low. Now with the vaccine news, the real economy will start booming by Spring when readily distributed vaccines result in pent-up demand for services that were avoided during the pandemic.
The powerful synchronized global monetary policies will continue to provide massive support for the stock market. Since 2018, there are $800 billion outflow from the stock market and $400 billion inflow into the treasury market. Imagine when the treasury yields go up and the money flows out of bonds and into the equities, what would happen to the stock market? The stock market is not cheap compared to historical valuation metrics, but the interest rates are near zero and the Fed is QE to infinity. There is no price target for this type of environment.
We found that today’s market 4-year cycle is comparable to the 4-year cycle that started in October 1998. From the October 1998 low, the tech sector rallied 278% to reach the DOTCOM bubble in March 2000. So far, the NASDAQ has rallied 88% from the March 2020 low. To reach DOTCOM bubble high, the NASDAQ could reach 25000, almost double of today’s 12464. We have March 14, 2022 as the top date for this rally. So, please buy all the dips while you can! We just can’t fight with money!
We run a concentrated portfolio because we only want to open positions in the best stocks in each sector. Right now we have a big position in PLTR. PLTR more than tripled from its IPO price and since then it has experienced a correction last week. We view this correction as a buying opportunity, rather than take the money and run. PLTR is a 5-10 year story. The company is just beginning to grow its commercial sector. It is the best software in AI and machine learning. The institutions haven’t put much money into the stock yet.
We are still holding KPTI. It is a deep value stock and the near term catalyst is right around the corner. The company is waiting to have the 2nd line multiple myeloma indication approved in March 2021. The company continues to produce positive clinical data and business execution has been flawless. The shorts kept shorting this stock because of the uncertainty related to the 2nd multiple myeloma approval. We believe the approval should be none event since the BOSTON data has been published in Lancet. The stock price hasn’t moved while the market is super bullish. It is a little frustrating, but it is normal for small biotech stocks to act this way, no movements for a long time, then all of sudden it moves a lot.
A lesson to be learned. 37% if a stock price movement is directly tied to the performance of the industry group the stock is in. Another 12% is due to strength in its overall sector. Roughly 50% of a stock’s move is driven by the strength of its respective group.
KPTI is not in the hottest group, tech is the hottest group.
We also hold PACB. This small cap genomic stock is doing really well. In the next 2-3 years, PACB could ramp up its commercial activity to push out its flagship product, which could potentially take business away from ILMN. ILMN has had an amazing run since early 2000. ILMN produced short read instrument, and PACB produces long read genomic instrument. It has been proven PACB’s long read is much more accurate than ILMN’s short read. The genomic sector is on fire. ARKG is a hot genomic ETF.
Technically, it is five weeks into the current weekly cycle and we should expect the rally to continue into Q1 2021 before we encounter a correction.