So far in August the major indices are showing incredible strength by making small incremental new highs every other day or so. The general market is NOT advancing much, but definitely not coming down. The market breadth continues to narrow down, meaning less and less stocks are participating with the general market.
This is definitely frustrating as a lot of funds are positioned to stay in cash and or get ready to short the market at the first sign of breaking down. If the market rallies from here, the funds would have a very hard time explaining missing the rally until the next FMOC meeting in September 2021. When a market doesn’t come down, does it mean that it will go up immediately? We beg to differ. When a market doesn’t come down right away, it DOESN’T mean that it will go up immediately. It is very difficult for the market to flip to risk on position when the market is so bloated in valuation. On the contrary, we believe this divergence (general market new highs with narrowing breadth) is a bull trap. It is meant to trap the Johnny-come-lately crowd. It takes discipline to stay on the sideline in the face of market making new highs almost on a daily basis.
The lack of a correction in August only increases the odds of a bigger correction in October. As of this writing, we believe the bond market is the leading indicator for the equities. The 10-year treasury interest rate topped on March 30th at 1.765% and bottomed at 1.128% on July 20th. Since the 1.128% 10-year treasury interest rate bottom, it has been trading sideways in the last four weeks. The 10-year treasury interest rate is not rallying as if the economy is doing fabulous, but the equities are telling a very different story as if the economy is rocketing away.
The next FMOC meeting starts on September 21st. Perhaps the FED will announce bond tapering would start some time soon? We don’t know, we do know that the market is getting more tired by the day. As change from the FMOC meeting announcement would serve as the catalyst for the market to have a much needed correction.
We are still early in the 4-year cycle (March 2020-?), and we do have a bullish 4-year cycle on hand. So we are just looking for a correction to deploy new money. It just doesn’t pay to deploy new money at today’s level.
Speaking of long term investment, we do want to talk about our major long term holding Palantir (PLTR) stock.
Early last Thursday, Palantir(PLTR) reported June quarter revenue of $376 million, up 49% from a year ago, beating both the company’s own target and the Wall Street consensus by large margins. Its earnings, at 4 cents a share, were a penny better than estimated.
The strong results were driven by accelerating growth in the company’s U.S. commercial business, including newly acquired clients such as Deere, BNY Mellon, and Southern California Edison.
PLTR Q2 earnings sufficiently addressed the weakness in the company’s future earnings. The Street has always talked bad about PLTR’s customer concentration in government sector, or its lack of abilities to serve more mid-sized customers in the commercial sector. Q2 earnings showed the U.S. commercial sector grew 90% year over year. This reminds us of Facebook. Soon after Facebook IPO, its stock price was cut in half because the Street was concerned that Facebook was not able to move the platform from PC to cell phone. With the iPhone gaining more and more customers, so did Facebook gaining more mobile users. The rest was history. Facebook became a monster because it was able to provide its platform to garner the mobile users’ eye balls.