I see all the signs of a market that’s moved beyond enthusiasm to excess.
This stage in a market is called many things. A market melting up. Forming a top.
You get the idea. We won’t, of course, know if the current levels constitute a top until we get a sustained downturn. And waiting for that confirming downturn can take a while and be very painful if you’ve tried to time the turn with shorts or Put Options and turn out to have been early.
The topping process can go on for a while. In this case I expect end of the year cash flows into retirement accounts and pension funds to stretch the topping process out until, say, mid-January. And the launch of a coronavirus vaccine (or two) adds a wildcard to any attempt to predict a top,
So you don’t  need to  rush to sell everything now by any means. But on the other hand, to me this doesn’t look like a time to be adding risk to a portfolio or taking flyers on high momentum speculations.
What are some of the signs of a top?
IPO mania and huge next day surges on new public offerings. Food-delivery service DoorDash (DASH) surged 86% in its public debut last Wednesday. Software firm C3.ai (AI) jumped 120%. Airbnb (ABNB) more than doubled. An analyst who made a widely ridiculed forecast that Airbnb stock would hit a market cap of $100 billion in 2021 wound up wildly pessimistic when the company’s shares broke that market cap in the day after the offer. In 2020 an index of IPO stocks gained 111%. First day rallies of initial public offerings have been three times larger than the average of the last 40 years. Among some 50 companies that had been backed by private equity and went public this year, their total worth jumped 660% on the first day of trading from levels indicated in their latest round of private funding, according to data compiled by PrivCo and Bloomberg.
Valuations that are so out of line as to make it clear that traders and investors don’t care about valuations. Not to pick on DoorDash (but why not?) the seven-year old unprofitable company with a truck load of competitors soared to a market cap of $60 billion after its IPO. That’s a bigger market cap then Kraft Heinz,  Marriott International, or Twitter.
Shorts are getting wiped out in big one-day moves. Remember last Thursday when Sangamo Therapeutics (SGMO), a stock in my Volatility Portfolio, jumped 52.98% in a day on relatively minor news from an early stage clinical trial? You don’t get that kind of move unless short sellers who have borrowed shares with the prospect of making a profit if they can buy the shares they borrowed at a lower price are getting wiped out and having to buy shares now in order to avoid even bigger losses as a stock’s price climbs. Whatever you think of short selling, short sellers are an important potential fuel in a rising market since they are potential buyers on a rise in stock prices. When the number of shorts and the size of their positions decline, that means just that much less fuel for a rally.
Companies are selling stock like there’s no tomorrow. Which always makes me wonder, Well, maybe there isn’t a tomorrow–at least when it comes to raising billions in the equity market. The poster child for this trend is Tesla (TSLA). The company sold $2 billion in stock in February. $5 billion more in September. And $5 billion last week. Investors and traders rushed to snap up the new shares–even though Tesla didn’t make a strong case that it had plans for the money that would produce a solid return on investment. (The company had $20 billion in cash after the end of its last quarter.) In a market where investors were actually calculating valuations on the back of an envelope, selling $12 billion in stock would have created at least a pause in any stock’s rally. Not in this market. If you look carefully, you might be able to see a day or two of “sideways” in Tesla’s chart. Nothing more.
I’m sure you have other signs of a top to add to this list.
I’m focusing here on those that affect the supply of stock on the market because that looks to me the most likely source of a retreat in stock prices. More in a post tomorrow.
