Leaders Index 12-31-20

The market closed out the year with modest gains on lower volume, continuing the recent positive action. It was a crazy year to say the least, but a very profitable one if you were in the right places. An early continuation of the rally that started in Oct. of 2019 ran into a brick wall in February when the COVID-19 pandemic hit. There was a very fast and pretty deep selloff that caused a strong reaction from the government. The Fed reeved up the printing press and produced trillions in new money and the Congress passed trillions more in stimulus spending. That turned around the market and produced a strong rally that with only slight interruptions continues to this day. Right now the market is strong, but there are warning signs all over the place. The market now has a lot of similarities to the market in 1999. That saw the blow off top to the secular bull market that began in August of 1982. The last quarter of 1999 and the first quarter of 2000 showed the strongest market I have ever seen. Gains that usually took months to build happened in a couple of weeks. It was heady times and it was easy to lose your head in all the excitement. We are seeing a lot of the same things now that we saw then. The IPO market is on fire and stocks are opening at huge premiums to their stated prices. This year has seen more IPOs that raised more money than at any time before. Valuations of these issues are also getting crazy. AirBnB came out at a huge premium and today its market cap is roughly the same as the entire publicly traded hotel industry. Also TSLA is now worth more than the next six largest car companies combined. It is looking like the Cisco Systems of this rally. CSCO has a legendary run in the 90s and topped out in March of 2000 with the Nasd market. It has not seen that price since. There are levels of valuation and bullishness that only have been seen in the past around important tops. We are seeing a rush of SPACs coming to market and raising large amounts of money. They are the latest iteration of the old blind pools of the 60’s and 70’s. Also we have seen a large influx of new inexperienced traders coming in like we did back then. In 1999 people were leaving their jobs to day trade on new and some existing online trading services. Today many are using their government check to trade stocks on their phones on RobinHood and other services. The technology is different but the human behavior is the same. I recently saw a commercial on Fox Business that showed a twentysomething guy sitting on a public bus trading stocks on his phone on RobinHood. Anyone who has studied market history knows the implications of this. We have been in a strong rally in recent weeks and it looks a lot like 1999. We know these kinds of situations rarely end well, but what we don’t know is how long they will go on. This market is showing many signs of being in the terminal phase of a bull market, but it could go on longer. We only know it’s a top after the fact. There is likely more upside before this is over, but you should understand where we are and the risks involved. Jerry