Price Is Now Just a Number, but There's a Catch

I'm about to tell you that price is becoming just a number and why that might be occurring -- and why I see yellow lights ahead. But I also wanted to make clear that much of what the market is pricing in is, in fact, based on fundamentals. On the fundamental side, I'm mostly at odds with how certain the market is that we will get more stimulus without a hitch. I also want to make clear that stock divergence is, right now, extreme. The Nasdaq 100 is 36% higher than the S&P 500. Despite all the talk about how bullish the market has been, the S&P 500 is below where it started the year and below its June 8 closing price. I am not sure when the Nasdaq 100 became the only benchmark people cared about, ahem, but away from that index, performance has been OK, but not great. It hasn't even been costly to be short for June, if you started on the S&P 500 around the 3,200 level. But, I would argue that the divergence is driven by fundamentals. When you look at companies like Amazon that are driving the returns in the market, they are clear beneficiaries of a shift in how we purchase products. The recent rise makes sense in terms of Covid-19 spikes and fears that the reopening is losing some momentum. On the other hand, $200 billion in market cap in a week is a pretty large surge. To put this in perspective, Pfizer is the 25th largest holding in the S&P 500 exchange-traded fund , and it has a market cap of only $192 billion -- basically what Amazon added in a week. Tesla , which isn't in the S&P 500, now has a market cap of $254 billion, up from $75 billion at the start of the year, and just passing Intel . At the other end of the spectrum, Hertz has returned back to earth and had to shelve its secondary issuance of shares (the first time I can remember a bankrupt company contemplating issuing shares). When Price Becomes 'Just' A Number This brings me to my view that we may have entered a stage where price is just a number. By that, I mean that we lose some focus on valuation and traders are just left chasing the last price. All that matters is where you bought it and where you sold it and the concept of value drops to the wayside. This is actually a relatively rare occurrence. I remember back in 2000, trading credit default swaps and all the those traders -- we'll call them CDS traders -- were constantly pestering their convert arbitrage clients for good stock picks. The convert arbitrage traders were big users of CDS, by the way, but at the time, they knew all the fun and exciting stocks. I remember it hitting a point where a bunch of us on the CDS made some very quick returns on a stock and went to thank the convert desk for the idea. They laughed at us, as we had bought the wrong ticker, but weirdly, at the time, the ticker mattered very little so long as it was something in the right space. In other words, it was just a number. In early 2007, CDS just went tighter and steeper every day. There was no such thing as a good 'buy' of protection. Eventually the credit default swap index (CDX) trader who reported to me got stopped out. I think CDX was 28 and the 5s vs. 10s curve was 30. It widened and then hit all-time lows in June as selling protection was remorseless. Of course, by the end of the summer it was 100 and the curve was inverted, but people selling protection (especially bears getting stopped out) didn't care about the risk vs. reward, it had all just become a number. There are some other times (European debt crisis as another example) where I have experienced this phenomenon where price seems to be just a number and I think we are starting to experience it. What is the Driver? We don't get to the point where price is just a number without a reason. Greed is always a big part, but it is usually accompanied by some innovation. In 2000 the internet itself was the innovation. In 2007, we had Constant Proportion Default Obligations and Leveraged Super Senior. Two of the worst products ever invented and rated, but that helped fuel the just a number trading. I believe that the incredible rise in weekly option trading by new accounts is a driver. We have seen a record number of new accounts opening and big increases in single stock option trading and weekly option trading. The accounts -- we'll use Robinhood as an example -- simply don't have enough cash to be causing the moves to occur by simply buying and selling stocks. To keep stocks rallying like they have been, there would need to be huge inflows into those accounts week after week and for those funds to be invested in the same stocks. That just doesn't seem feasible. On the other hand, lets assume that many of these investors are risking large portions of their account on weekly call options or short dated single stock options. When those pay off, they can reload their profits in new options. Buy options. Make money. Buy more options the next week. That behavior is consistent with some of the volume activity we are seeing. It is consistent with put/call ratios. It also might explain why early in the week seems so strong (buyers of options) while the end of the week has struggled in comparison (taking profits on those options). It would also explain why such a relatively small pile of cash could move markets using options as leverage. It would explain the just a number concept, as well, as the option sellers wind up buying delta to offset their losing gamma positions. This is all slightly weird, but I think it is a bigger driver than many believe and relatively few are talking about it. This leads to the question of when does it end? I am not sure when it ends, but from experience, when the just a number trading ends, it ends abruptly and painfully. The bottom line is I'm still bearish on the S&P 500, target 2,800. My main concern is that the market is too confident D.C. won't let it down, or at least not stumble enough to let us down. Slightly bearish credit, as it remains a very crowded trade and even my mother knows the Secondary Market Corporate Credit Facility is buying bonds and that is usually a pretty strong signal. The Fed has not instituted yield-curve control, but the 10-year Treasury closed at 0.66, 0.68, 0.67, 0.67, 0.68, and 0.68, so it is hard to get too exited either direction. My advice: Be cautious here. (Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stocks? Learn more now.)

Price Is Now Just a Number, but There's a Catch

The hitch is that fundamentals do matter, too. Confused? Let's examine what's happening in the market and why it's making me cautious.

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