Stocks Are Beginning to Melt Down

We are in a bull market for stocks! While this month is off to an ugly start for the S&P 500, stocks are still up. Well, a few! The S&P 500 Index, down 2.6% so far in September after 3 days, has gained 16.5% in 2024.

I have been and remain bearish. In late August, I pointed to the plunge ahead that I envisioned for Super Micro (SMCI), which was on the receiving end of a short report and which also delayed the timely filing of its 10-K. This morning, the stock is testing $400. It was $547.64 the night before I published, and it was breaking $500 that day. The stock was added to the S&P 500 this year and has dropped a lot from that time. Investors and traders have been overly optimistic about stocks related to Artificial Intelligence.

I have pointed to the fact that we are in a bull market and a bear market simultaneously. The Magnificent 7 have been leading the way. I called them not so magnificent a little over a month ago. These stocks have been mixed since then:

Looking at them year-to-date, though, it is pretty clear why the S&P 500 is up so much:

The Magnificent 7 currently represent 29.8% of the S&P 500. NVIDIA (NVDA), which I am betting against, has more than doubled, and Meta Platforms (META) is up more than the S&P 500 by far. The rest are up except for Tesla (TSLA).

I am betting against Tesla again. I warned in late July to take profits on it whether one was long or short! The stock has fallen a lot since then, trading as low as the low 180s in August. There is a gap open above, and the stock is already down in 2024, but it could fall a lot more. It was up a lot yesterday, which allowed me to get a good price on my inverse TSLA. It ended 2023 near $249 but traded as low as $139 in April. At $230, it has a market cap of $735 million and an enterprise value of $718 million. The stock trades at 37.5X projected adjusted EBITDA for 2025, which seems very expensive.

The bull market began after the collapse of the markets when the pandemic hit in early 2020. As I said above, it feels like we are in a bear market too. I know that small-caps jumped and are now up in 2024, but so many stocks are in the falling mode. The economy seems to be challenged by inflation percolating still, though it has been improving. Payroll growth has been slowing. For many, the good news is that the Federal Reserve Board is finally going to cut rates, perhaps this month. I don't think that will matter much, though certainly falling rates have historically been good for stocks. Now, though, rates are already very low:

• 2-year Treasury Note: 3.75%

• 5-year Treasury Note: 3.54%

• 10-year Treasury Note: 3.73%

• 30-year Treasury Bond: 4.02%

All of these are down from year-end levels. The Fed Funds rate is managed at 5.25-5.50%, which is way higher than these rates for federal obligations. Of course, mortgage rates and corporate borrowing rates are higher than the Treasury yields, but they are pretty low compared to Fed Funds. These rates are very low compared to 1986, for example, which was when rates had dropped a lot from the very high levels in the early 80s due to the attack against inflation. Many younger people note that they are high during their lifetimes, which is true but not really the right way to look at it. Their lifetimes included the Y2K panic and the pandemic.

We have a Presidential election in two months, but I don't think this will impact stocks if Trump wins or if Harris wins. There are two big geopolitical issues right now too: Ukraine and Israel. I don't believe that the resolution of either of these will help stocks.

I have been too negative for too long, but I remain negative. My IRA and trading account are loaded with ETFs that allow me to be exposed negatively to NVIDIA and Tesla. In my IRA, I am long 7 stocks too, though my net exposure is very short effectively.