Did We Learn Anything From the Sock Puppet in 2000?
2024.12.09 03:59
Last week, in an AI-enabled event, the Sock Puppet emerged from retirement and sat on a panel of market prognosticators with Micro Strategy’s chairman, Michael Saylor.
The Sock Puppet said to Mr. Saylor…
I’ve seen this movie before. I raised $267 million to help people buy pet supplies (which they certainly needed) in a much more efficient way than driving to the store. Now, you’re borrowing billions to buy Bitcoin and then advocating that people, companies, and even the government should buy Bitcoin because it’s a more efficient way to
Mr. Saylor: Correct, but you lost money on every sale you made, and I’m making money hand over fist. And I don’t spend money on advertising.
Sock Puppet: Fair points, but what happens if the price of Bitcoin goes down dramatically and you have to repay your bond holders?
Saylor: That won’t happen.
Sock Puppet : But what if BTC goes down?
At about this time, CNBC’s host was interviewing Fed Chaiman Powell at the widely watched Deal Book conference and asked him if he felt that was competitive with the . The Chairman immediately responded with his opinion that Bitcoin was not going away, but it was also not a medium of exchange. “Bitcoin”, chairman Powell said, “is like digital gold.”
Shortly after this comment, Bitcoin sailed effortlessly through the $100k ceiling that had been restraining it for days.
Ironically, at about that time, Saylor responded to the Sock Puppet…
Saylor: It will come back up.
Sock Puppet: But what if it doesn’t?
(to be continued)
Last week began with traders’ expectations focused on the Friday employment report as the likely highlight of the week, but before that could happen…
- The AI animal spirits pivoted away from NVIDIA (NASDAQ:) and ignited another phase of the AI bull market
- Fed Chairman Powell, speaking at the Deal Book Conference lit a match under Bitcoin and it blasted through the much anticipated $100k level
- Evidence of an optimistic consumer piled up
- Earnings reports and guidance sent more stocks flying high
- And by the time the employment numbers were released, it was hard to see them as anything other than uneventful
As a result, years from now, we may look back on this week and the conclusion of this quarter as one in which the market sent a clear message that the bull market was stronger and more durable than many expected.
In fact, this week and this quarter may set the stage for 2025 to be analogous to the state of the Dot.com bull market in 1995.
The fact that both years end in 5 is not insignificant, but it’s not part of this analogy and will be covered in an upcoming issue of this column.
Politics, Animal Spirits, and Market Trends
In last , we pointed out the similarity between 2016 and the market’s current strong reaction to the new Trump 2.0 led administration. More importantly, we suggested that the continuation of the market trend could hinge on the bond market’s direction.
We also emphasized an expectation that the market sectors that continued higher into the end of November would likely be the segments of the market that continue to lead into the end of the year.
So far, this perspective appears to be playing out.
As you can see in the chart below of the percent change in the sectors last week, the and the Risk On sectors continue to lead. The ’s sit conservatively near the breakeven line but positive.
For readers who are not members of our ETF Sector Plus membership, “RiskOn” (in the chart above) is the aggregation of sectors , XLC, and XLY. “RiskOff” represents , , and . “Cyclical” aggregates XLU, and . It’s a helpful way to see sector rotation.
Clearly, large-cap, technology and the consumer led the way.
Looking at a broader perspective in the chart below, the same trends are apparent.
The top of the chart, “MAGS,” the ETF representing the Magnificent 7, and “IBIT”, Blackrock’s Bitcoin ETF (NASDAQ:), capture last week’s sentiment well, but there were equally important market messages last week that also show up in the order of this chart.
Bitcoin’s $100k Wake Up Call
This week, the Bitcoin ETF, IBIT, tops the chart above and reflects Bitcoin’s move through a major milestone of $100k.
For years at MarketGauge we’ve advocated and educated about the opportunities that blockchain and crypto have to offer. The blockchain technology and the new way of thinking that cryptocurrencies represent should not be ignored. There are ways to manage your risk in this space, and 2024 has been a year in which institutional money managers have both embraced and enabled this new asset class.
As you can see from the chart below, one example of this adoption, Bitcoin ETFs, has now become mainstream.
It’s easy to see big round numbers as indicators of speculative excess, and often, big round numbers define major market tops. That’s what round numbers do in markets.
This week’s break of this big round number ($100k) should be viewed in the same way we so easily accept and celebrate (or quietly lament ‘missing out’) the hitting a new big round number. Some of you may remember Dow 1,000 or 10,000, 20k, 40k, etc.
There’s no guarantee that Bitcoin will rise like or stocks over time, but that’s why risk-management is such a powerful skill. Done correctly, it doesn’t just protect you from the downside, it enables you to be in the game to capture the upside.
Bitcoin isn’t for every investor, however, if it’s not for you, it still may be well worth your attention so that you’re in touch with the changing nature of markets, business, and day-to-day living. These changes are impacting traditional investing too.
What we can learn from 1995?
As a consumer, my memory of Windows 95 is that it was the most bug-ridden, frustrating piece of software Microsoft (NASDAQ:) had ever released. It’s still the butt of disrespectful jokes today.
What I didn’t appreciate at the time was how much it would change my life and work.
In the 1980s, Cisco (NASDAQ:), 3Com, and many other hardware companies were building the infrastructure enabling the masses to connect to the Internet, which had existed for decades.
AOL was founded in 1985 and pioneered connecting the average person to the Internet. However, it was Windows 95 that accelerated the ability for the masses to connect to the internet with a user-friendly interface that also supported what we call “browsing”.
In that same year, the Netscape IPO doubled on the first day, grabbing the attention of the public, and the proverbial genie was out of the bottle. The foundational hardware was in place, software was accelerating the end user’s ability to adopt, and the commercialization of the internet was no longer a question of when but rather of “how fast.”
This week, Salesforce (NYSE:) reported earnings, and it missed its EPS estimates. Revenues were in line, and its guidance for Q4 was lower than expected. In a different time, a headline report like this would send a stock tumbling, but CRM exploded upward to all-time highs.
The catalyst for investors’ enthusiasm was the CEO’s explanation that “Agentforce, our complete AI system for enterprises built into the Salesforce Platform, is at the heart of a groundbreaking transformation.”
Translation – AI software is driving productivity and growth for CRM and hundreds of big clients.
Benioff’s CRM is not the first company to say this or demonstrate that AI is, in fact, leading to benefits that justify the cost. CRM’s roughly 10% jump on its earnings day is also not the most impressive example of how software companies are leveraging AI. Palantir (NASDAQ:) is an example that has led the way and investors have noticed and rewarded it with a gain of 400% in 2024.
In 2023, ChatGPT captured the imagination of the public and corporate America. 2024 was a year of grappling with the hardware, and energy needed for AI and questioning if the costs could be justified.
Now the answers are becoming clear.
The gap in performance you see between software stocks and semiconductor stocks as represented by their respective ETFs in the chart below, is evidence of an understanding or at least a bet by investors that the AI revolution is broadening out. The focus on ChatGPT-related hardware and software is maturing into the commercialization of this new technology in an analogous way that occurred in the evolution of the internet, most notably around 1995.
Like 1995 and the Dot.com bull market, shifts like this usually take longer than weeks or even months, but if you listen, the market has a way of letting you know when it’s time to pay attention if you want to enjoy the next big trend.
Bitcoin over $100k, the market’s rotation, and elevated consumer sentiment all point to an acceleration of new AI and crypto trends in 2025.
Elevated Consumer Sentiment – Just Hot Air?
A strong economy thrives with a strong and optimistic consumer, and there’s a lot of evidence of that.
Last week The University of Michigan Consumer Sentiment for the US increased for a fifth consecutive month to 74 in December 2024, the highest level since April, compared to 71.8 in November and above forecasts of 73.
More significantly, as you’ll see in the chart below, this trend in sentiment is a continuation of a trend that’s been in place for two years.
One of the components of the sentiment survey shown above is the consumers’ expectation for stock prices one year into the future.
As you can see from the chart below, these expectations are running quite hot. The optimism is at all-time highs on a chart spanning all the way back to the 1980’s!
In the AAII survey that reflects the opinions of people more focused on the stock market, the data is quite different.
As you can see in the chart below, the AAII survey just ended its longest-running streak since 2015, of weeks where the Bulls outnumbered the Bears.
One indicator I like to look at when considering sentiment based on actions rather than survey answers of the average investor is margin debt. In this case, the sentiment is neither excessive nor accelerating.
This data is monthly and delayed, so it doesn’t include the response to the election. I’ll be sure to follow up with this in the coming months.
Few Things Deflate Sentiment Faster Than A Bearish Surprise From The Fed
The reason traders expected last Friday’s employment report to be the news event of the week is that this monthly payroll report and the inflation data of PCE, CPI, and PPI are the most likely data points to change the Fed’s current posture of cutting rates.
Fortunately, the employment report was neither too strong nor too weak. Payrolls were modestly higher than expected, balanced by an uptick higher in the unemployment rate. That’s something for everyone and nothing extreme enough to suggest the Fed should change its stance on the December meeting.
The Fed funds futures market agreed. The probability of another 25-basis points rate cut at the upcoming December meeting was 70% ahead of the report, and currently it stands at 86%.
Next (LON:) week we’ll get the CPI data on Wednesday and PPI data on Thursday. As suggested by the Fed Fed funds futures, the market is not worried about it.
What Should We Make of The Return of the Sock Puppet?
The Puppet’s questions of Saylor continue below, but first, as we look forward to 2025, there are a few facts to consider before assuming we’re in a state anywhere like that of 2000.
According to a FactSet summary of Q3…
- 61 of the S&P 500 issued negative guidance which was the lowest number since Q4 2021
- Communication Services (XLC) was the best sector with 23% earnings growth
- Earnings growth for the S&P 500 was 5.8%, and 5th consecutive quarter for the S&P 500 to have positive growth.
- 75% of the S&P 500 reported better-than-expected EPS
Admittedly, EPS doesn’t compute when trying to value Bitcoin (for most people), so the Sock Puppet did have a very good last question for Mr. Saylor…
Sock Puppet: Mr. Saylor, if you’re right and Bitcoin keeps going up, what are you going to buy with all your Bitcoin?
Mr. Saylor: Didn’t you hear Chairman Powell at the Deal Book conference? Bitcoin is an asset, not a currency. You don’t buy things with Bitcoin. You just buy Bitcoin and use it as an asset in your business. It’s a new business model for the digital age.
Summary: Mostly bullish indications from Big View continue with the S&P and Nasdaq pushing to new highs, though some more neutral readings creeping up with inflationary concerns persisting.
Risk On
- More of a mixed picture in the indexes with the Dow and Small caps closing marginally lower, though S&P 500 and rose to new all-time highs with Nasdaq reasserting itself up +2.17%. (+)
- Volume patterns were overwhelmingly positive in favor of accumulation days with the exception of IWM. S&P 500 has had 4 accumulation days to 0 distribution days in the last 10 days. (+)
- Strong moves for European equities with Italy, Sweden, Germany all up over 3.5% on the week. (+)
- Volatility continued to come off a little and reached its lowest levels since early July. (+)
- Growth surged to new highs while value was actually down on the week, flipping the ratio back to the levels we last saw in July when the trend had its last major flip. (+)
- Developed markets continued to marginally outperform emerging markets, though both are catching up relative to the SPY after underperforming for most of the last two months. (+)
- Bitcoin finally nudged that $100k mark with the new presidential administration seen as more friendly to the crypto space. (+)
- Modern Family remains strong with 4 of the 6 in bullish phases. and are the two holdouts, though semiconductors flirted with flipping back to bullish this week. (+)
- The percentage of stocks over their key moving average came off a little, though remains strong overall. (+)
- The color charts (average of stocks over key moving averages) looks quite positive for the Nasdaq and small caps with a mixed picture in the S&P. (+)
Neutral
- Sectors were far more mixed and the trends were shuffled with Transportation, Utilities, Energy and Homebuilders each down over -3% while Consumer Discretionary and Technology both up over +3%. (=)
- Risk gauges are a neutral at 60%, mostly due to strength in treasuries. (=)
- McClellan Oscillator pulled off its recent highs this week even as the markets pushed to new highs, showing some market breadth weakening, likely from strength in megacaps while small caps were down on the week. (=)
- Soft commodities (DBA) soared past its multiple highs from earlier in the year in April and September indicating inflationary pressures persist. (=)
- Demand for treasuries continues with TLT outperforming the SPY over the short-run. (=)
- Oil slumped down to the lower end of its trading range for the last two months, perhaps signally lower concern about geopolitical tensions. (=)
Due to our travel schedule there will not be a video this week.
