There’s $4.5 trillion in ‘firepower’ that could drive the stock market higher in April, Fundstrat’s Tom Lee says

Tom Lee
  • There’s $4.5 trillion in cash on the sidelines that could serve as the “firepower” needed to move the stock market higher in April, according to Fundstrat’s Tom Lee.
  • Since the start of the year, institutional cash balances have surged 9% to $3 trillion, according to Lee.
  • “Institutional investors are even more cautious now,” Lee said in a note on Sunday.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The stock market’s recent rally will continue in April as $4.5 trillion in “firepower” makes its way into stocks, according to Fundstrat’s Tom Lee.

In a note on Sunday, Lee said “conditions [are] in place for a significant rally to continue into April.” Those conditions include a stronger-than-expected March jobs report, giving investors a bullish outlook for the US economy.

Additionally, Lee highlights that the COVID-19 vaccine rollout is well ahead of schedule as the US vaccinates on average 3 million people per day.

But the biggest driver of imminent stock market gains will likely be the significant rise in cash on the sidelines since the start of the year, according to Lee.

“Institutional investors are even more cautious now,” Lee said, pointing to a 9% increase in institutional cash balances since the start of the year. Institutions have raised $241 billion in cash and currently sit on a $3 trillion cash pile.

On top of that, retail investors have $1.5 trillion in cash.

“Pretty shocking rise in institutional money market cash balances [means] investors not bullish,” Lee said. The $4.5 trillion cash pile now represents “tons and tons of firepower” that “bodes well for April equity gains,” Lee added.

To capitalize off the potential future stock market gains, Lee advised investors to continue buying cyclical stocks that are poised to benefit from a reopening of the physical economy.

“The case for cyclicals is fundamentally attractive and has the most capacity to positively surprise,” Lee said.

fundstratttt.JPG
Read the original article on Business Insider

A decline in bitcoin’s volatility makes it more attractive to institutions and supports a $130,000 long-term price target, JPMorgan says

A visual representation of the digital Cryptocurrency, Bitcoin is on display in front of the Bitcoin course's graph
A visual representation of the digital Cryptocurrency, Bitcoin is on display in front of the Bitcoin course’s graph.

  • A recent decline in bitcoin’s volatility could boost its adoption by institutions as a low-correlation asset that helps diversify investment portfolios, according to JPMorgan.
  • If bitcoin continues to see its volatility converge with gold’s volatility, it would fetch a long-term price target of $130,000, JPMorgan said in a note on Thursday.
  • “Mechanically, the bitcoin price would have to rise [to] $130,000, to match the total private sector investment in gold,” JPMorgan said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Bitcoin’s price volatility has been on the decline in recent weeks, making it more appealing to institutions that are seeking low-correlation assets to better diversify investment portfolios, JPMorgan said in a note on Thursday.

A boost in institutional adoption of bitcoin is “likely to arise from the recent change in the correlation structure of bitcoin relative to traditional asset classes,” the bank explained.

One of the biggest barriers to institutions adopting the cryptocurrency has been its markedly high volatility, which exploded in 2020 as bitcoin more than tripled. From a risk management point of view, high volatility “acts as a headwind towards further institutional adoption,” JPMorgan said.

Now, there are signs that bitcoin’s volatility is normalizing, which would help “reinvigorate” interest by professional investors to include the cryptocurrency in its asset allocations.

One asset that’s negatively impacted from bitcoin’s growing favor with institutions is gold, which has seen $20 billion in fund outflows since mid-October, compared to $7 billion in bitcoin fund inflows over that same time period, according to the bank.

“Considering how big the financial investment into gold is, any such crowding out of gold as an ‘alternative’ currency implies big upside for bitcoin over the long term,” JPMorgan said.

That upside includes a long-term price target of $130,000, which represents potential upside of 121% from current levels.

“Mechanically, the bitcoin price would have to rise [to] $130,000, to match the total private sector investment in gold,” JPMorgan said, based on the current price of gold of $1,700 per troy ounce. JPMorgan previously had a $146,000 long-term price target for bitcoin, but that fell as gold’s price has recently fallen from a peak of $1,900 per troy ounce.

“The decline in the gold price since then has mechanically reduced the estimated upside potential for bitcoin as a digital alternative to traditional gold, assuming an equalization with the portfolio weight of gold,” the bank explained.

JPMorgan’s long-term price target for bitcoin is predicated on the idea that bitcoin’s volatility will converge with gold’s. That’s still far off from happening, as the three-month realized volatility for bitcoin recently stood at 86%, versus just 16% for gold.

“A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is likely a multi-year process. This implies that the above $130,000 theoretical bitcoin price target should be considered as a long-term target,” JPMorgan said.

Read the original article on Business Insider

Cathie Wood’s Ark Invest expects Tesla to soar to $3,000 per share by 2025 on robotaxi service

cathie wood ceo ark invest profile 2x1
  • Cathie Wood’s Ark Invest now expects Tesla to soar 359% to $3,000 per share by 2025.
  • Much of the upside for Tesla is predicated on its ability to launch an autonomous robotaxi service, according to Ark.
  • In a bear and bull case scenario, Ark expects Tesla to trade in between $1,400 and $4,000 per share, respectively.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Cathie Wood’s Ark Invest is out with a new eye-popping price target for Tesla, and investors are taking notice due to the accuracy of its previous price predictions on the electric vehicle manufacturer.

Ark now expects Tesla to hit $3,000 per share by 2025, representing a potential upside of 359% from Friday’s close and a market valuation of about $3 trillion. That’s a sizable increase from its previous 2024 price target of $1,400.

The price target incorporates expectations that Tesla will launch an autonomous robotaxi service built upon its full self-driving tech platform, which could bring in as much as $327 billion in revenue, according to Ark.

“In preparation for its robotaxi service, Tesla could launch a human-driven ride-hail network first, delivering a highly profitable recurring revenue stream and limiting the downside of a failed autonomous service,” Ark explained.

In its bear case, Ark expects Tesla to trade to $1,500 per share as it sells 5 million cars per year. In its bull case, Ark expects Tesla to trade to $4,000 per share as it sells upwards of 10 million cars per year. In 2020, Tesla sold about 500,000 vehicles.

The valuation model utilized by Ark incorporates Tesla’s relatively new insurance business, but doesn’t include its energy storage and solar business, nor its $1.5 billion allocation to bitcoin.

Tesla remains the largest holding for Ark Invest across all of its ETF strategies, and this isn’t the first time the investment management firm had a sky-high price target for Tesla.

In 2018, Wood said Tesla would hit $4,000 when the stock was trading at a split-adjusted price of about $250. The stock went on to trade at a split-adjusted price of $4,500 in early 2021, two years ahead of schedule.

Read the original article on Business Insider

The Grayscale Bitcoin Trust is now the largest public holder of bitcoin, but competition is heating up

FILE PHOTO: People walk past a board with the logo of Bitcoin in a street in Yerevan, Armenia September 9, 2019. REUTERS/Anton Vaganov/File Photo
  • The Grayscale Bitcoin Trust is now the largest public holder of bitcoin, according to Bank of America.
  • The trust likely owns 700,000 bitcoin, or about 3.5% of total supply, BofA said in a note on Wednesday.
  • But competition is heating up as Osprey launches a rival bitcoin trust and several ETFs apply for approval.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The largest public holder of bitcoin is Grayscale, which operates the Grayscale Bitcoin Trust, Bank of America said in a note on Wednesday.

The trust, which trades like a stock on the over-the-counter market, likely owns 700,000 bitcoin, which represents about 3.5% of total supply and is worth more than $31 billion, BofA said. The trust has $36.1 billion in assets under management as of Tuesday and has often traded at a premium to its underlying bitcoin holdings.

“The trust has been steadily buying bitcoin over 2020, especially in 4Q20 and has become one of the 5 largest holders of the cryptocurrency,” BofA said.

The Grayscale Bitcoin Trust launched in 2013 and is the go-to option for investors who want to add bitcoin exposure to their portfolio without directly buying the cryptocurrency. For years, Grayscale’s trust has been the only option for investors looking for easy access to bitcoin, as the SEC has blocked the launch of bitcoin ETFs over the years.

Grayscale has been able to take advantage of being the only option for investors by charging a hefty 2% annual fee, but competition is beginning to heat up.

Last month, the Osprey Bitcoin Trust launched with an annual fee of 0.49%, significantly undercutting Grayscale’s fees. The Osprey Trust has already attracted $103 million in assets under management as of Tuesday.

February also saw the first launch of a bitcoin ETF in North America, as Canada approved the Purpose Bitcoin ETF, which trades on the Toronto Stock Exchange. Issuers in the US that have filed applications with the SEC for approval of a bitcoin ETF include VanEck, WisdomTree,

Even Grayscale is looking to launch its own bitcoin ETF, as Grayscale CEO Michael Sonnenshein told Insider earlier this month. Recent job listings from the firm have zeroed in on ETF specialists, signalling the firm’s expected move into the space if the SEC grants approval.

Whether the Grayscale Bitcoin Trust will be able to hold onto its title as the top public holder of bitcoin as the cheaper Osprey Bitcoin Trust gains its footing and if the SEC approves bitcoin ETFs remains to be seen.

bitcoin bofa.JPG
Read the original article on Business Insider

Why the spiking bond yields driving sharp losses in tech stocks are not a long-term threat to the market, according to one Wall Street chief strategist

trader nyse pray
  • Rising interest rates have sparked a surge in stock-market volatility that’s seen tech shares take a sharp dive.
  • But investors should not fear rising interest rates, according to a recent client note from The Leuthold Group.
  • “Yields may be rising, but yield pressure is still extremely low because real growth is improving even faster,” said Jim Paulsen, the firm’s chief investment strategist.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A spike in interest rates since the start of the year has accelerated a rotation out of high-growth technology stocks and into value stocks poised to benefit from a reopening of the economy.

The Nasdaq has fallen more than 10% over the past month as the Dow has soared to record highs, with a spike in the 10-year US Treasury yield acting as the main catalyst. It recently surged to a cycle high of more than 1.60% after starting the year below 1%.

But according to Jim Paulsen, the Leuthold Group’s chief investment strategist, rising interest rates do not represent a long-term threat to the stock market. Paulsen expects the 10-year yield to cross 2% by the end of the year.

A spike in interest rates and its impact on the stock market depends on the economic backdrop, according to Paulsen. Rising interest rates amid a strengthening economy “may prove no challenge at all for stocks,” Paulsen said.

Since 1950, the S&P 500 achieved an average annualized price return of 9% during quarter when interest rates were on the rise, according to the note. “The effect of rising-yield quarters is probably not that much worse because real economic growth also improved for many of these quarters,” Paulsen explained.

With COVID-19 subsiding and the full reopening of the economy imminent, economists are expecting 2021 GDP growth to surge to 5.5%. This represents a favorable backdrop for the stock market even if interest rates continue their ascent.

If the pace of economic growth slows in 2022, the stock market will become much more sensitive to rising interest rates.

But for now, “with the economy enjoying a post-pandemic boom, rising yields may prove far less damaging for stock investors in 2021,” Paulsen concluded.

Read more: UBS says to buy these 13 ‘most compelling’ contrarian stocks that are poised to surge, including one with 40% upside – and shares what could drive each one higher

Read the original article on Business Insider

The S&P 500 is primed for a 10% rally by the end of June following a bullish upside breakout, Fundstrat’s Tom Lee says

Tom Lee
  • The S&P 500 is primed for a 10% rally by the end of June following a bullish breakout to the upside on Thursday, according to Fundstrat’s Tom Lee.
  • A breakout in the S&P 500 is taking place as the stock market’s volatility index is breaking down, which represents “double confirmation” of an imminent market rally, Lee said.
  • Lee recommends investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The stock market is poised to extend its recent rally following an upside breakout in the S&P 500, Fundstrat’s Tom Lee said in a note on Friday.

Lee expects the S&P 500 to surge 10% to 4,300 by the end of June, before any potential correction materializes, according to the note. Lee said Thursday’s record highs in the S&P 500 occurred as the Cboe Volatility Index – or VIX, also known as the stock market’s fear gauge – is on the decline. To him that represents “double confirmation” of the move higher in stocks.

Over the past year, periods of consolidation in the S&P 500 have been followed up by 10% rallies, Lee observed in the note. From June to July and from September to November, the S&P traded flat before jumping 10% after a breakout in its respective trading range.

According to Lee, the technical breakout in stocks does come with a favorable fundamental backdrop that will help drive the market higher.

Those fundamental drivers include COVID-19 retreating faster than expected, resulting in a faster re-opening of the US economy, pent-up demand and operating leverage that could be greater than expected, and interest rates could stabilize or even fall, the note said.

“We think there will be fundamental surprise in the coming months,” Lee said.

To take advantage of the expected move higher in stocks, Lee continues to recommend investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.

But the expected 10% rally higher in the S&P 500 won’t happen overnight, with Lee setting expectations that the next seven to 10 trading days could be flat as stocks “catch their breath.”

Read more: UBS says to buy these 13 ‘most compelling’ contrarian stocks that are poised to surge, including one with 40% upside – and shares what could drive each one higher

fundstrat chartt
Read the original article on Business Insider

General Electric extends 2-day decline to 14% as JPMorgan’s Stephen Tusa sticks with $5 price target

Larry Culp GE CEO
Larry Culp, CEO of General Electric.

  • Shares of General Electric have plummeted as much as 14% over the past two days after the company held its analyst day.
  • Investors are souring on the company’s plan to combine its GE Capital Aviation Services unit with AerCap as well as its reverse stock split.
  • JPMorgan analyst Stephen Tusa thinks the downside in General Electric is not over, as he sticks with his $5 price target.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

General Electric investors are souring on the company’s plans revealed at analyst day earlier this week, with the stock falling as much as 14% over the past two-days.

The company announced plans to combine its GE Capital Aviation Services unit with AerCap in an effort to reduce its debt burden by about $30 billion. On top of that, the industrial company said it plans to initiative a 1-for-8 reverse stock split to bring down its nearly 9 billion share count.

JPMorgan analyst Stephen Tusa thinks there’s more downside left for General Electric. Tusa reiterated his Neutral rating on the company and maintained his $5 price target in a note on Thursday, representing potential decline of 59% from current levels.

Tusa argues that General Electric bulls can no longer point to the GE Capital Services unit as a source of value for the stock since the company is merging the unit with AerCap.

“Starting yesterday, there are no longer GE Capital assets around which Sell Side Bulls can argue there is enough value/equity to support related debt,” Tusa said. The average sell side price target for General Electric is $13, Tusa noted.

Some investors have cheered General Electric’s decision to offload GE Capital Services, as it is now a pure play industrial company. But Tusa still sees weakness in those businesses as well.

“We continue to see structural concerns in the key Power markets, and now structural weakness at Aviation, combined with still relatively high financial leverage, and numerous tail liabilities for both GE and GE Capital Services, all hurdles to a speedy turnaround,” Tusa said.

ge chart.JPG
Read the original article on Business Insider

Recent stock market weakness represents a rotational correction rather than a big top, BofA says

FILE PHOTO - Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2020. REUTERS/Lucas Jackson
  • The recent weakness in the stock market represents a rotational correction rather than a big top, Bank of America said in a note on Tuesday.
  • The NYSE advance-decline line remains near record highs, indicating that underlying market breadth is strong.
  • “We believe that rotation is the lifeblood of a bull market,” Bank of America said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A correction in technology stocks over the past month represents a rotational correction rather than a big top in the stock market, Bank of America said in a note on Monday.

The bank is taking its cues from the New York Stock Exchange advance-decline line, which remains near record highs. The advance-decline line measures the difference of stocks that are moving higher or lower on a daily basis.

Near record highs, the NYSE A/D line indicates that underlying market breadth is strong. In other words, a broad swath of the market is performing well despite the sell-off in mega-cap technology names over the past month, which have been responsible for a bulk of the gains in the stock market over the past few years.

Other indications of strong market participation include an improvement in the percentage of S&P 500 stocks above their 10-day moving averages even as the market fell on Monday, and the strongest reading in the percentage of NYSE stocks at 52-week highs since March 2020.

“These solid breadth indicators suggest that market rotation is alive and well as US equities have corrected/consolidated lower from mid-February,” BofA said.

The rotation accelerated over the past month following a spike in interest rates, with investors selling out of technology stocks to buy cyclical stocks that are poised to benefit from a reopening of the economy.

“We believe that rotation is the lifeblood of a bull market,” Bank of America said.

But there are risks that could turn the recent rotational correction into a bearish breakdown for stocks, BofA highlighted.

The outperformance of the Nasdaq 100 relative to the S&P 500 is currently testing big support at the prior high from the 2000 tech bubble. “A decisive loss of this support [would] confirm a more sustainable loss of leadership, or bearish rotation, for the Nasdaq,” BofA said.

Additionally, a break below support in the high-yield and corporate bond indexes is a potential bearish leading indicator for the stock market, BofA said.

“This increases the risk for a deeper corrective phase on the S&P 500 with supports in the 3,714/3,700 to 3,647 range as well as at the prior highs from September and October,” BofA said.

bofas chartt
Read the original article on Business Insider

3 reasons why the correction in tech stocks has further to run, according to Morgan Stanley’s top US equity strategist

Mike Wilson
  • The sell-off in technology stocks is likely not over, according to Mike Wilson, Morgan Stanley’s chief US equity strategist.
  • In a note on Sunday, Wilson highlighted that the bull market in stocks will continue with value and cyclicals leading the way rather than the technology sector.
  • But technology stocks will continue to lag for three key reasons, according to Wilson.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The swift decline in technology stocks over the past month likely has further room to the downside, Mike Wilson, Morgan Stanley’s chief US equity strategist, said in a recent client note.

Since its peak on February 16, the Nasdaq 100 has declined by more than 10% even as a constant stream of good news hit investors. Vaccinations for COVID-19 continue to surge, daily COVID-19 cases have collapsed since the January peak, and Congress is on the verge of passing a $1.9 trillion stimulus package.

But with a full economic reopening within reach, coupled with a surge in interest rates, investors are rotating out of high growth tech stocks and into value and cyclical stocks that are poised to benefit from consumers finally being able to leave their homes and spend money following a year of rolling lockdowns. 

The recent trend of high-growth technology stocks underperforming its value peers will likely continue as Wilson sees more downside in the technology sector for these three reasons, according to the note.

1. “Markets lead the Fed, not the other way around.”

“The non-linear move in 10-year yields has awoken investors to a risk they thought was unlikely, if not impossible. The equity market now knows the 10-year yield is a ‘fake’ rate that either can’t or won’t be defended. To that end, the Fed did expand its balance sheet by $180 billion in February, 50% greater than its target. Yet, rates surged higher,” Wilson said. 

2. “The rotation might accelerate even further.”

“There will be a big shift in the top and bottom quintiles of 12-month price momentum by the end of this month. Most of the stocks going into the top quintile are value and cyclical stocks. Conversely, many of the stocks moving out of the top quintile are tech and other high-growth stocks.

Read more: Wedbush says to buy these 16 stocks that represent its analysts’ best ideas and are set to outperform in the next 6-12 months

“Part of the rotation from growth to value has been due to better relative fundamentals, as the economy recovers, and cheaper valuations. However, as these value stocks move into the top quintile of price momentum and growth stocks move out, the rotation might accelerate even further. This could be quite disruptive to portfolios and lead to another round of deleveraging like in January.”

3. “The Nasdaq 100 should test its 200-day moving average.”

“Based on the technical damage to date, the Nasdaq 100 appears to have completed a head and shoulders top and should test its 200-day moving average,” Wilson said. 

The 200-day moving average of the Nasdaq 100 currently sits at 11,635, representing potential downside of 10% from Friday’s close. 

A head-and-shoulders pattern is a bearish topping pattern that often signals a reversal following a bullish trend. The pattern takes its shape from a series of three tops, with the second top being the highest of the three. A neckline represents support and is formed by connecting the bottoms associated with the peaks. When the stock breaks below its neckline, a sell signal is triggered for traders.

qqq chart.JPG
Read the original article on Business Insider

Nikola slides 12% after JPMorgan downgrades to neutral given that the ‘good news is priced in the stock’

nikola tre prototype
Nikola said it completed the first of five Tre prototypes planned for this year.

  • Nikola fell 12% on Friday after JPMorgan downgraded the firm to neutral from overweight, according to a note. 
  • The call from JPMorgan was “a tactical move” as much of the good news is priced into the stock.
  • Nikola’s steep decline on Friday came amid a broader decline in electric vehicle stocks like Tesla.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Shares of Nikola dropped as much as 12% on Friday after JPMorgan downgraded the fuel-cell truck developer to neutral from overweight, according to a research note.

JPMorgan’s drive to downgrade Nikola was “a tactical move” based more on the timing of future catalysts than the underlying fundamentals, the note said.

According to the bank, the “good news is now priced in the stock, so we step aside for now,” the note said. The bank maintained its price target of $30, representing potential upside of 87% from Thursday’s close. 

Much of that good news includes evidence that the company is more focused on its goals and is passed the drama caused by founder and former CEO and chairman Trevor Milton.

Milton voluntarily stepped down from the company as chairman in late September, after a short-seller report from Hindenburg Research alleged that Milton and Nikola deceived investors. Nikola dismissed many of the claims raised in the report.

Nikola “has left much of the drama of 2020 behind,” JPMorgan said. 

But JPMorgan sees the Nikola’s story exciting investors once again in mid or late 2021 if customer orders are announced, “and as the first FCEL prototype comes to life,” the note said.

The decline in Nikola on Friday came amid a broader market sell-off in high-growth tech stocks that have been shunned by investors amid rising interest rates. Shares of Tesla were down as much as 13% on Friday.

Read the original article on Business Insider