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• The Dow Jones fell 200 points on Tuesday.
• Even a massive rally in Apple couldn’t keep the Dow in the green, though the Nasdaq did jump to a new record.
• A bubbly looking stock market has completely detached from the fundamentals, but Nordea Asset Management believes there could be more upside ahead.

It could have been a rough day for the Dow Jones, but a substantial rally in Apple kept the stock market bellwether from a suffering significant loss – and helped launch the Nasdaq to a new all-time high.

Dow Jones Falls as Fed Meeting Looms

The three major U.S. stock market indices diverged on Tuesday.

While the Nasdaq surged to record levels and flirted with the 10,000 mark, the Dow and S&P 500 spent the day just trying to keep the losses as small as possible.

Here’s how they were faring less than an hour before the closing bell:

• The Dow fell 209.19 points or 0.76% to 27,363.25.
• The S&P 500 dropped 0.51% to 3,215.84.
• The Nasdaq rallied 0.52% to 9,976.29.

On a light day for economic data, JOLTS job openings came in slightly off forecasts, but still painted a dim picture of the outlook for employment in the United States.

While everyone frets about economic fundamentals in an increasingly frothy looking stock market, there could be a structural cause of the dramatic moves in equity prices.

Taking a look at Dow Jones’ larger cousin, the S&P 500, Sebastian Galy of Nordea Asset Management said that there could still be substantial gains ahead for stocks.

Galy said in a statement shared with CCN.com that a lack of supply could squeeze markets higher this year:

This portfolio effect means that the supply of stocks becomes ever more inelastic going forward, which means that more mature growth stocks can become even more expensive. This portfolio effect is one key reason why we expect the S&P 500 to overshoot 5 to 15% not justified by expectations but by current and especially future scarcity.

One of the primary reasons there is a shortage of shares is the loose Federal Reserve policy that has made cash such an unattractive asset.

The FOMC meets tomorrow, and investors have been left on tenterhooks regarding whether or not Powell will actively push back on the possibility of negative rates by floating a rate hike sometime in the next 24 months.

Surely even the Fed must be concerned about a speculative bubble when a company like Chesapeake Energy can rally 180% the day before reports emerge that it’s likely filing for Chapter 11 bankruptcy.

Dow 30: Apple on Fire After Chip Announcement

A rocky day for the Dow 30 was salvaged by an impressive bounce in Apple. AAPL shares soared 3% to hit a new record high after the company announced plans to start manufacturing its own chips for its computers.

Curiously, even though this could be a major blow to Intel, INTC stock was only down 0.75%.

Apple’s rally wasn’t enough to lift the Dow into the green, but it did help the tech-heavy Nasdaq touch 10,000 for the first time to set a new all-time high of its own.

Elsewhere, Boeing halted its incredible climb, falling 5.2% on a bad day for domestic airline stocks.

One of the most damaging blows to BA bulls was a headline that the aerospace giant’s mighty order book continues to be upside down, as cancellations outstrip new orders.

This is not good news, particularly for a company that was weakened by the 737 MAX disaster even before the pandemic lockdown began.

• Dow futures surged as much as 650 points on Friday morning after a blowout jobs report left Wall Street stunned.
• The U.S. economy added 2.5 million jobs in May.
• It’s just the latest evidence that the stock market rally is sustainable, but contrarian traders say there is something else to worry about.

Forget “sell in May and go away.” The Dow Jones Industrial Average (DJIA) is on an absolute tear, and the stock market’s breakneck recovery shows no signs of letting up just because spring is preparing to give way to summer.

The Dow is up 2,500 points in the past two weeks alone, while the Nasdaq Composite is on the verge of setting a new all-time high.

It’s getting more challenging for even the most ardent bears to fight the rally, loathe it though they might. But for contrarian traders, that capitulation might be the very thing that grinds the stock market’s “unstoppable” rally to an inauspicious halt.

The Jobs Report Is Out – And the Dow Jones Is Loving It

The U.S. stock market is heading for a blockbuster end to a blockbuster week. The Dow and other major indices were already coiled for massive gains when the market opened this morning, but a blowout jobs report stunned investors – and sent risk appetite into the stratosphere.

According to Labor Department data, the U.S. employment situation didn’t just weaken less than expected in May. It actually improved.

Economists expected payrolls to slide by around 8.3 million and lift the unemployment rate to just under 20%. Instead, the economy gained 2.5 million jobs and the unemployment rate fell to 13.3%.

As of 9:03 am ET, Dow Jones Industrial Average futures had rocketed 588 points or 2.24% higher. This primed the index for an incredible opening bell gap that will carry its cumulative gains over the past two weeks to around 2,500.

S&P 500 futures enjoyed a big gain too, climbing 1.45% ahead of the open. The same couldn’t be said of the Nasdaq 100, though, whose futures traded flat.

The Stock Market Is Growing Unashamedly Bullish – Maybe Too Bullish

The jaw-dropping employment report is perhaps the best argument that the economy’s fundamentals justify the stock market’s rapid ascent. But there are plenty of technical indicators that suggest this Dow Jones rally has legs too.

For one thing, the number of S&P 500 stocks trading above their 50-day moving averages is holding above 90%. At one point this week, that figure spiked as high as 98%.

Rallies this broad almost never happen, but when they do, they have almost always augured a banner year for stocks.

It’s not surprising, then, to see traders turning bullish too.

The CBOE put/call ratio – the ratio of bearish options trades (puts) to bullish ones (calls) – has collapsed in recent weeks, suggesting that traders have all but given up betting on a stock market decline.

And earlier this week, the put/call ratio for equities briefly collapsed to 0.4 – its lowest level since 2014.

These are the sorts of charts that make contrarian traders squirm. According to this investing strategy, when the markets get this universally optimistic, it’s a good sign that it’s probably time to sell (and vice versa).

As wealth manager David Bahnsen explained in a Thursday evening note:

Contrarianism simply believes that markets do better when people are more weighed down by fear (because, people are wrong, a lot). A screaming number of bearish option trades (puts) compared to a collapsing number of bullish option trades (calls) is a very bullish contrary indicator. As markets have rallied in dramatic fashion the last two months, that indicator has reversed.

For what it’s worth, Bahnsen thinks the rally is justified – at least over the long term. Alluding to the Federal Reserve’s unprecedented stimulus injections, he told Fox Business that investors have “three trillion reasons to invest” in the stock market – even if the economy recovers slowly.

But after today’s jobs report, maybe the fabled V-shaped recovery really is back on the table.

• Airline shares are rallying strongly, as early indicators are that they will fly close to 50% capacity this summer.
• That’s a steep rise from 20% back in April and May.
• The sector remains a mess, and bankruptcy is still a prospect for a segment only at half its capacity.

Airline stocks offered some of the biggest percentage returns in the stock market Thursday. Retail investors are jumping into soaring shares, even as billionaire investors like Warren Buffett continue to shun the trade.

The rally, led by American Airlines (NASDAQ:AAL), is based on pure hope after the airline announced it would fly about 55% of its usual domestic schedule in July. That’s a massive jump from May when the airline reported that it only operated at about 20% of its schedule.

Meanwhile, competitors are moving at a slower pace. United Airlines (NASDAQ:UAL) expects to fly just 25% of its capacity in July. JetBlue (NASDAQ:JBLU) and Delta (NYSE:DAL) are still cutting flights–a convenient fact that greedy retail investors overlooked.

Turbulence Ahead as Airlines Face Cash Flow Challenge

While the market is pricing in this seemingly good news now, the real challenge is in how much further demand can rise past July.

Millions of passengers have already made alternatives, and the TSA has reported that total screenings are down about 85% from this time last year.

But capacity numbers aren’t everything. Airlines have slashed ticket fares to fill seats already. Fares were down over 35% on average back in March, and to lure passengers back, some lines are cutting fares by half.

But getting capacity up while cutting prices still means most flights are operating at a loss.

As a result, airlines are burning through tens of millions of dollars every day. That’s a problem.

The sector as a whole has relied on a hefty debt flow that can’t be covered by current cash flows. The industry will need to consistently get to a higher capacity level for that issue to go away.

Investment Implications

The airline sector has been a popular economic rebound play with retail investors.

Chances are this isn’t the last time we’ll see the sector lead the day. It’s easy to see why.

Say the government gave you $1,200 recently, and you put it all in American Airlines. Shares are near $15 now, up from a low near $8.25. That’s about an 80% return in two months. Your $1,200 is now $2,160. Keep those returns up, and you’re a genius.

Yet cash flows matter. That’s why money managers and other professional investors have been shying away from this space. There’s a high expectation that at least one major airline will go bankrupt this year.

Meanwhile, the CEO of Boeing has come out stating that it may take as long as three to five years for demand to reach pre-crisis highs.

So far, signs point to retail investors keeping the party going. But when it’s time to rush for the exit, that’s when they’ll find that there are few buyers interested–at least at these prices.

If anything, the airline sector action by retail investors looks like a microcosm of the economy.

The trend is improving, but the trend got so bad first that valuations look stretched following their bounce.

Worse, it wouldn’t take much of a change in sentiment to send things tumbling back to crisis lows or lower. Retail investors may enjoy the ride now, but the landing will prove bumpy.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.

• Elon Musk has renewed his rivalry with Jeff Bezos.
• The Tesla CEO wants Amazon to be broken up, stating that “monopolies are wrong”.
• Musk is starting to sound like Bernie Sanders, but don’t let him fool you.

Weeks after openly siding with conservatives about reopening the U.S. economy, Tesla (NASDAQ: TSLA) CEO Elon Musk is showing his progressive side.

On Thursday, Musk called for regulators to forcibly break up online retailer Amazon (NASDAQ: AMZN).

Time to break up Amazon. Monopolies are wrong!

One week he is aligning with Ivanka Trump. The next, he is rooting for policies associated with Senators Bernie Sanders and Elizabeth Warren!

Talk about flexibility.

Elon Musk might be preaching Bernie Sanders talking points, but don’t be fooled

The Tesla CEO’s tweet came after reports emerged that Amazon had initially declined to publish a controversial ebook. The online retailer later buckled under pressure.

Amazon has a foothold in a number of industries, and its market position varies from sector to sector. But when it comes to the controversy that led Elon Musk to demand that Amazon get the Ma Bell treatment, the Tesla CEO was right on the money.

Amazon isn’t just the leading U.S. bookseller; it completely dominates the market. The online retail behemoth accounts for 83% of all ebook purchases in the U.S.

But if you believe that Musk is siding with the likes of Bernie Sanders to protect helpless authors from the heavy-handed Amazon regime, I have a bridge to sell you.

This has nothing to with censorship – and even less to do with book sales.

The rivalry between Elon Musk and Jeff Bezos is all about cars and rockets

The two billionaires started out in starkly different fields, but they have begun to encroach on each other’s turf.

In the electric vehicle space, Amazon has been making forays that could threaten Tesla’s dominance. Last year, Amazon invested in electric carmaker Rivian. The online retail behemoth also ordered 100,000 delivery vans from the budding Tesla rival, giving Rivian a head start that Musk never had.

Amazon has simultaneously made inroads in the self-driving space. This is an area where Tesla claims to have the most advanced technology.

In 2019, Amazon led an investment round in self-driving tech startup Aurora Innovation. And late last month, reports emerged that Amazon was considering acquiring autonomous driving unicorn Zoox.

Amazon swerves into Tesla’s lane

Nor is the rivalry confined to this planet. Each billionaire heads a private space company, and their approaches to exploring the final frontier couldn’t be more different.

For example, Musk and SpaceX envision the human race establishing a colony on Mars to stave off extinction, while Bezos and Blue Origin see the red planet as uninhabitable.

But while SpaceX seems to be the darling of the media, it is actually the relative newcomer. Musk started SpaceX in 2002 – two years after Bezos launched Blue Origin in 2000.

Blue Origin fires past SpaceX

And Bezos’ space firm is also securing more government financing, at least recently.

Less than two months ago, NASA picked three private space firms to spearhead lunar lander development. SpaceX received $135 million, while Blue Origin got a whopping $579 million.

This was on the grounds that Blue Origin was closer to achieving NASA’s goals than SpaceX, a fact that must have peeved Musk.

There’s obviously a personal rivalry at play here. The two billionaires are not overly fond of each other, as we’ve observed on multiple occasions.

Last year while Jeff Bezos was engulfed in a cheating scandal, Elon Musk branded the Amazon founder and CEO “Blue Balls.”

Suffice to say that if Jeff Bezos ever cries for help on a crowded street, Musk probably won’t be the first person to come running.

But just like it’s not a sign that he has suddenly become the world’s richest Bernie Bro, Musk’s call to break up Amazon has nothing to do with his feelings towards one of the few people who are even wealthier than him.

This is all about self-preservation.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

• Warren Buffett made a classic rookie investing blunder when he sold Berkshire’s airline holdings in April.
• He panic-sold the stocks, right before the industry bottomed out in May.
• The big four U.S. airlines have soared since then, posting gains of up to 100%.

When Warren Buffett dumped all of Berkshire’s holdings in four U.S. airline stocks, he said the “world has changed for airlines” and that he’d made an “understandable mistake” investing in them in the first place.

A month later, it’s clear Buffett made a mistake, albeit one that’s far less understandable – and exponentially more embarrassing.

Buffett – hailed as the greatest value investor of our time – appears to have made a classic rookie investing blunder. He panic-sold at the bottom, and now the stock market is making him pay.

Warren Buffett Spent $8 Billion Buying Airline Stocks – Then He Sold the Bottom

The airline industry was one of the first sectors pummeled by the global pandemic. Flight groundings began even before the nationwide lockdown, and analysts warned that fears of infection could limit passenger numbers long after stay-at-home orders expired.

Industry analysts initially estimated that airline passenger sales could drop as much as $314 billion this year, a 55% nosedive compared to 2019.

Buffett shared a similarly-bearish outlook when he revealed that Berkshire had dumped its airline stocks:

I don’t know that three, four years from now people will fly as many passenger miles as they did last year. You’ve got too many planes…

Berkshire had invested as much as $8 billion in American Airlines, Delta Airlines, United Airlines, and Southwest Airlines. Buffett admitted that he sold those shares “at far lower prices than we paid.”

His willingness to incur such massive losses suggests that the airline industry should be on the verge of collapse. Instead, airline stocks are rallying aggressively as the economy reopens and demand bounces back.

It looks like mom-and-pop got this one right. As for Warren Buffett? He panic-sold at the bottom.

The Big Four U.S. Airline Stocks Have Been Soaring Since Buffett Panic Dumped

In April, the month Buffett sold his airline stocks, American Airlines traded as low as $9.11. But after dipping to $8.25 the following month, AAL stock took flight and has surged more than 100%.

It’s a similar story for United and Delta.

DAL and UAL shares are still well off their yearly highs, but they’ve also bounced around 80% off their lows.

Even Southwest – the relative laggard – is up over 70% from its 2020 low of $22.47. All four airline stocks carved a bottom within a month after Buffett cashed out.

The Oracle of Omaha must have seen that Berkshire booked a $50 billion hit in the first quarter and decided to cut his losses, starting with airlines.

Understandable? Maybe. But as Buffett himself taught us, when investors capitulate, the bottom is often in sight. That appears to be the case here.

Warren Buffett – as bizarre as it feels to say it – made a classic rookie mistake. And considering his other recent trades, maybe it’s time to buy bank stocks next.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

• The U.S. labor market bounced back hard in May with 2.5 million new jobs.
• That validates the stock market rally – at least for now.
• At the same time, it represents a massive wealth transfer to big business.

The stock market is going absolutely nuts on Friday as Wall Street reacts to a U.S. employment report that nobody saw coming.

The U.S. gained 2.5 million jobs in the month of May. That’s according to the Labor Department’s non-farm payrolls data. These statistics don’t include agricultural jobs. Nor do they include freelancers in the gig economy, the self-employed, small businesses, or people employed by family members.

So that part of the picture is unclear.

But incorporated businesses with employees hired 2.5 million people in May. We might be bouncing back to peak productivity – and stock market valuations – in very little time.

Jobs Growth Rockets Back to Life in May

The U.S. had incurred a staggering 30 million unemployment claims in the six weeks preceding May. Amid ghastly weekly jobs reports, the stock market rallied confidently throughout April.

It seemed that the CNN headlines could have read, “The Literal Four Horseman of the Apocalypse Spotted By U.S. Navy Descending On Planet,” and the Dow would have yawned.

The money was betting that the U.S. economy is more resilient and efficient in 2020 than ever before. Stock valuations reflected the belief in the old soothing mantra of presidents and central bank policymakers that “the fundamentals of the economy are strong.”

It appears the stock market was right.

The desire of the American people to work and make money is evident from May’s job growth. It aligns with the near full employment of the U.S. labor market going into 2020. The economy was humming along. People were working very hard.

And that wasn’t the only bullish factor. Enabled by digital technology deployed on an unprecedented scale with more usefulness than ever before, it takes less and less capital every year to increase the productivity of work.

Unfortunately, the May employment report also highlights something else about the stock market rally.

Stock Market Bets on Big Business

On the Thursday episode of CNBC’s “Mad Money,” Jim Cramer said the economic shutdown led to “one of the greatest wealth transfers in history” – to big business from the rest of the economy:

How can the market rebound without the economy? Because the market doesn’t represent the economy. It represents the future of big business.

At the extreme end, Amazon exemplifies the acceleration of big business in the crisis, especially tech business. The titan of retail industry went on a 100,000 worker hiring spree as early as March.

And big businesses have an outsized impact on the stock market benchmarks:

The bigger the business, the more it moves the major averages. And that matters because this is the first recession where big business is coming through virtually unscathed, if not going for the gold.

During the economic freeze and $6 trillion fiscal and monetary splurge by Congress, Trump, and the Federal Reserve, the poor got poorer, and the rich got richer.

That’s something the country is going to have to grapple with at some point.

But for now, the 2.5 million Americans who went back to work in May are keeping calm and carrying on. And the stock market is continuing its trajectory back toward February’s historic peak valuations.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in U.S. equities at the time of writing.

• Not everything is rallying on the job market’s surprise good news.
• Gold is diving and now trades under $1,700.
• Longer-term, lower interest rates and easing measures will likely lead to a massive rally for gold.

Happy days are here again! At least they are in the stock market. Thanks to a surprise increase of 2.5 million jobs, against expectations of further millions hitting the unemployment line, stocks are on a tear.

The S&P 500 is close to breakeven for the year after its massive plunge back in March.

Of course, not all assets are going along for the ride. Gold prices dropped 2.5% on Friday.

It’s easy to see why. Gold is an asset that traders tend to dive into during times of uncertainty. When fear is waning, traders tend to take their capital elsewhere.

At least, that’s how gold usually acts in the short term. Other trends can be at work too. When traders were rushing to cash in March, gold sold off then as well, before heading higher as part of that fear trade. Unsurprisingly, gold did the same thing in 2008.

But there are a few key reasons why gold is now starting to look attractive for investors today.

Gold’s Long-Term Trends Remain Intact

Although the short-term trends don’t look attractive for the metal, long-term trends do.

With interest rates back at zero, and with the Federal Reserve outright printing money, we could see gold make another run to all-time-highs.

That’s if we get a repeat of the 2009-2011 era when considerable money printing led to fears that inflation would start surging.

As those fears rose, and with the debt ceiling crisis in 2011, gold spiked to just over $1,900 per ounce, more than doubling in the span of a few years.

Fast forward to the present.

With the vast government stimulus programs going on as well as a repeat of the Fed’s crisis playbook, there’s even more money flooding into the financial system than the last time.

What’s more, Friday’s jobs numbers indicate that all this money may end up finally overstimulating the economy.

When that happens, traders may start to get uncomfortable with rising inflation and put some money into gold.

Gold has already outperformed the stock market by far in the past year, even with the recent pullback.

Finally, central bankers have been buyers of gold for years. And there’s been no recent sign of a slowdown there.

Sure, some traders will stick with stocks, even though they’re already at historically high valuations. But it only takes a small move of capital into the gold market to see some big moves.

Top Plays for a Rally Over the Next 18 Months

While investors can buy physical gold, it tends to cost a premium, making it poor as a trade.

That’s why liquid investments like the SPDR Gold ETF (GLD) are an attractive starting point. The ETF is attractive as long as gold is valued at $1,700 per ounce. Some analysts predict that gold can soar to $3,000  by the end of 2021.

But you can do even better. How? When prices rise, the relatively fixed costs of gold mining companies don’t budge. So their profits tend to explode.

That’s why traders may want to consider the VanEck Vectors Gold ETF (GDX) on this current pullback.

The mining companies have already had a great run, but they tend to see gains three-to-four times the price of gold, so there’s room to go in the next 18 months.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.