Disney Increases 7.32% On Successful Disney+ Launch

Another Relatively Flat Day: Stocks Refuse To Correct

S&P 500 has been nearly flat for the past 4 days. It increased 7 basis points on Wednesday. That was enough for a new record high. When investors discuss the stock market having a horizontal correction, they don’t envision new record highs being hit consistently. The market isn’t correcting. January 2018 to June 2019 was a horizontal correction. 

Personally, I’m not calling for that type of correction. I think stocks need to fall about 5% and eventually rally if the data improves. This is about the market being very overbought in the near term; it’s not an intermediate term cyclical issue. If you’re bearish because you think 2020 won’t be a turnaround year, you likely think stocks will fall over 10% in the next few weeks. I’m not in that camp either.

CNN fear and greed index fell 1 point to 87 which is still extreme greed. It peaked at 91 a few trading days ago. This index rarely stays high for long. Fact that it is still in extreme greed territory tells you the market is still ripe for a correction. 

As of Tuesday, the 14 day RSI was at 69.72. It got slightly above 70 on November 8th. Since the market was up on Wednesday, the RSI got above 70 again. That’s an overbought signal.

As you can see from the chart below, 72.95% of S&P 500 stocks are above their 200 day moving average. This percentage has peaked at similar levels earlier this year. It got to the low 80s in January 2018. 63% of NYSE stocks. And 49.32% Nasdaq stocks are above their 200 day moving average. 

There have been 26 trading sessions in a row where stocks haven’t fallen in back to back days. Since stocks were up on Wednesday, that will reach 27 on Thursday.

Big Rally In Disney Stock

Dow increased 0.33% because Disney stock increased 7.32% after the successful launch of its Disney+ streaming service. This success isn’t a shock because consumers love streaming services and the properties Disney owns are wildly popular. 

Netflix stock is down 3.76% in the past 2 days. It’s tough to tell how big of a hit Netflix will take due to the Disney+ launch. The new service had 10 million sign-ups a day after launching. Main question is how many streaming services people can afford.

Very few people will subscribe to Disney+, Hulu, Netflix, YouTube TV, Apple TV+, Amazon Prime, and HBO. That’s too many to pay for all at once. Most people get Prime to get free shipping on Amazon. The other services consumers choose depend on their preferences. 

While Netflix is right that they compete against all forms of entertainment, I think people have a limit as to how many streaming services they buy. People were mad they were paying so much for cable. But a bundle of streaming services could end up costing more than the original cable package. 

Content is expensive. On the other hand, Disney+ comes free with Verizon and Netflix comes free with T-Mobile. Apple TV+ is free for a year if you buy an Apple device.

Review Of Wednesday’ Action

Nasdaq fell 5 basis points and the Russell 2000 fell 0.37%. VIX was up on an up day as it increased 0.32 to 13. We probably can't read much into such a small move in the VIX. Many see a correction coming, but not because of this. Russell 2000 probably fell because long bond yields fell. 

Risk on trade appears to have fallen by the wayside as the 10 year yield is at 1.87% which is 9 basis points from its recent peak. This makes sense because that trade got out of hand. For some reason, the S&P 500 hasn’t followed suit. 

Financials fell 0.57% and the utilities gained 1.47% because of this decline in the 10 year yield. Utilities sector had been oversold. This rally changes that somewhat. Real estate and consumer staples were up 1.07% and 0.86%. It’s odd to see all the makings of a correction, yet the S&P 500 at its record high.

Let’s put it all together. VIX, utilities, consumer staples, and real estate were all up and the 10 year yield fell. This is risk off action without the decline in the S&P 500. I think that’s coming soon. 2 year yield has also fallen a bit as it is at 1.63%. 

10 year yield is 24 basis points higher than the 2 year yield which means there has recently been 3 basis points of flattening. That’s not a big deal. What would be a big deal is a rate cut in 2020. Even though the 2 year yield has fallen slightly, the odds of a rate cut next year fell to just 44.6%. It probably won’t happen.

Trade Deal Struggles

News on trade in the past few days has been bad as China and America are struggling to finalize phase 1 of the deal. Time is limited as the deadline is mid-December. It appears China is backing down on its promise to buy $50 billion in U.S. agricultural goods. 

The two sides are also at a stalemate when it comes to China regulating intellectual property protections and it stopping the forced technology transfer. In other words, everything that was agreed to is up in the air. Traders don’t seem to be worried. S&P 500 paring back gains doesn’t count. It needs to fall 10% if there is no trade deal and new tariffs are implemented.

Conclusion

The stock market is overbought and markets are showing signs of the risk off trade gaining hold. Issues with finalizing phase 1 of the trade deal could catalyze a 5% correction. 

Disney stock exploded on the successful launch of its streaming services. This might only be the beginning of its rally if the stock gets the Netflix treatment. 

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