Stocks Extremely Overbought
The stock market again rallied significantly on Monday. Any increase is significant with the market at a record high and the S&P 500 up over 20% year to date (it’s up 22.79%). This has been a very strong run in the past few weeks. Since October 8th, the S&P 500 is up 6.4%. Annualizing that would get you over 70% yearly returns.
Stocks have liked earnings season, the progress on the trade deal, the potential bottom in manufacturing activity, and the strong employment report. This situation could be perfect if you believe either Q3 or Q4 is the bottom of this slowdown.
MSCI all country world index is very close to its record high. It is at $76.87 and its record is $77.54. It probably will hit a record this month. The global economy could be turning around. Investors are certainly betting on that occurring.
It’s interesting that even with the recent amazing gains, the S&P 500’s 14 day RSI is only 55.44. That’s not an overbought signal. On the other hand, the CNN fear and greed index is off the charts. It increased 6 points to 86 out of 100 which is extreme greed. This is its highest reading since the fall of 2017.
Only the volatility index in relation to its 50 day moving average isn’t showing greed. That’s because it has been low for a few weeks. While it did increase 0.53 to 12.83 on Monday, it is still very low. Anything below 14 is very low. It’s as low as it was in 2017, but that was an extreme year.
Even though stocks have mostly rallied this year, the volatility is significantly more than that extreme year. We don’t want to repeat that because most markets had a rough 2018. Many commentators are saying Q4 2019 is the exact opposite of Q4 2018. Mainly because stocks have rallied, the Fed is more dovish, and the trade war is cooling off. A slowdown was in its beginning stages last year. Now, it might be near its end.
Details Of Monday’s Action
Nasdaq increased 0.56% to another record high, Dow increased 0.42% as it joined the record high party. Apple was up 0.66% to another record high. It is up a ridiculous 63.06% year to date. Personally, I think the new AirPods Pro will be a huge success. Apple's $249 wireless earbuds have gotten great reviews for their sound quality and noise cancellation capability.
Russell 2000 was up 0.51%, but it’s still not near its record high. It needs to rally 8.97% to reach a new high. If the Fed was to guide for rate hikes in 2020, it would reach a record. I don’t see that happening. Earliest the Fed will hike rates is 2021 if the economy recovers next year.
As you can see from the chart below, the best 6 month period for the S&P 500 is November to April. The economy is probably recovering and the market is entering a sweet spot in the calendar. That doesn’t mean a correction can’t happen though.
We’ve seen volatility in the last 2 of these periods as stocks cratered in January 2018 and in Q4 2018. Surely, we can see a 3% to 5% correction with the CNN fear and greed index at 86.
Energy stocks exploded higher as the sector was the best performer, rallying 3.15%. WTI oil rose 0.6% to $56.54 which is its highest price in over a month. Prices jumped over $2 on Friday. Investors bought energy stocks because of optimism surrounding the trade deal with China.
Energy has underperformed terribly this year, but could bounce back if the global economy recovers. This sector is up 4.67% year to date. Obviously, it would be bad for the consumer if oil prices rise as real wage growth would plummet. Consumers are in a sweet spot this holiday season with a tight labor market and low inflation.
Investors think retail sales growth will be strong. Iindustrials sector was the 2nd best as it increased 1.2% for the same reasons energy rose.
2 worst sectors were utilities and real estate which fell 1.28% and 1.05%. They don’t like the recent rise in long term rates. 10 year yield is back at 1.79%. It fell from 1.84% to 1.69% in the end of October. I think that was a trend correction and that the 10 year yield will hit 2% in the next couple months.
2 year yield is at 1.59%. The curve has steepened which is bullish for the economy. There is now only an 8.1% chance of a rate cut in December. Most likely there won’t be one. In fact, there might not be a cut all of next year. Analysis shows a 69.1% chance of a cut in 2020.
Uber Stock Plummets Again
Uber isn’t a good business as it continued to lose money in its latest quarter. I wouldn’t go anywhere near this stock even after the decline after-hours. Uber stock fell 5.5% after-hours even though it beat EPS and revenue estimates. It’s flirting with a new record low.
Before the after-hours decline, the stock was down 25.23% from its first close in May. The firm reported a loss of 68 cents per share which beat estimates for a loss of 81 cents. It had $3.81 billion in revenues which beat estimates for $3.69 billion. Uber had $1.16 billion in net losses which increased from last year’s $986 million.
The firm raised its 2019 adjusted EBITDA guidance by $250 million, but it still expects a loss from $2.8 billion to $2.9 billion. This company is a disaster. It expects to breakeven on an EBITDA basis in 2021. That sounds dubious given the firm’s $7.4 billion in losses in the first 9 months of 2019.
Uber Rides grew revenues 19% to $2.9 billion. Uber Eats revenue grew 64% to $645 million and Uber Freight grew 78% to $218 million. As you can see from the chart above, Uber Eats is a big loser. Revenues growing at that fast clip don’t help if they generate high losses.
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