Market Rises Slightly On Wednesday
Stocks rose slightly on Wednesday as the S&P 500 continues to hover near the 3,000 level which is just below its record high. S&P 500 rose 0.28% to 3,004.52. Even though the action seems boring, the intraday session was interesting. It was the exact opposite of Tuesday as stocks rallied at the end of the day. It the last 80 minutes of the trading session, the S&P 500 rose 0.35%.
S&P 500 only needs to rise 21 points to hit a new record. But it has been impossible to gain traction in the past few months. I think investors know that if the market hits a new record high, it will continue to rise a few more percentage points. With the slowdown in play, the market isn’t ready for a new high.
Even though stocks do well in Q4 especially when they are up heading into the quarter, I can’t see stocks bursting through the record high and going on a great run for the annual Santa Clause rally. Why should stocks rally 5% when the economy is in a slowdown with no evidence of it improving?
Much More Optimism Which Makes Stocks Less Of A Buy
CNN fear and greed index actually fell 4 points to 55, which is neutral, even though stocks rallied on Wednesday. Just based on equities alone, there is much more optimism than there was earlier in the month. This is probably because much of the uncertainties have passed. Trade meetings with Europe and China happened. A Democratic debate occurred and 25% of earnings season is over. Fed meeting hasn’t occurred yet, but we are already clear the Fed will cut rates; the Fed’s quiet window has started.
Stocks aren’t at a record high yet because these news events didn’t come out positively. It’s still good they are over with though as investors can focus on the economic data. As you can see from the chart below, the weekly advisory service sentiment index has 52.8% bulls and 17.9% bears. Differential of 34.9% is slightly towards the high end of its range since 2011.
Looking at individual investors, the recent rally has led to it becoming much more common than last week to be bullish. Percentage of bulls increased 13.3 points to 33.6% which is still slightly below the historical average of 38%. And percentage of bears fell 12.9 points to 31.1%. It's still slightly above the historical average of 30.5%. AAII sentiment survey isn’t bearish, but it’s no longer giving off a bullish signal.
Update On Democratic Primary
Elizabeth Warren has lost some momentum after the latest debate. That probably occurred because she faced more criticism as the new front runner. An ideal situation for a candidate is probably in the top tier, but not first place. They want to avoid the slings and arrows the front runner receives. It doesn’t help a candidate to lead in the polls a few months before the first votes are cast.
Iowa caucus is February 3rd. In the latest Economist national poll, Warren dropped 6 points and Biden lost 1 point. It went from Warren +4 to Biden +1. Biden leads the average of polls by 6.6 points. As you can see from the chart below, Warren went from having an over 50% chance of winning to just a 38% chance. Mayor Pete has gained momentum as he has a 17% chance of winning.
Microsoft Beats On Top And Bottom Line
Microsoft was the first major internet firm to report results and they were solid. The firm reported $1.38 in EPS which beat estimates by 13 cents. Revenues were $33.06 billion which beat estimates for $33.23 billion. As you can see from the chart below, yearly revenue growth improved from 12.1% to 13.7%.
Despite the beats on the top and bottom line, the stock only increased 0.48% after hours on Wednesday. Its stock has been in a very tight range since late June. Since June 24th, the stock as only been between $132.21 and $141.57. That’s a 7% range. It’s in a sideways correction just like the S&P 500.
Azure is Microsoft’s profit center. Its growth rate has been falling steadily in the past few quarters as growth of +90% is unsustainable. Azure’s revenue growth fell from 64% to 59% which is still really strong. Evercore expected growth to stay at 64% which is odd in my opinion.
It has been falling for several quarters. In July, Microsoft announced LinkedIn would move to Azure. The change will take place over a few years. This is a big deal as LinkedIn has 645 million members. The only segment that saw a decline in revenues was gaming which saw them fall 7%.
Tesla Beats On EPS, But Misses On Revenues
Personally, I don’t see Tesla’s quarter being worthy of its stock’s 20.15% rally after hours. The company had its first revenue decline since 2012. Specifically, adjusted EPS was $1.86 which destroyed estimates for a 42 cent loss. It had $6.3 billion in revenues which missed estimates for $6.33 billion. That’s a 7.6% decline from last year. Auto revenues fell 12% yearly.
Model Y, which is Tesla’s SUV, is expected to launch this coming summer which is earlier than expected. The firm cut its full year deliveries guidance from 360,000 to 400,000 to just 360,000. We’ve seen Tesla print a few profitable quarters. Let’s see if it can final sustain itself. To be fair to Tesla, the bears have been wrong in calling for it to collapse in the past few years.
Conclusion
The stock market has been stuck just below its record since July. There are now about the amount of bulls there usually are. Meaning, there isn’t an obvious trade to buy stocks based on sentiment anymore. I think Mayor Pete will gain in the polls in the next few weeks. Next Dem debate is November 20th.
Microsoft reported a great earnings report and its stock did nothing afterhours. Tesla reported suspect results and its stock screamed higher Wednesday evening.
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