Momentum Stocks Look Weak; Nvidia & Tesla Crater

Momentum - Stocks End The Week On A Positive Note

Momentum - This week continued the streak of avoiding a 1% daily move in the S&P 500. However, it was a relatively topsy turvy week for stocks as there were two pullbacks. The week ended up nicely since stocks were up on Friday. The S&P 500 increased 0.33% and the VIX fell 6.02% to 12.64. The S&P 500 was up 0.59% on the week and is up 6.6% year to date.

It is now less than 1% away from its record high. The CNN Fear and Greed index is at 54 which means the S&P 500 can easily break its record high without getting too overbought.

We got more confirmation that the consumer is doing well as Nordstrom reported great earnings. It had same store sales growth of 4%. They were only expected to increase 0.8%. Same store sales guidance expects an increase of 2% in 2018. This is above the initial estimate between 0.5% and 1.5%. Even with the 13.11% increase in Nordstrom stock, the consumer discretionary sector only went up 0.12%.

Since all sectors were positive, it was the worst performing one. The best was real estate which was up 0.96%.

Momentum Is Toast: Facebook Is In A Bear Market

The momentum leaders haven’t been doing well lately, but the S&P 500 is still near its record, partially because of the rally in financials. Facebook has been doing terribly as it is down 6.4% since August 6^th.

The fact that Snapchat lost users isn’t important because investors aren’t concerned with competition. Facebook has a huge moat because it has a ton of users who won’t leave because of the strong network effect.

The reason it’s down is because of the increased costs associated with moderating the website. The stock might not be able to increase again until it reports next quarter’s earnings and gets into more detail about how much costs will rise.

Momentum - Netflix Adding Advertising?

Netflix stock is down 24% since July 9^th. You wouldn’t think that one quarter missing subscriber numbers would matter because there have been a few down quarters throughout this massive growth run.

Netflix doesn’t get a pass because it is highly leveraged and is expensive. Netflix is priced for perfection and the company is investing so heavily in new content that if it doesn’t add enough users the entire company can implode. It won’t go bankrupt, but it could lose the ability to add new content quickly which would further hurt growth.

The way growth has snowballed, the collapse can snowball as well.

On an unrelated note, Netflix is running promo ads for its shows. It would probably be a mistake to extend this test into regular advertising because it is so much easier to just raise subscription prices.

The goal with these promo ads is to increase viewership especially on originals; the test will only be rolled out if it is successful. Don’t fear that Netflix is suddenly changing its business model.

Momentum - Nvidia Reports Disappointing Guidance

Nvidia stock was down 4.9% because the company reported weak revenue guidance. Since it is also priced for perfection, any sign of weakness is a big problem since the semiconductor industry is cyclical.

If the cycle ends, the stock will fall way more than 4.9%. EPS was $1.76 which beat estimates by 10 cents. Revenues were $3.12 billion which beat estimates by $20 million. Revenue guidance was $3.25 billion plus or minus 2% which missed the consensus for $3.34 billion.

Momentum - Tesla Crashes

The most interesting action was in Tesla stock which fell 8.9% on Friday and is down 19.51% since August 7^th. The stock has been cratering ever since the market realized Elon Musk’s secured funding to take the company private is not secured.

There is no serious plan to take it private at $420 or any price at all. Investors in Tesla came into the year thinking that the biggest struggle was going to producing enough Model 3 cars without running low on cash.

It turns out that the biggest issue is actually the pressure Elon Musk is under because it has caused him to act erratically.

The company needs him and his massive social media following to grow sales, but he has been the biggest thorn in investors’ sides this year. Everyday there is a big story on Elon Musk mentally breaking down.

Friday the story was in the New York Times as he claimed his mental health will be getting worse as he will be dealing with more pain from working long hours. He claimed to have not left the factory for a few days earlier in the year. He also says the once worked a 24 hour shift, and that he regularly works 120 hour weeks.

Momentum - Oil Is Down 7 Weeks In A Row

Oil was actually up 45 cents to $65.91 on Friday, but it was down 2.5% on the week.

As you can see from the chart below, the 7 straight week decline in oil is the worst streak in 3 years. This may not be that big of a deal because the declines have been minor. It could extend the streak without an issue.

My concern is that global growth is slowing, led by China. The decline is a bad signal for the global economy as the strong dollar is hurting emerging markets. It’s decline mix between demand worries and the strong dollar.

Momentum - Gold Craters

Gold was actually up 0.72% on Friday, but it had a terrible week and is having a bad year.

The GLD ETF is down 6.19% year to date. Gold has been hit by a double whammy of rising rates and a strong dollar. Plus, inflation hasn’t been as high as you’d expect at the end of the cycle and equity volatility has been low.

The chart below shows it might be ready for a turnaround. As you can see, the net speculative position in gold is short for the first time since December 2001 when gold was $275 per ounce.