Netflix Starts Off FANG Earnings

Slight Decline, But Stocks Still Overbought

S&P 500 fell 0.27% on Tuesday, but let's discuss how overbought the market is. One modest decline doesn’t end that state. We need to see a decline of at least 5% for this market to become more normal. As I have said many times, this isn’t a bubble. For perspective, in 1999 there were 546 IPOs and their average first day price gain was 68%. This isn’t like that. It’s just an overheated market. 

For example, as of Friday the 14 day RSI was at 75.98 which is very close to the recent peaks last fall. It’s amazing to see these peaks so close to each other as the index usually falls back down below 50 after runs end.

As you can see from the chart below, the number of new highs on the NYSE and Nasdaq combined is the highest since January 2018. In that month the market was exhausted. On the other hand, there were a lot of new highs in December 2016, but that was a sign of strength.

Weekly relative strength index for the tech sector is at 82 which is the 5th such instance since 1990. The prior times it hit that level were in the 1990s during the tech bubble. Some were near the beginning of the bubble, some near the middle, and one was a year before the end. 

According to Bespoke Investment, 63.4% of S&P 500 stocks are overbought and 6% are oversold. That’s the most overbought stocks since February 2019. That level didn’t lead to a big correction. The 30 day put to call ratio is near 0.84 which is about 1 basis point above the January 2018 bottom which preceded the XIV (short VIX) blowup.

Breakdown Of Tuesday Markets

Nasdaq fell 0.19% as we get closer to the major tech firms reporting earnings. Netflix reported earnings on Tuesday afternoon. Apple is heading into its earnings report, which is on Tuesday, with its highest valuation since before 2009. Its 30 day and 60 day moves are 2 standard deviations above normal which means they are in the 95th percentile. 

It wouldn’t be surprising to see Apple fall sharply after it reports. On the other hand, it’s rallying because its business model has changed which isn’t uncertain. It’s not like Apple is going to report that it’s no longer interested in expanding services.

One of the biggest moves of the day was in Tesla stock which rallied 7.19% as we get closer to the launch of the Model Y. I think it will be very successful. Electric car market share in 2019 in America actually fell from 2.1% to 1.9% in part because some customers were awaiting the Model Y. 

As you can see from the chart below, Tesla’s Model 3 trounced the competition. In my opinion, if you want a crossover electric car, you should buy a Model Y. There aren’t many other viable options. Competition will eventually ramp up with the launch of the Mach-E in 2021, but Tesla owns this landscape for now. Tesla’s market cap passed $100 billion as it is very close to surpassing VW. That would put Tesla only behind Toyota in terms of automaker market caps.

VIX was up 0.75 to 12.86 which is still low. Russell 2000 was down 0.81% because rates fell. The 10 year yield fell to 1.78% which was the lowest rate since December 3rd. It’s now at 1.79%. The 2 year yield is at 1.54%. There is a 13.8% chance of a rate hike in 7 days. I think the Fed will maintain rates. 

2 worst sectors on Tuesday were energy and industrials which fell 1.88% and 1.09%. Best 2 sectors were utilities and real estate which increased 0.84% and 1.07% because rates fell.

Dem Primary Update

Biden looks really good in the latest polls. He has the best chance of winning by far. As you can see from the chart below, with Sanders’ recent slide in the polls, Biden has a 38.9% chance of winning and Sanders is at 22.7%. The latest 2 Iowa polls both have Biden up by 6 points. 

Latest New Hampshire poll has Sanders up by 1 point on Biden. The Iowa Caucus is on February 3rd and the New Hampshire primary is on February 11th.  

Boeing News

Boeing stock declined 3.33% on Tuesday because Boeing is telling suppliers that regulators won’t sign off on the 737 Max until mid-2020. It expects regulatory approval in June or July. 

Max 737 keeps getting delayed. But if this is the final one, the stock is a screaming buy with a time horizon of about 6 months.

Netflix Earnings

Netflix’s 4th quarter earnings report was highly anticipated because it was the first quarter since the launches of Disney+ and Apple TV+. The firm reported decent results with that considered. Obviously, the issue is that these competitors aren’t leaving. That wasn’t a one time negative event.

The firm reported $1.3 in EPS. It reported $5.47 billion in revenues which beat estimates by $20 million. Domestic paid subscriber additions were 550,000 which missed estimates by 39,000. It added 8.33 million international paid subscribers which beat estimates for 7.17 million. The chart below shows it added 8.8 million subs in total. 

Q1 guidance was for $1.6 in EPS which beat estimates for $1.2. It guided for $5.73 billion in revenues which missed estimates by $30 million. In response to this quarter, its stock rose 2.26% after hours. Netflix is no longer as important as the other FANG stocks.

The firm reported negative $1.7 billion in free cash flow in Q4 and expects just negative 2.5 billion in free cash flow in all of 2020. 

CEO Reed Hastings stated, “We’re on the glide path, slowly, towards positive free cash flow. We’re excited about that but that’s not coming from shrinking back our content spending. That’s coming from the increase in revenue and operating income.”

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