Overbought Market Cranks out Another Record High

Another Record High: Santa Clause Euphoria

The stock market rose again on Tuesday as the S&P 500 is now up 25.28% year to date, making this the best year since 2013. CNN fear and greed index fell 1 point to 69 which is greed. But don’t let that make you think stocks aren’t overbought. VIX fell 0.33 to 11.54 which is a new 2019 low as you can see from the chart below. 

And, VIX has been below 15 for 32 straight trading sessions. As of Monday’s close, the 14 day RSI was at 73.1. I’m guessing it hit about 74 after the small increase on Tuesday. Usually, it doesn’t stay above 70 for long. It’s highly unlikely to get to 80 which means there’s very little upside in the market in the near term.  

Details Of Tuesday’s Action

Nasdaq increased 0.18%, putting it at another record high. Russell 2000 inched closer to its record high as it increased 0.14%. MSCI all country world index hit a new record high on Monday because of the rally in US stocks. It’s now up 0.25% from its January 2018 high as it increased slightly on Tuesday. 

That’s a sideways correction with some volatility sprinkled in, in late 2018. S&P 500 is no longer stuck in a horizontal correction as it is up 9.3% since its January 2018 peak. That’s not an amazing return in 22 months, but it is much better than most markets.

Best 2 sectors on Tuesday were real estate and consumer staples which rose 1.44% and 0.82%. Consumer discretionary was up 0.81% because of Best Buy’s big rally on its earnings report. Its stock rose 9.86% to within 1% of its record high. I wouldn’t say this means the consumer will have a strong holiday shopping season.  

This report was from Q3 and the firm only had 1.7% same store sales growth. Same store sales growth increased 0.1% from Q2, but the 2 year growth stack fell from 7.8% to 7%. Good news for this stock is operating margins increased from 3.4% in Q3 2018 to 4%. I still think consumer spending will be strong this holiday season, but not because of this report.

Only 3 sectors fell. 

They were energy, financials, and healthcare which were down 1.01%, 0.12%, and 0.07%. It’s interesting that healthcare fell because the recent polls were bad for Warren. In the 2 new national polls, Biden was up 9 points on Sanders and 8 points on Buttigieg. In the New Hampshire poll, Sanders was up 2 points on Warren. 

It’s way too early to say who will win, but usually huge momentum reversals don’t lead to comebacks. Warren had her time in the lead. It looks to be over as PredictIt shows there is an 18% chance of her winning which is the 3rd highest percentage. Biden is in the lead at 25% and Buttigieg is at 21%. Sanders only has a 16% chance even though he leads Warren in the polls.

Long bond hasn’t moved much in the past few days. That in itself is a big deal because stocks have rallied. S&P 500 is predicting a big burst in economic growth in 2020, while the 10 year yield says growth will be weak. 10 year yield is at 1.74% which is 20 basis points below its closing high earlier his month. 

Yields aren’t rising like they did in late 2016 which signaled 2017 was going to be a rebound for the economy. 2 year yield hasn’t moved much either as it is at 1.59% which is only 15 basis points below the 10 year yield. And, the yield curve is very flat. There is a 66.5% chance of a rate cut in 2020. Rally in stocks makes no sense if the economy is going to be weak enough to need a rate cut. Oddly, there is a 5.2% chance of a hike at the December meeting which is in 14 days. There is no chance in the world the Fed hikes rates after cutting them 3 times; the economy has weakened since the last cut.

Investors Don’t Like Tesla’s Design

Tesla stock fell 2.21% on Tuesday as the hype about the Cybertruck has worn off. I’m not saying it won’t sell well. But Tesla’s Twitter video where it shows the Cybertruck dragging the Ford F150 isn’t fair. Tesla weighs more, that model costs more, and they used a Ford with rear wheel drive instead of 4 wheel drive. I like Tesla, but that’s clearly deceptive marketing.

The chart below shows what investors thought of the Cybertruck’s launch. As you can see, the design was thought of poorly as 31% stated it could be successful with a material redesign. There definitely won’t be a major redesign. Personally, after thinking about it for a while, I think it was smart to have a controversial design. I’d rather have 40% hate the design and 40% love it than 80% like it. 

It doesn’t matter if someone doesn’t like it if they aren’t going to buy a truck anyway. I think this design brings more people that are on the fence to buy it than it drives people away. Keep in mind, there’s a difference between investors saying it was a failure and consumers doing so. Consumers only care about what they like, while investors try to figure out what people will like.

Conclusion

Data on Tuesday implies Q4 GDP growth could be better than the initial bearish estimates from the Nowcasts and a few other tracking estimates. The economy is still weak in Q4, but investors don’t care. They are euphoric based on price as the 14 day RSI is above 70. 

VIX is at its 2019 low and hasn’t been above 15 in 32 days. I don’t like buying stocks if volatility is suppressed and stocks are spiking very quickly. Warren continued her long drop in the polls. Investors didn’t like Tesla’s Cybertruck launch, but that doesn’t mean consumers won’t. 

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