Santa Clause Rally & Tesla’s Cybertruck Flub

Stocks Recover On Friday After Solid PMI

Sometimes we’ve seen the stock market ignore big economic data. It wouldn't be surprising if the stock market ignored the Markit report because it usually follows the ISM report closer. However, on Friday stocks increased slightly as they should of after the encouraging Markit PMI. Flash reading, which has a bigger sample size than the ISM report, showed some promise from the first two weeks of November.

Plus, we’ve seen some decent housing data that pushed up estimates for real residential investment growth in Q4. If the economy recovers, we could see stocks rally quickly after whatever correction they might have soon. On the other hand, sometimes you see markets price in the entire acceleration when growth is still weak and then selloff when the data turns positive. It’s like buying the rumor of strong growth and then selling the news of it actually occurring. 

To be clear, if there was news about a trade deal being signed, that would cause a rally. We’ve seen so many positive and negative rumors in the past few months, it’s tough to know what to believe.

Santa Clause Rally?

Santa Clause isn’t just for kids. Gains are brought to investors as well. This isn’t a media driven narrative with no merit. As you can see from the chart below, the positive calendar effect is strong. Gains from now until the end of the year average 2.26% using data since 1957. That size of a rally actually is similar to what we’ve seen in October and November.

Did Christmas come early for the bulls or is there more to come? That answer might depend on the initial data points from the holiday shopping season. We will quickly hear about how Black Friday and Cyber Monday went. If sales are strong, we could see 2% GDP growth. 

Technically, if the market ignored the negative economic reports because it was focused on 2020, it could just ignore these reports. All year I’ve been of the opinion that the economy would be weak in 2H 2019. But there wouldn’t be a recession. I’m sticking to that and I think growth in 1H 2020 will be stronger than current growth.

Review Of Friday’s Action In Markets

Because the S&P 500 only fell 0.59% in its 3 day losing streak, the 0.22% rally on Friday actually took back almost half of the losses. Stocks aren’t out of the woods yet in terms of being overbought. However, that 3 day losing streak and the declining number of bulls in the AAII survey certainly helped the bulls’ cause. 

Nasdaq was up 0.16% and the Russell 2000 was up 0.31%.VIX was down 0.79 to 12.34 which further extended its streak of being below 15. 15 isn’t even high for the VIX. The market simply has had no volatility since early October. Investors were satisfied with earnings season and the Fed’s rate cuts. They shouldn’t be satisfied with the economy or the trade negotiations yet.

Real estate sector was the biggest loser as it fell 0.54%. Financial sector was the biggest winner as it rose 0.76%. Healthcare was up again on Friday as it increased 0.4%. IHF Dow Jones Healthcare ETF was up another 0.13%. It’s up 22.15% since October 8th. There weren’t any new polls, but it’s clear Warren has lost momentum in the Dem primary race. There will likely be a few days without new polls. Pollsters probably wanted to delay asking people their opinions until after the debate. Next week we should get the initial data on who won the debate.

Personally, I don’t see Bloomberg effecting the race. There are 4 candidates who can win (Buttigieg, Warren, Sanders, & Biden). My opinion is based on his low favorability among Democrats, the fact that it is late in the race, and his weak initial polls. He probably won’t participate in the December debate. 

That's only 2.5 months before the first votes are cast. He hasn’t officially announced he’s running yet. So far, 6 candidates have made the December 19th debate. And, the fact that it’s so close to the holidays might make it less important than the others.

Tesla Falls After Truck Announcement

Tesla stock fell 6.14% on Friday after its truck announcement the previous evening. Cybertruck has great specs as it can out tow a Ford F150. Two issues traders saw were the big mistake during the presentation and the unusual design. During the presentation, Tesla stated the side windows were bullet proof. When they demoed the windows by throwing a metal ball at them, they shattered. 

Good news is the ball would have gone through all other trucks’ side windows. Tesla can pressurize them by the time the truck goes on sale. This was simply bad publicity. It also looks bad to investors that the firm didn’t fully test out this presentation. These types of announcements are tested ad nauseum by most firms. It makes you wonder what else Tesla hasn’t perfected.

A main issue is obviously the design because that can’t be changed. Tesla’s other cars are widely considered to be beautiful. Their minimalistic interior isn’t loved by everyone, but their exteriors are beautiful. This truck is far from those. That was obviously Tesla’s goal, but it’s a big risk. Usually investors need to worry about the firm hitting production goals and quality control. Now they need to worry about demand because of the design.

Conclusion

Stocks are overbought, but the situation isn’t as bad as it was at the start of the week. The S&P 500’s decline this week ended its 6 week winning streak. Tesla’s unusual design and mistake at its presentation caused its stock to drop. 

It’s very obvious big fans of Tesla will love this car. Question is if it can steal significant market share from Chevy or Ford. No one really knows the answer to that until the first sales occur in the fall of 2021.  Attachments area

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