Stocks Fall Slightly - Yet Stock Market Isn’t As Overbought As It Feels
The stock market fell slightly on Wednesday after hitting a record high on Tuesday. The S&P 500 fell 0.22%, the Nasdaq fell 0.23%, and the Russell 2000 rose 0.19%. Small caps finally outperformed. The market fell because it is incredibly overbought.
However, it didn’t fall much because this earnings season has been fabulous. The great reports after hours mean the equity market’s momentum should continue for the next few days.
As you can see from the chart below, as of Tuesday’s close 74.4% of S&P 500 stocks were above their 200 day moving average which is the highest percentage since February 2018. There is still room for the market to rally further before it reaches the peaks made earlier in this bull market.
The past 4 major peaks this cycle were at 96%, 93.6%, 94%, and 83.6%. When this short term momentum ends in the next few weeks or months, there won’t necessarily be a big decline. There could be a sideways correction. We will cross that bridge when we get to it.
Stocks Fall Slightly - Stocks can move higher if earnings season keeps being great.
The chart below is another example of the market having room to increase further. As you can see, in the weekly advisor service sentiment index, there were 53.6% bulls and 18.4% bears. This chart is very similar looking to the one above. The bull bear spread is 35% which is much below the peak in January 2018 and slightly below the peak in September 2018.
It always takes investors as a whole a significant period of time to shake off volatility and turn bullish. The best time to buy stocks was in December, but the sentiment index is a contrarian indicator, so the percentage of bears spiked. Think of the investors who got bullish January 2018 and the ones who go bearish in December 2018 as the worst investors possible.
We need those people/algos to buy this market before a top can occur. The market isn’t there yet.
Stocks Fall Slightly - Earnings Update
Before I review Facebook earnings results, let’s look at the updated earnings scoreboard. The results are great. Of the first 152 S&P 500 firms to report results as of Wednesday afternoon, 82% beat EPS estimates on 6.68% growth and 62% beat sales estimates on 5.59%.
In the past few days, the percentage of firms beating sales estimates has increased decently. This has now been a great quarter in terms of earnings and sales. Let’s see if the numbers keep being great after Thursday which is when the most firms report earnings this quarter.
Stocks Fall Slightly - Facebook Beats Revenue Estimates
Facebook reported a great quarter as revenues came in at $15.08 billion which beat estimates for $14.98 billion. This sent its stock up 7.56% after hours. I was incorrect to give up on this stock. It is nearing its all time closing high of $217.5. EPS was 85 cents which doesn’t directly relate to estimates because of a one time charge. Daily active users were 1.56 billion which met estimates.
As you can see from the chart below, the ratio of daily active users to monthly active users increased from 65.6% to 65.8%. The higher it goes, the more monthly active users log in every day. The monthly active user total beat estimates for 2.37 billion as it came in at 2.38 billion.
That represented 8.2% yearly growth which is below last quarter’s growth rate of 9%. Sometime in the next few quarters the growth rate will fall to the low single digits as Facebook reaches full saturation. Yearly revenue growth fell from 30.4% to 26%. Average revenue per user was $6.42 which beat estimates by 3 cents, but was down about one dollar sequentially.
As you can see, the one time charge that hurt earnings caused its operating margin to fall from 46% to 22%. The FTC has been investigating Facebook since March 2018 because the consulting firm Cambridge Analytica gained access to 87 million users’ data improperly. Facebook stated it expects the loss caused by the fine to be between $3 billion and $5 billion.
Bad news is the FTC’s biggest fine against a tech company ever was $22.5 million against Google.
Stocks Fall Slightly - This fine on Facebook will set a new record.
That sets a bad precedent for Facebook as it can be fined large amounts in the future if it doesn’t handle user privacy and security with care. These fines along with potential negative publicity mean Facebook will definitely be pulling out all the stops to make sure its family of platforms runs smoothly during the 2020 U.S. presidential election campaign season next year.
Facebook’s biggest transition is its migration from Newsfeed towards Stories which is the feature it copied from Snapchat. Facebook, Messenger, and WhatsApp’s Stories feature reached 500 million users. Instagram hit that mark in January. There are 3 million advertisers using Stories across Instagram, Facebook, and Messenger.
It’s important to study the success of this transition because when another social network disrupts the industry, either Facebook will need to buy it or copy it. The firm’s success at copying Snapchat shows how deep its moat is. Another important aspect of measuring Facebook is its diversification.
Currently, Facebook is an advertising company, but as it builds out Instagram’s e-commerce feature, it has the potential to be a merchant like Amazon as well.
Stocks Fall Slightly - Conclusion
Even though it feels like the stock market is very overbought, I reviewed two indicators which show it hasn’t reached extreme levels yet. This earnings season has been great. If results keep coming in strong, I expect the market to rally further. Facebook reported great results.
The firm has pivoted to focusing on privacy, Stories, and Instagram commerce. Also, it seems to have an impenetrable moat that won’t be affected by the potentially record breaking fine it will get from the FTC. When the fine comes out, it probably won’t affect Facebook’s stock because it is already priced in.
Recent Comments