Morning Comment: TSLA...MSFT.

  • More good news out of China (this time on trade)…is helping the stock market again this morning.
  • Bond and commodities are telling a slightly different story, but it’s not a major concern yet.
  • “Forced buying” led to a parabolic move in TSLA, so the decline should last for a while.
  • MSFT is very overbought and looks tired. So it’s getting ripe for a short-term pull-back.

More good news out of China…this time on trade…is helping the stock market again this morning.

The stock market rallied more than 1% yesterday on reports of a vaccine for the coronavirus and some better-than-expected economic data (the ADP

Employment Report & ISM Non-Manufacturing Index). The futures (along with the overseas markets) are trading higher again this morning on the news that China will cut tariffs 50% on U.S. goods (even though that was a part of the trade deal). So the action in the stock market is telling us that the coronavirus was a non-event for the long-term and the market stocks will go back to “pricing for perfection.”

Bond and commodities are telling a slightly different story, but it’s not a major concern yet.

We’re not seeing the same kind of extreme bounces bond yields and commodity prices. We don’t want to make too much of this divergence…at least not yet…because yields had fallen a lot more than stock prices and commodities like crude oil and copper had done the same. However, since they have retraced such a small percentage of their declines, it is something we’ll be keeping a close eye on going forward. If they roll-back over in the coming days and weeks, it will indicate that they were only dead cat bounces…and that these markets are the ones that are getting it right…and the stock market is too euphoric.

Right now, however, the momentum in the stock market is incredible…and we’ve all seen just how powerful of a force that momentum can be once it gets going…with the recent 395% rally in Tesla (TSLA) from early June early February.

Forced buying” led to a parabolic move in TSLA, thus the decline should last for a while.

Speaking of TSLA, we sent out a note mid-afternoon on Tuesday stating that Tesla (TSLA) had gone parabolic and had become ridiculously overbought…and thus it would get clobbered at some point in the near-future. Well, the stock rallied another 4% over the next half hour (until about 3:00 that day) and then rolled over. It closed 24% below those Tuesday intraday highs on Wednesday and 20% below where it was trading when we sent out that warning signal. When you combine this call with the call we made early last June…saying that investors should back up the truck and buy TSLA with both hands (when it dipped below $190)…we’ve had some great calls on this stock. (We also turned negative on the stock in April of last year…just before it fell 28%...down to those early June lows.)

Okay, before we dislocate our shoulders patting ourselves on the back, we readily admit that we also made some cautious comments about TSLA last week…when the stock was still trading near $600. No, we didn’t say investors should short the stock…nor did we say they should sell all of their holdings…but we DID say that taking some chips off the table would be a good idea. So we’re not trying to say that we turned negative right at the top in TSLA. Also, when we DID finally pound the table about the ridiculous rally in TSLA, we did not tell people to short the stock when it was above $900 (like we did when we said it should be bought…when it was below $190). In other words, we are certainly not trying to claim that all of our calls on TSLA over the past 6-8 months have been spot-on, but we have made some very good ones.

So what to we think about the stock right now? Well, even though the wild extremes have been worked-off, the stock is far from oversold. In fact, it’s still quite overbought. This should be no surprise given that although TSLA has dropped over 20%, it is still up a whopping 75% YTD…and up 310% since the early June lows of last year that we mentioned above!!!

Experience tells us that when a stock (or other asset) goes parabolic…like TSLA did over the past couple of weeks…the decline lasts for more than just a few days…and the retracement of the rally tends to be quite deep (even if it leaves it much higher than when the rally began). The reason these declines tend to last for a while and become relatively deep is because parabolic moves involve A LOT of “forced buying” (mostly short covering). Therefore, the situation becomes exactly the opposite when a stock becomes completely “washed-out” after a major sell-off. In those cases, “forced selling” (from margin calls, redemptions, etc.) takes a stock (or some other asset) well below its short/intermediate-term fundamentals…and the stock sees a sharp and extended bounce before it sees any compelling selling.

With this in mind, we would expect TSLA to move even lower over the near-term (although not in a straight line). First support comes in at $616 (a Fibonacci 38.2% retracement of the June-January rally)…followed by $533 (a 50% retracement). If things really get ugly, the next level would be $450 (a Fibonacci 61.8% retracement). Those kinds of declines would mean the stock would fall 30%, 40% or 50% (respectively) from its closing highs from Tuesday. That might sound extreme, but those kinds of moves would still leave the stock with a gain of 245%, 200% or 150% (respectively) above its June lows from last year!

For us, we believe TSLA will fall to at least the first support level of $616, but we think it is more likely that a 50% retracement will take place. Therefore, we believe a drop down below $550 is more likely. Again, that will leave the stock 200% above its June lows…and will say nothing about the company’s prospects over the long term. Let’s face it, AMZN is one of the best run companies in the world…and that was true from 2000-2003…and the stock still fell 90%. We do not think TSLA will fall 90%, but that action in AMZN tells you that ANY great company can see its stock decline in a material way from time to time…after it rallies in a parabolic way.

MSFT is very overbought and looks tired. So it’s getting ripe for a short-term pull-back.

We’d like to highlight one other stock this morning: Microsoft (MSFT). This is another stock that has seen an outsized rally in recent months…and it has brought it to a very overbought condition. No, it’s not as overbought as TLSA was on Tuesday, but its weekly RSI chart has still moved above 86 midday yesterday (and closed at 85.12) so it was getting very extended. In fact, you have to go all the way back to 1997 to find a time when MFST was more overbought based on this reading than it is right now.

We’d also note that the stock looked tired yesterday. On a day when the broad market was SO strong, it was disappointing that MSFT closed in negative territory. The stock opened strongly in the morning, but it closed more than 2.3% below its opening highs…..Don’t get us wrong, we’re still going to have to see more downside follow-through before we raise a warning flag on MSFT, but given how overbought the stock has become, yesterday’s poor action did grab out attention……It will have to decline below $170 before we send up a yellow warning flag, but it’s still something that investors should keep an eye on…given how overbought the stock has become recently.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Feb 06, 2020 — 9:02 AM
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