The rally only gets more and more narrow
It was a very quiet day in the markets yesterday. The volume actually the highest volume in 2.5 weeks...but that was only due to some month-end window dressing at the very end of the day. At 3:45 yesterday afternoon, we were on pace for the lowest volume day of the year...so there must have been some sort of month-end program. (The changes in the DJIA should not have had an impact.).....If there was one thing that was interesting, it was the breadth on the Nasdaq Composite index was negative...even though the Nasdaq rallied 1%. This kind of negative breadth on a positive day for the Nasdaq is becoming commonplace recently, but when it comes when the index rallies 1% or more, it definitely raises some serious concerns. (Wouldn’t it be nice if this narrow market actually had a whopping 50 names rallying strongly instead of less than 10? In other words, this rally is a lot more narrow than the “Nifty 50” rally of the early 1970s.
Of course, the Fed should be able to prevent the kind of bear market that took place after the “Nifty 50” bull market ran its course in the 1970s, but to quote Judge Smails in Caddy Shack, the “internals” for this rally still “sssssssssssssuck”...even worse than they did back then. We won’t bore you by regurgitating the details of overbought condition of many of these Nasdaq mega-cap names at these levels (especially TSLA and AAPL)...except to say reiterate that history is FILLED with examples of the stocks of GREAT companies that have experienced POWERFUL declines EVEN when though those stocks eventually rallied to much higher levels (and in many cases stayed at those higher levels several years down the road).
Don’t follow the suckers
In other words, many (and maybe even ALL) of these mega-cap tech stocks could rally to much higher levels in the years ahead, but we believe that they will see substantial declines that will be begin very, very soon. Therefore, the suckers (oops, we meant to say “the investors”) who buy stock in TSLA on the new $5bn equity distribution they announced this morning are going to get burned. Even if this stock rallies a bit more over the next week or two, it’s going to be trading at least 30% below todays level before the end of the year in our opinion. (BTW, a 30% decline in TSLA will still leave it almost 100% above its February highs!!!) In fact, we think that most of the mega-cap leadership names will trade 20% below their current levels at some point this year...and a stock like TSLA will probably see a 10% one-day decline once the algos get ahold of it.
Of course, nobody should short these stocks right now...because they could definitely rally further. However, those who buy them up at these levels are going to get burned soon....and they’ll get burned just as badly as those who have had their faces ripped off on the short side of the market in these names over the past few months. Therefore, we believe that investors should not be buying or shorting these stocks at current levels. However, we do believe that those who already have long positions in these names should take some profits. That doesn’t mean they should dump 100% of their holdings, but shaving 10%-20% of their positions at these levels and putting the money into cash (so that they can buy some of those same stocks back at much lower levels) is a good idea in our opinion.
We’re still waiting with baited breath for the mainstream pundits to tell us that this is obviously a time where the mega-cap names will see a material pull-back....because that is certainly what they’ll be saying (in retrospect) once the pull-back is firmly in place.
Transports have caught up nicely, but they're getting overbought
Moving on......Guess what? We have to start worrying about some problems with the Dow Theory. In other words, there is a divergence between the DJIA and the DJ Transportation index. However, who in the world thought a few months ago that the divergence would be due to the inability of the DJIA to make a “higher-high” when the Transports were making a new “higher-high”...not the other way around??? That’s right, the TRAN moved above its February highs on Friday...while the DJIA still stands 3% below its own February highs.
Actually, discussing this in terms of the Dow Theory is a bit misleading. Even though the TRAN did indeed trade above its February highs, those February high are not the all-time highs for that index (while the Feb highs on the DJIA are the record highs for that index). The TRAN still stands 2% below its 2018 all-time highs, but the fact that it has been able to move above its Feb high...after underperforming the DJIA so badly during much of the rally off the March lows...it’s still surprising to see the Trannies act so well.
Needless to say, the recent (very) positive action in this economically sensitive part of the stock market is a positive development even though it hasn’t made a new record high yet. However, we do need to mention that TRAN did not act well at all yesterday. It saw an “outside-down” day and closed more than 1% below its Friday’s close. It was a bad day for all three of the groups within that sector...as they all closed more than 1% below their morning highs......Of course, “one day” does not make a trend...and we’ve also seen quite a few “outside down days” in several indexes over the past few months...and none of them signaled any kind of reversal in trend (like those kinds of days can frequently do). Therefore we are a LONG way from raising a yellow flag on this sector (much less a red one), but it’s something we’ll be watching as we move into the new month...especially since all three groups in the TRAN (airlines, rails, truckers) acted so poorly yesterday. (Charts below)
Donald Trump sets the political narrative once again
Now that the end of the month is behind us...and the employment report doesn’t come for several days...and it’s the last week of August...there’s not a lot we can add to what we’re seeing in the market place this morning. Therefore, we just thought we make a comment about what we’re seeing on the political front. It sure seems like the GOP has been able to change the “narrative” to the issue of law and order...and away from the coronavirus recently. Maybe this feeling exists merely because we just got out of the Republican convention last week...and the narrative will switch once again. However, there is no question that the press...even the networks that don’t pretend to hide their liberal tendencies...shifted their focus the riots this past weekend. It was almost like they thought it was an issue that would put President Trump on the defensive...when it’s an issue he himself has actually pushed to the top of his list of campaign issues he’s focused on.
Our point is that whether you like Trump or don’t like him....or even love him or hate him...you have to admit that he is a genius when it comes to setting the narrative that everyone else follows. He’s been doing since 2015...and he continues to do it to this day.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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