Are The Indexes Out Of Balance?

With how hot tech stocks have been lately, one has to ask are the key indexes out of balance? Let’s take a look. It is no secret tech stocks have been on fire, the Nasdaq Composite (see chart here) has been setting records weekly. Stocks like Tesla, Apple and Amazon continue to set all time highs. Price to earnings ratios aka the P/E ratio are also expanding to levels not seen since the tech bubble of the early 2000’s. I am not suggesting that tech as a whole is in a bubble, but there can be an argument that certain tech stocks are. I am not singling out Tesla at all, but what I am highlighting is the company’s eye-popping 1000 + P/E ratio. The price to earnings ratio is a metric for valuing a company that measures its current share price to its earnings per share. For example the S&P 500 typically trades in the 15-20 P/E range. Yes, a 15 to 20 P/E multiple is the historic price to earnings multiple that the S&P 500 trades at. So when you look at Tesla and see that this company’s P/E ratio is currently over 1000, it does bring pause and perspective into the mix.

Back to the indexes that appear to be out of balance. As the S&P 500 (see chart here) and the Nasdaq Composite (see chart below) continue to set records, the majority of stocks have not returned to their pre COVID highs and still remain down on the year. This to me is something to pay attention to. Sure, some tech stocks deserve their current valuations due to how they are growing and benefiting from the widespread lockdowns. Tech stocks and the technologies they provide are serving businesses and consumers alike in a way no one would of thought of before the pandemic took hold of our country. However, even stocks like Apple have high seen quite the expansion of its P/E multiple which is currently trading at 39. Bottom line for me, as we are setting records each week, I would prefer to see a broader base rally to ensure that we are not out of balance with each and every record that is being set.

Good luck to all πŸ™‚

~George

Are The Indexes Out Of Balance? - Paula Mahfouz

 

 

Tesla Follows SpaceX…

Tesla follows SpaceX right into space! Tesla’s stock that is! (Nasdaq:TSLA). I am not sure if even Elon Musk thought that Tesla’s stock price would almost hit $1000 per share (see chart below) before its fundamentals warrant it. That’s right folks on February 4th Tesla hit an all-time high of $968.99 with an astounding parabolic move. This kind of stock behavior reminds me of the dot-com days where companies were trading in nose bleed territory without the fundamental backdrop to support the valuation. That said, without question the extremely large short position that has been put on Tesla has played a major role in the stock price spike. Tesla has long been one of the most shorted stocks on the Nasdaq which when stocks breakout of a trading range such as what happened to Tesla, and also having a significant short interest against it, then it’s the perfect set up for a major parabolic move.

With the stock still trading north of $800 per share, the company is not missing out on their next financing. To close the week out, Telsa took advantage of their recent stock price surge to price a $2 Billion secondary offering at $767 per share. I mean brilliant move for a company that continues to experience sporadic growth and still demands cash in order to hit their objectives. The potential problem I see is how can the Tesla a stock hold up at this crazy valuation? No question the short sellers covering their positions was a big part of this recent parabolic move. So the question now is who and what will drive the price higher? What’s more is who and what is going to support a $150 Billion dollar valuation? There are some analysts that are on their soapboxes with new buy recommendations and new target prices in the $1,000’s. So just maybe this will be enough to keep the stock up until the company catches up to its current valuation.

Good luck to all πŸ™‚

~George

Tesla Follows SpaceX - Paula Mahfouz

 

Better Than Expected…

Q3 earnings reporting season has just begun and early on earnings are coming in better than expected. Almost 15% of the S&P 500 have reported their latest quarterly earnings and over 80% of that group have beat expectations. Included in this group that have already reported are Netflix (Nasdaq: NFLX), Bank of America (NYSE: BAC), JP Morgan Chase (NYSE: JPM), and Morgan Stanley (NYSE: MS) just to name a few. A look ahead to next week and hundreds of companies are set to report including but not limited to Halliburton (NYSE: HAL), TD Ameritrade (Nasdaq: AMTD), Biogen (Nasdaq:BIIB), Discover Financial Services (NYSE: DFS), Harley-Davidson (NYSE: HOG), McDonald’s Corp (NYSE: MCD), Proctor and Gamble (NYSE: PG), United Parcel Service (NYSE: UPS), Boeing Co (NYSE: BA), Caterpillar (NYSE: CAT). eBay (Nasdaq: EBAY), Ford Motor Co. (NYSE: F), Las Vegas Sands Corp (NYSE: LVS), Microsoft (Nasdaq:MSFT), O’Reilly Automotive (Nasdaq:ORLY), Paypal Holdings (Nasdaq:PYPL), Spirit Airlines (NYSE: SAVE), Tesla (Nasdaq: TSLA), Xilinx (Nasdaq: XLNX), 3M Co (NYSE: MMM), Aflac Inc (NYSE: AFL), American Airlines Group (Nasdaq: AAL), Capital One Financial Corp (NYSE: COF), Citrix Systems (Nasdaq: CTXS), Deckers Outdoor Corp (NYSE: DECK), First Solar (Nasdaq: FSLR), Gilead Sciences (Nasdaq: GILD), Southwest Airlines (NYSE: LUV), T-Mobile (Nasdaq: TMUS), Twitter (NYSE: TWTR), Visa Inc (NYSE: V), Goodyear Tire & Rubber (NYSE: GT), Phillips 66 (NYSE: PSX), and Royal Caribbean Cruises (NYSE: RCL). Hundreds more companies are set to report but you get the picture.

So with earning reporting season kicking into high gear, let’s see how investors continue to respond. On the week the Dow Jones Industrial Average (chart) closed at 26770, the S&P 500 (chart) closed just under the 3000 mark, the Nasdaq Composite (chart) closed at 8089 and the small-cap Russell 2000 (chart) closed the week at 1535. With the exception of today’s pullback the aforementioned indexes have all been in a recent uptrend. I think it is safe to say that next week’s earnings results will play a role in the markets direction.

Good luck to all πŸ™‚

~George

Tech Stocks Under Fire!

Despite a modest rebound on Friday tech stocks remain under fire. From Facebook (NasdaqGS: FB) to Tesla (NasdaqGS: TSLA) and now even Amazon (NasdaqGS: AMZN) are all under pressure for a variety of reasons. This is spilling over into the overall tech sector (see chart below) and even into the overall marketplace. Facebook is facing significant scrutiny regarding user privacy while Tesla continues to trip up with deliveries and debt issues and now even Amazon is under pressure due to President Trump’s direct attack on the online retailer’s sales tax structure. This was enough to send the major averages down to close out the quarter at or in negative territory. The Dow Jones Industrial Average (chart)Β finished Q1at 24103, the S&P 500 (chart) closed the quarter at 2640, the Nasdaq Composite (chart) closed at 7063 and the small-cap Russell 2000 (chart) finished the first quarter of the year at 1529.

What was also obvious in Q1 was how volatility came back to life. For years the market was in a lullaby state melting up and setting record after record. Well the first quarter has swiftly reminded us on how markets can and should behave. Investors that placed money into mutual funds or passive funds over the past several years made out like a bandit with not a worry in the world. Abnormal stock market gains were in vogue especially after the election. Now with rising interest rates, the Federal Reserve reducing its debt load and the daily drama out of Washington DC, I think it is safe to say the melt up mode and daily records being set are in the rear view mirror. That said, market corrections are very normal and healthy and so is volatility at least for traders that is πŸ™‚

Looking ahead and with earnings reporting season right around the corner, let’s see how corporate America fared in the first quarter of the year. This could be the catalyst that calms things down a bit but in the same breath should there be any slippage in earnings growth, we could be in for more even more volatility. Good luck to all πŸ™‚

~George

Nasdaq - george mahfouz jr

What Correction?

I think it’s safe to say that the bulls took back control of the stock market, at least for now. After what seemingly was the beginning of a meaningful market correction in late January, stocks closed the month of February at or near record levels. For the month, the Dow Jones Industrial Average (chart) finished up 3.96%, the tech focused Nasdaq (chart) closed up almost 5%, the broad based S&P 500 (chart) closed at a new record high of 1859.45 and was up 4.3% in February, and the small-cap Russell 2000 (chart) finished the month in the green by 4.6%.

So what changed from the apparent sell-off in late January to today? In my view, absolutely nothing. We still have a very accommodative Fed, interest rates remain near zero and a new Fed chairwomen that essentially emulates the former head of the Federal Reserve Ben Bernanke, and his policies. Hence, markets remain flush with cash with no where else to go but into higher yielding assets. This in my humble opinion is why equities snapped back from their January declines and why new highs are occurring. The bears are wondering how much longer can this go on without sparking a potential problematic inflationary environment. The bears are also growling about the bubbly type market we find ourselves in with valuations beginning to get stretched a bit and the apparent stratospheric $19 billion price tag that Facebook (NasdaqGS: FB) recently paid for the 55 employee app company WhatsApp. Then you have electric car maker Tesla this week receiving a price target boost from Morgan Stanley (NYSE: MS) to $320 dollars, which is more than double what Morgan’s previous target price was. Other data supporting the bear thesis is margin interest remains at all time highs and the retail individual investor is coming back to life according to online trading discount brokers TD Ameritrade (NYSE: AMTD) and Charles Schwab (NYSE: SCHW) which are seeing a surge in trading activity.Β Some pundits argue that this is the type of market behavior that is conducive with market tops. All valid points. My take is both the bulls and bears have valid points, but personally I cannot bet against the power of the central bank and their incessant support of the markets. When and only when the asset purchase program concludes and when interest rates begin to rise, we can then have a different type of discussion.

That said, we can easily see pullbacks and corrective type actions in the marketplace like we witnessed in late January. When volatility does come back, I would expect a similar pattern of market participants coming in looking for potential bargains, and thus placing yet another floor under these markets. On the technical front, it appears that all systems a go with none of the key indices in overbought territory yet according to the Relative Strength Index (RSI) however, yesterday we did see a “quasi-reversal” of sorts in where we closed well below the sessions highs after the S&P 500 (chart) hit an all time intraday high. This reversal was apparently due in large part to the increasing tensions in the Ukraine late Friday afternoon, which is something I will pay close attention to next week. Β In closing, whether you are bullish or bearish, make sure to always consider having protective stops in place with your positions which is designed to protect your portfolio against unexpected losses.

Have a great weekend πŸ™‚

~George