---Volatility within a sideways range.
---Tesla is in a bubble
---Has the Fed changed the goals of their stimulus injections?
Volatility within a sideways range.
The volume in the stock market has been quite low so far this week...with the composite volume 25% below the 10 week average. This is not a surprise at all...given that we’re coming out of a long holiday weekend and investors are waiting for the earnings season to begin. This lack of volume does not indicate a boring market, however, as Monday’s strong gain was followed by yesterdays 1% decline...which shows that volatility is still with us. That said, this volatility has been taking place within a range on the S&P 500, DJIA and Russell 2000 indexes. So even though the Nasdaq has rallied 14 out of the past 17 trading days, the broad stock market has been range-bound for over a month.
Speaking of tight trading ranges, the Treasury market has been in one for more than three months now. That’s right, except for 4 brief days in early June, the yield on the U.S. 10yr note has been stuck in a range near its all-time lows...between 0.5% and 0.75%. When you combine this with the rally in gold above $1,800, you can see that investors are hedging their bets in the high flying tech names they own (just like they did in January and February of this year).
Tesla is in a bubble
Speaking of these high flying tech names, there is no question in our minds that Tesla (TSLA) is in a bubble. That does not mean it cannot go higher...and it also does not mean they will not become the kind of innovative company that changes an entire industry in the way Amazon (AMZN) has over the past 25 years. However, even companies that change the world CAN move into bubble territory from time to time. Heck, AMZN fell over 90% when its bubble burst in 2000. That didn’t prevent it from changing the world...but the fact that it eventually became such a powerhouse did not prevent it from forming a bubble and falling significant (several times) during its ascent either.
No, we are NOT saying that TSLA is about to begin a 90% decline, but there is no question that the stock has formed a bubble in our opinion. There are only four ways a stock can rally 45% in just 5-6 days. First, it can happen right after a crash...but TSLA had not crashed before its recent 45% rally. In fact, it had rallied 166% just before the most recent rally leg! Second, it can be taken over, but TSLA has not been bought-out. Third, a company can discover a world saving drug (like a coronavirus vaccine), but that certainly has not happened with Tesla. The final way a stock can rally THAT much...THAT quickly...is when it is forming a bubble. That’s what TSLA has been doing with its 284% rally in less than four months...and therefore we believe it is getting to a level where investors need to be VERY, VERY careful on the long side.
Don’t get us wrong, we have seen the RSI chart on TSLA become more overbought than it is right now before the stock topped out in the past. We also know that a stock can remain “irrational longer than investors can stay solvent”...and thus TSLA could easily rally to the $1,500-$1,600 range before it tops-out. It could even reach the $2,000 target that some analyst put on the stock recently before it rolls over. However, the stock is getting quite ripe for a serious decline...one that will take it down by 30% or more......Again, this can happen even if the company going to successfully change the world the stock is eventually going to go to $5,000 over the next 5 years. However, now that TSLA has reached a premium of almost 300% to its 200 week moving average, we believe investors should seriously consider taking at least SOME profits at current levels...and they should also be VERY careful with the rest of their position up at this level. (First two charts below.)
Has the Fed changed the goals of their stimulus injections?
Of course, if the Fed is going to continue to increase its balance sheet by keeping its liquidity spigots wide open, Tesla and other high flying names can indeed continue to rally for a while. However, we’d continue to note that the Fed’s balance sheet has flattened out over the past six weeks. Investors need to at least consider that this is a sign that the Fed is happy with what they’ve accomplished...and thus they will not add significant amounts of liquidity unless we see more stress in the credit markets.
In other words, investors need to consider that maybe the goals that the Fed has set forth for the impact of their QE programs have changed. In the 5-7 years following the financial crisis, their (publicly stated) goal was to push asset prices higher in an effort to help the economy. So whenever the stock market saw a hiccup, the Fed would step the plate with another program. However it was safe for them to do that because the stock market was still cheap.
Now, however, the stock market is quite expensive...and the Fed risks inflating another bubble if they push asset prices too high. In fact, we would argue that instead of focusing on the both the credit markets and the stock market, the Fed has been almost solely focused on the credit markets in recent years. Let’s face it, when the stock market was falling out of bed in December of 2018, the Fed STILL raised interest rates in the middle of that month. It was not until the high yield market began to fall apart...that the “pivoted” and reversed their tightening program. We saw the same thing last fall with the “not QE” QE program when the repo market froze-up...and again in March when the corporate bond market froze-up as well. Each time, it was the credit markets that forced their hands, not the stock market.
Now that that the repo market and the corporate bond market have stabilized in a dramatic fashion...the Fed just might want to hold off adding a lot more stimulus...especially given how expensive the stock market has become...and given how much certain high quality names have pushed well beyond their fundamental values as well. Otherwise the will risk inflating a bubble that they won’t be able to control.
Sure, they’ll want to continue to provide a “safety net” somewhere underneath the stock market, so we don’t see another major drop of 30%+ in the stock market. (That would have some serious ripple effects on the credit markets.) However, they just might be willing to stand by and watch the stock market pull-back a little bit...so that they can avoid another bubble.
Maybe we’re wrong. Maybe the flattening out of the growth of the Fed’s balance sheet is a short-term phenomenon...and they will start growing it once again. Maybe they are not worried about a bubble (or a “further bubble” as some people would call it), but there’s no question that the broad stock market has leveled off over the last month...and that has coincided with a flatten-off of most of the stock market. (Much like the strong rally in the stock market coincided with the expansion of the balance sheet in Q4 of last year...and in Q2 of this year.) Don’t be fooled by the divergence that developed between the stock market & the balance sheet between 2015 & 2017. More recently, it has been an excellent indicator. Ignore it at our own peril. (Third chart below.)
Thankfully, if we’re wrong, we’ll know it by a meaningful upside breakout of the S&P 500 Index of its 5-6 week sideways range. If the SPX can break above its June highs in a significant way, it will raise the odds that the Fed is indeed going to push asset prices higher in order to help us navigate through the economic crisis that has developed due to the global pandemic outbreak.
Matthew J. Maley
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.