The torch has passed – Tesla is so 2021
Most stock indexes are making new ATHs (with our favoured Russell 2000 being the standout exception). Normally, this indicates that investors expect higher earnings to come. That is, unless the market is gripped in a feverish speculative mania of course, when earnings don’t really enter into it. But as we all know they do, eventually.
The high flyers are the Big Tech M7 monsters, of course (ex-Tesla) which dominate the two Nasdaq indexes – the 100 top caps and the Composite that comprise the more than 2,500 companies listed on that exchange. In the latter, there are many of the hopefuls of the Net Zero kind that languish as harsh reality has already dawned on investors in these.
But for now, all hope is pinned on the M7 (and a few others) to lead us into the New AI Age sunny uplands. As a measure of how irrelevant earnings are to today’s FOMO investors, here is the chart of the real earnings yield on the Nasdaq which has collapsed from the rational +3% a couple of years ago to the current irrational -2% mark. That matches the negative yield experienced way back just before the 2007/2008 financial crisis blew up when the Nasdaq collapsed by 50%.
A rational investor looking for yield wouldn’t touch the M7 with a bargepole but opt for the ‘safe’ Treasury bonds especially when a glance at the above chart would likely scare the pants of him/her.
But investors aren’t rational, are they? When gripped by a manic fervour in a solid belief in the future, they become irrationally exuberant and there is not one stock that underlines that observation more clearly than Nvidia – the must-have share that feeds the AI revolution.
Luckily, we are today very familiar with revolutions aren’t we? I have offered a running commentary on the EV non-revolution in these blogs with Tesla previously taking the very same role as Nvidia as the Supreme Leader. Last week, Tesla shares were dumped on poor results and outlook and are down a good 55% from its ATH and is in danger of being dropped out of the M7 gang altogether.
So with the Nasdaq offering a negative yield, will investors wake up en masse from their reckless/hopeless dream of achieving their moonscape target?
Already, we are seeing some of the negative aspects of the AI revolution with the proliferation of deep fakes that will keep the lawyers busy at least. And Ms Swift will not be the only high profile target. With the US elections around the corner, I see much fakery to come. The Russian and Chinese scammers will have a field day.
The degree of epic speculation in Nvidia is revealed in the two charts below.
The top chart is the eight-year weekly and shows a very clear classic textbook five-wave impulse pattern with the current very extended fifth wave which itself has a clear five wave structure (seen below). Remember, fifth Elliott waves are terminal to the main impulsive trend (up here). And fifth of fifths are even more so. This fifth wave is shown broken down in the lower chart.
And when these fifth waves terminate, the major trend will reverse strongly to down. Will that happen soon? The much anticipated Q4 earnings report is slated for 21 February – about four weeks away. Much can happen in four weeks with sister M7 companies reporting next week.
Already, Intel – the granddaddy of the computer chips industry – has reported disappointing results last week..
The MSM has convinced itself that the Fed will cut rates this year with the March meeting being their first opportunity. This is said to be the top factor driving stocks. Bets are being placed on this forecast with the below chart showing a bull trend to late December as stocks surged. Then a dip in early January with an accompanying dip in stocks and then a surge in mid-January along with a stock rebound to new ATHs.
But the last week has seen a severe drop in expectations as Treasury yields firmed (unexpectedly for some, but not us!) but stocks have remained also firm. That is a short term bearish divergence and suggests stocks are living on borrowed time.
Thus, the stock roll-over I have been diligently waiting for should be on deck waiting to slug the first pitch out of the park. Or perhaps I should use a cricket analogy, not baseball. But with the England cricket team not able to impress, I will stay with baseball and anyway, it is the Nasdaq’s national game.
But since I am open to most other eventualities, while almost everything is possible in financial markets – including a ongoing bull market – not everything is probable. The sentiment extremes are coming clearly down on a topping process that points to at least a severe correction ahead. As ever, the question is when?
The chart below illustrates the historical fact that all revolutions eventually die and another one takes its place. Tesla is today’s poster-child of this transition process. It has lost 55% off its November 2021 ATH and has now dropped below Nvidia’s valuation relative to the S&P.
The torch has truly passed. Incidentally, note the lovely Head and Shoulders reversal pattern in Tesla valuation in 2021/2022, the break of the neckline, the rally to kiss the underside of the neckline (shorting opportunity) and the current Scalded Cat Bounce lower. That is pure textbook Tramline Trading analysis.
My question is tis: When will the torch pass from Nvidia? And who will take over? Will anyone? or will stocks begin a historic bear trend soon?
Crude oil buffeted by supply/demand changes
For months now, we have seen high oil production around the world especially from the USA. At the same time, demand has fluctuated and this fluctuation in the supply/demand balance has produced a whipsaw market, unfortunately for trend-followers. A complicating factor is the Red Sea turmoil with attacks on shipping including oil tankers (except Russian, of course).
At the same time, the strategic reserves of the USA and also China were being depleted last year in order to drive the price of fuel down to their consumers in a fight against high inflation and cost-of-living pressures. Yes folks, US politicians have at least one eye on votes while Chinese communist party bigwigs have to obey their masters who decree that fuel prices must come down to prevent widespread dissatisfaction nurtured by their real state bust.
But both nations have depleted their reserves to just puddles and thus, we have today the very bullish setup that both of these countries’ reserves must be – and are being – refilled with no regard to price (it’s government (our) money, remember). And OPEC now has a major opportunity to lower production just as major reserves are upping demand. This is a potentially very bullish setup.
So are we at the forefront of a huge wave 3 up? Prices have been trading in a range from 67 – 76 for two months and has last week just broken up out of that range – a bullish sign. There is chart resistance at the $80 level and breaking above that would also be bullish.
I feel the key here for my bullish case is for OPEC to announce some kind of supply restriction to come, or perhaps for increased attacks on oil tankers in the Red Sea. Or any number of possibilities on Russian oil shipments.
Chart-wise, I see a Head and Shoulder reversal pattern over the past few weeks that points to a target closer to 90.
Are really facing WW3 with Russia?
Last week we read several MSM articles alerting us to a possible coming war with Russia that will envelop the world. Just today, we hear that US nuclear missiles are being stationed here in the UK again after years of their absence.
Allowing for the fact that we are gearing up for major elections this year here in the UK and the USA, this is a sudden resurgence of war scare stories.
One thought – if this is a real prospect (at least in the minds of our dear leaders), it surely reflects the darkening social mood – and would fit in perfectly with a stock market crash ahead. Hmm cubed.