MARCH 7, 2021
STOCKS – AMZN, ROKU, DOCU, AMD, NVDA, SQ
MACRO – SPY, TIP
- T.W.A – Trouble Lies Beneath The Surface
- The Fed Is Likely To Remain On Hold At Its March Meeting
- Live Stream Will Start At 1:10 PM ET
- MORNING NOTE: WATCH FOR THE GAP FILL
- MIDDAY VIDEO- BONDS MAY PUNISH POWELL
- MIDDAY NOTE: YIELDS CONTINUE TO RISE
- Morning Note: This Can Still Grow Much Worse
- Morning Notes: Yield Curve Suggest A Market Top Is Near
This will be another big week for stocks, with the CPI and PPI data, plus an ECB meeting. This is all critical stuff for the bond market specifically, and while most will focus on the 10-year, the TIP market maybe even more important.
The TIP and TLT ETFs provide an easy and fast way to see what is happening for both. The TLT has fallen faster than the TIP ETF, suggesting that yields on the longer-dated bonds have risen much faster than TIPS. The last time this happened was in 2013, and the TIP market corrected quickly. I talk about this much more in my Week Ahead Video for members of Reading The Markets – T.W.A – Trouble Lies Beneath The Surface
But the difference between this time and 2013 is that presently, the S&P 500 is much more highly correlated than in the past. It is likely because the equity market follows the signal from inflation expectations to help it determine if growth is returning to the economy. Inflation expectations are determined by the difference in Treasury rates and TIP rates. Therefore, if TIPs have underperformed Treasuries, and Treasury rates pause or fall, and TIP rates continue to climb, it will cause the inflation expectations to fall, sending a negative signal to the equity market.
It will be viewed as an indication that the growth outlook is slowing.
S&P 500 (SPY)
The S&P 500 futures could rise this week to around 3,860, or perhaps as high as 3,900. But I really don’t think any rally will last. The higher rate environment has, to some degree, changed the game. Rates are surely historically low, but we need to remember that part of this push higher were the lower rates, and now that rates have moved higher, equity valuation is even more expensive. (Should be free to read – The Stock Market Party May Finally Be Over)
The highly valued technology sector has been hit the hardest and could easily continue to be hard. For example, Nvidia fell this week all the way to $467. But more importantly, the earnings yield versus the 10-year is still well below its historical average and would need to rise an additional 35 bps to get back to that average. But remember, the more the 10-year rises, the more expensive Nvidia gets on a relative basis, meaning the stock needs to fall even further.
Currently, the stock trades for around 33 times 2023 earnings estimates, an increase of just 35 bps on the earnings yield would shrink that multiple to 29.9, valuing the stock at $445, a drop of another 10% from its closing price of about $498 on Friday. (Should be free to read – Nvidia’s Stock Declines May Have Only Just Begun)
Amazon finally hit my target of roughly 2,860 last week, too, after months of doing nothing. I don’t think it is finished falling either because we can see volume levels have risen sharply, and the RSI is telling us there is further to drop. I think we are likely to see a retest of 2,860 with even the potential to drop below that support level all the way to 2,670, maybe not this week, but at some point over the next few weeks. It might rise all the way back to 3,200 over the very short-term. (Should be free to read – Amazon Stock Faces Massive Challenges As AWS Disappoints)
Roku also fell sharply this week, all the way to support around $320, which I had been targeting. Again, the a similar situation here to Amazon, with volume rising and the RSI trending lower. Could it bounce back to $385 in the near-term? Sure, does that change the trend lower no. The company doesn’t deserve a $50 billion valuation; may by is it is worth $15 billion, tops. They sell and have a very low monetization rate, despite the annualized ARPU number appearing high. Divide that number by four, and it doesn’t seem so impressive. (Should be free to read- Roku: The Party May Finally Be Over)
AMD hit $75 this week, and it should be even lower. The Xilinx deal is great for AMD, bad for existing AMD holders. It is extremely dilutive to AMD holders, and the more AMD falls, the more dilutive it gets. In fact, if AMD stock falls enough, I wouldn’t be surprised if Xilinx walked away, why they made an all-stock deal with a company that has a stock as volatile as AMD is beyond me. If AMD falls, Xilinx will fall.
AMD has a gap all the way down to $62, which seems like a logical place for the stock to fall. It probably goes back to $87 first, but the trend is lower. (Should be free to read – AMD’s Stock Will Struggle Under The Weight Of Xilinx)
Docusign trades at 81 times 2023 EV to EBITDA and almost 120 times 2023 earnings estimates. How much will Docusign be able to grow in the future? Probably not enough to deserve the multiple the market has assigned it currently. Maybe the stock drops back to $226 over the short, but once support at $188 breaks, the decline becomes steep, very steep. (Should be free to read – DocuSign’s Valuation Is Still Ridiculous Despite Strong Results)
Square’s drop likely hasn’t even started; the RSI is still holding a range. Once that RSI 35, the drop will begin. The company has all this revenue growth but has nothing more than how it books its bitcoin revenue. It makes the stock look fairly valued on the price to sale multiple, but their margins on bitcoin are very low, like low to mid-single digits low. It makes the sales multiple useless.
$200 has been a rock for this stock, and once that level goes, it breaks in a big way. (Should be free to read- Square’s Post-Earnings Plunge May Be A Sign Of Things To Come)
Does it mean any of these stocks won’t rally this week? No. In fact, they likely will all rally at some point this week; they have all been battered. In fact if they don’t rally that then it could be a really bad sign, really bad.
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