Too Much To Handle For Stocks As Rates Continue To Rise

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10/18/23

#Stocks – $TSLA, $NFLX

#Macro – $SPX, #Rates, $XBI

Mike’s Reading The Markets Macro Subscription Service on Seeking Alpha

Stocks finished sharply lower as rates reached new cycle highs on the long end of the curve, and the yield curve steepened. This led to a drop of about 1.3% on the S&P 500, bringing the index down to around 4,315. This retraces about 50% from the rally following the Job report. For now, the index managed to find some support at 4,310, and a gap below that level tomorrow would probably suggest that the double top on the hourly chart has broken, which could lead to a decline back to the lows on October 6 around 4,220, and potentially lower.

The spread between the 30-year Treasury and 3-month Treasury rose by seven bps to around -51 bps and is approaching what appears to be an important resistance region around -40 bps. A break above that -40 bps could result in a much bigger rise in the inversion, and one would think that it potentially heads back to 0%. I would think that most gains could be from the 30-year rate rising. Unless the Fed starts cutting rates, sending the 3-month sharply lower (which I don’t see happening anytime soon), the only way for the curve to steepen further is by the back of the curve rising to the front.

From a technical standpoint, there are a few ways to measure a move in the 30-year up to 5.4%.

Biotech (XBI)

It is probably worth pointing out that today’s Biotech sector is almost back to October 2022 lows. This ETF rallied by 51% off the low, has fallen 25% since June, and is almost back where it started a year ago.

Netflix (NFLX)

Netflix is trading higher by around 12% following what looked like really good results. Net streaming subscribers easily beat expectations, and what was impressive was that free cash flow rose by $1.9 billion in the quarter, much higher than the estimated $1.27 billion. Cash flow from operation was even stronger at nearly $2 billion, which means it hit a new high of $6.1 billion on a trailing twelve-month basis. If the price follows cash flow, the stock could go higher over the longer term.

However, the stock rose sharply for now, right to a big uptrend line, which is where the stock stopped. It seems pretty clear that the resistance level right now is around $390, which could limit the upside.

Tesla (TSLA)

On the other hand, Tesla did not report a good quarter, missing on revenue and earnings, while automotive gross margins came in at 15.7%, missing estimates of 19.2%, and operating margins came at 17.9%, missing estimates of 18.3%. Free cash flow also missed estimates of $2.7 billion, instead coming in at $848 million. One would think this stock would be down big, but it isn’t. Just really bad numbers all around. The stock is trading down after hours, but it is probably not down enough. The symmetrical triangle is broken, which probably means the stock revisits the $220s again at some point in the near future.

-Mike

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