Month: February 2020

Equities Move Higher But High Beta Stocks Struggle to Outperform

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One of the topics I spend a lot of time on each week in my Thrasher Analytics letter is risk appetite. I try to look at the market from multiple angles and evaluate how risk-averse or risk-hungry the data is suggesting for the U.S. equity market.

One tool I use to accomplish this and one of the components that feed into my Risk Appetite Index is the relative performance of High Beta stocks to the S&P 500. When risk appetite is high, we typically see higher beta stocks outperform the broad market, which makes sense – more bullishness sends traders to chase after the higher volatile components of the index.

This causes the correlation between the ratio of High Beta and the S&P 500 to remain relatively high when the index is in a positive trend. However, that relationship has broken down in recent weeks. In fact, high beta stocks are no longer outperforming. It’s not due to a lack of exposure to the stronger corners of the market, the Invesco S&P 500 High Beta ETF ($SPHB) is 45% tech and its largest holdings are Advanced Micro Devices (AMD), NVIDIA (NVDA), Micron (MU), and Western Digital (WDC), so it’s not because tech is leaving the ETF behind. Instead it’s showing that traders are becoming more risk adverse during this latest move higher in the broad market. This has sent the correlation to the lowest level since during the Q4 ’18 sell-off.

A bearish divergence like this is not a common characteristic of a healthy equity market risk appetite. Instead it suggests maybe the market has gotten a little bloated and needs to digest the gains it’s already realized and thus is moving away from the high beta stocks that it so loved just a few months ago.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Has Tesla Peaked? A Historical Chart Study

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Below is an excerpt of what was sent to Thrasher Analytics subscribers on February 4th.

This is not a recommendation to buy or sell any securities mentioned. All investing has risks, consult a professional for personal advice.

The run-up in the price of Tesla stock has been fun to watch as few stocks have been able to replicate such a move in such a short period of time. The questions now become: Has Tesla run too far too fast? Can the stock keep up this level of momentum? Yes it can, but history suggests that’s a very difficult hill to climb.
Rather than guess how many electric vehicles they can sale or how many windows they can throw rocks at, I’m interested in the charts. I’ve gone back to 1995 and looked at many prior large cap stocks that have made a similar parabolic trend higher. This is not an exhaustive list, I pulled out some that were a result of a massive single day gap higher and/or didn’t reflect a similar trend length that lasted more than just a handful of days.
I’m going to show many of them below and you’ll see a common pattern:
-Few are able to continue the trend higher (a couple did)
-Many of them occurred during the heyday of the tech bubble during the late 1990s, where many stocks were making incredible runs. I’d argue this isn’t such an environment today. 
My objective was not to try and find analogs of Tesla’s latest move. Some stocks that hit my screen replicated a similar run in a longer period of time, others shorter, some went up by a larger percent, others not as much. There are many ways to slice up Tesla’s impressive chart, what I describe below is just one such method.

First, I ran a study that looked for stocks that met the below criteria (green arrows mark on the chart when the criteria was met):
-The stock is trading above $20 per share
-Had two back-to-back gaps higher (open > prior day’s high)
-The stock is trading 50+% above its 20-day Moving Average
-The stock did not have a recent IPO (many stocks experience parabolic-like moves after coming to market, not a fair comparison to what Tesla’s done).
– The stock has risen at least 100% over the last 21 days

Unsurprising, this drew just a few results, so I relaxed the study a bit and set the bar at ‘just’ 30+% above the 20-day MA and 40+% 21-day return. You’ll see on the charts below that some were able to keep moving higher a little while longer, some peaked immediately but what stands out to me is that most were unable to keep the trend and once it broke, sellers jumped all over it.

The two gaps and the fact that it’s run up 100% in one month is what made me begin to question the sustainability of Tesla’s trend and interested in looking for similar chart setups over the last 25 years.  The Tesla chart will be one few will forget and likely end up in future editions of investment books, but if history is our guide, the charts suggest we could see Tesla’s chart come back to earth first.

Full Disclosure: I do own a position in Tesla options in my personal account.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.