Morning Comment: Be Careful on TSLA & MSFT at These Levels.

  • Year end rally in the broad stock market looks like it will hold.
  • However, TLSA is overbought and reaching a level that has been followed by severe reversals in the be careful.
  • MSFT is at a huge premium to its 200 week MA, so be careful.
  • We wouldn't short these two stocks, but adding to longs up here could/should be quite dicey on a short-term basis.

The weakness in Boeing’s stock yesterday kept the DJIA from performing in-line with the rest of the market. However, it was still a very good day for stocks. After a one day “breather” on Friday, we saw some very nice upside follow-through yesterday…which took the S&P 500 and the Nasdaq further above their November highs. The same was true for the XLK technology ETF and the SMH semiconductor ETF…which have been two important leadership groups all year. The breadth was nothing special…at 3.3 to 1 positive on the S&P 500 and just 2.3 to 1 positive for the NYSE Composite index….BUT the volume was fairly strong at 3.2bn shares. That is about 15% above this year’s average daily volume…and much higher than we usually see on a Monday!

We have been saying that “the next few days” are going to be important for the rest of this year. So yesterday’s action was certainly something that bodes well for a continued rally into year-end. Yes, the market did nothing on Friday…and it’s looking flat this morning. However, experience tells us that when you get flat days…right after very strong days…it’s still a good combination. In other words, “sideways breathers” are fine for the market. It’s when those “breathers” are entail one-day sharp drops, that’s when we start to worry that the market is becoming fragile. So unless we get a surprisingly acute decline immediately, we’re looking at further gains into the end of the year.

This means that investors want to avoid getting short the broad ETFs or the ETFs for the leadership groups for now…and be very careful about shorting individual names (especially if they don’t have any exposure to BA). That said, there are two big names that look dicey to us on the long side. In other words, they’re not ones we’d want to sell or short…at least not until we move into the New Year. However, they are still ones we wouldn’t want to add to positions at their current levels. Those stocks are TLSA and MSFT.

Starting with TSLA, it is getting overbought on both a short-term and intermediate-term basis. We do admit that its weekly RSI chart has become more overbought (more extreme) a couple of times in the past (2013 and 2017 to be specific), but it’s still quite overbought. Given that it is this overbought...AND that it is testing its all-time highs…investors need to be careful on the long side up at these levels. TSLA has tested its current level on four other occasions over the past three years…and each time it was followed by a SUBSTANTIAL decline. In fact, its SMALLEST decline was still a drop of over 20%!!! Therefore, the risk/reward equation for TSLA…after a 50% rally in less than 2 months (and more than a 100% rise in just six months)…is no longer nearly as beneficial as it has been at other times this year!!!

As for MSFT, its weekly RSI chart is more overbought that TSLA’s, but like TSLA, it has seen more extreme readings in the past (in late 2017 and early 2018 to be specific). So the stock could certainly rally a bit more before it tops out. However, this is another one were we think the risk/reward is getting a bit dicey right here.

MSFT has now reached a 72% premium to its 200 week moving average. That is about the same level it reached at the very end of September of last year…just before MSFT began an 18% drop over the next three months. We readily admit that the late 2018 decline had to do with a drop in the broad market and not any specific problems with MSFT. However, we’d also note that you have to go all the way back to the tech bubble to find time when MSFT reached a bigger extreme to its 200 week MA than now (and last Sept). Even at the top of the broad market of 2007, MSFT only reached a 30% premium……Of course, if you’re looking for another major tech bubble, we’d note that MSFT did not top-out until it reached a 150% premium to its 200 week MA back at the very beginning of 2000. However, we don’t think anybody is looking for that kind of bubble to inflate going forward.

This call has on MSFT has nothing to do with its fundamentals. The company is doing well…and it could very well continue to rally strongly over the intermediate and long-term. However, we’re merely trying to point out that it’s technical condition is getting quite overbought…and thus the odds that it will see a pull-back over the short-term are growing.

As we stated at the beginning of this morning’s note, the broad market looks quite good for a continued rally into the end of the year. Therefore, we want to reiterate that we are NOT saying investors should sell or short these two stocks at these levels. (We’ll take another look at them early in the New Year.) However, after the incredibly strong rallies they’ve seen in recent months, we don’t think adding to these stocks on the long side is a good idea right now.

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Matthew J. Maley

Managing Director

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.

Posted to The Maley Report on Dec 17, 2019 — 9:12 AM
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