Stocktake: Nothing bullish about Elon Musk’s tweets

Is buying at all-time highs a good idea, and has the Santa Claus rally come early?

Investing based on Elon Musk's tweets is not a good idea. Tesla shares recently sank 6 per cent, falling to $333, following the botched launch of the Cybertruck, when Musk's demonstration of the car's ostensibly unbreakable armoured windows went badly wrong.

His pride stung, Musk spent the weekend tweeting how Cybertruck “orders” were flooding in. Some enthusiasts concluded it was a buying opportunity, helping the stock open 4 per cent higher last Monday. However, the rebound was short-lived; despite Musk boasting about 250,000 orders, shares soon fell below $330. What Muck described as “orders” were in fact refundable pre-orders costing a mere $100.

In 2017, Tesla claimed it had 455,000 reservations for its Model 3; according to Reuters, it had sold 275,000 by the second quarter of this year. Given the Model 3 had a $1,000 reservation price, analysts assume the conversion rate will be much lower for the Cybertruck.

Indeed, Tesla has tended not to give pre-order numbers in recent times. In January, then-CFO Deepak Ahuja declined to give updates on early demand for its Model Y, saying "people just read too much into those" numbers. As Roth Capital noted, a $100 Cybertruck reservation price "is Tesla admitting pre-orders are meaningless". As always, investors should think twice before acting on Musk's tweets.

The global rally is broadening

Small-cap stocks in the US have joined the global market party. Almost everything’s been rallying lately. The S&P 500 is already up 26 per cent in 2019, hitting multiple all-time highs in the process. Tech stocks have led the way, helping the Nasdaq advance 31 per cent. International markets, as evidenced by the MSCI World Index’s 22 per cent gain, have also soared. The one concern has been the lagging small-cap Russell 2000, which had not hit a 52-week high in 15 months. That finally changed last Tuesday, the index surging 2.1 per cent to hit its highest level since October 2018.

Small-caps remain shy of all-time highs and have not nearly been as strong as their large-cap counterparts over the last 12 months but 52-week highs "are a sign of strength and strength tends to persist", says Baird investment strategist Willie Delwiche.

Data from LPL Research's Ryan Detrick bears this out; historically, when the Russell 2000 has gone a year without hitting 52-week highs, it has been higher a year later in 10 of 11 instances, averaging 17 per cent gains. A broad rally is a healthy one. Large-cap stocks and countries all over the world have been rallying and small-cap laggards are now doing likewise. "Participation is the key to any lasting bull market", says Detrick, and is a "great sign as we head into 2020".

Buying at all-time highs: a great idea?

The S&P 500 made 11 all-time highs in November, the most in any month since markets topped out in January 2018. Nervous investors are bound to ask: is buying stocks at all-time highs a good idea? No, it's not a good idea, says US money manager Meb Faber. It's a great idea.

A counterintuitive strategy – buy global stocks if they are at all-time highs at the end of the month, stick to government bonds if not – would have outperformed global stocks in recent decades, according to recent data from the EconomPic blog. Intrigued, Faber backtested the data, going all the way back to 1920. The results show it’s a “pretty damn good strategy” – better returns than being in stocks all the time, lower volatility, and much lower drawdowns.

That prompted “lots of disbelief” on the internet, so Faber checked his code and compared the results to other risk assets. The results confirmed his initial analysis – better returns, despite being out of the market most of the time. Now, the outperformance is not large and such a strategy would be psychologically testing. You might not want to implement such a strategy, says Faber, but the key takeaway is all-time highs “are nothing to be afraid of”.

Has the Santa Claus rally come early?

December is famously the best month for stocks. However, with November’s outsized gains and the S&P 500 already up 26 per cent this year, is it too much to hope for the usual Santa Claus rally? Like any seasonal pattern, a strong December is no sure thing. Just think back to 2018, when stocks plunged as markets endured their worst December since 1931.

Still, recent market strength doesn’t rule out continued gains. A month ago, LPL Research’s Ryan Detrick noted that when markets are up over 20 per cent at October’s end, November and December returns usually get better. November stuck to the historical script and history suggests another strong December is also on the cards, he says.

That said, most sentiment measures indicate sentiment is overheated, suggesting increased odds of a near-term pullback. December also often sees mid-month weakness, says CFRA strategist Sam Stovall. Santa may well come to Wall Street over Christmas, but traders shouldn't be surprised by a little advance volatility.