foxex: Dollar Rebound

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, August 07, 2020 Headlines

1. Dollar rebounds on Nonfarm Payroll report

2. Good business, bad merger

3. No fundamental protection in speculation

Market Moves

The U.S. Dollar rebounded strongly on the news from today's Nonfarm Payroll (NFP) report. The result was that stocks and commodity prices slid a little. The S&P 500 index (SPX) closed flat while the Nasdaq 100 index (NDX) fell by 1.33 percent. This signals the possibility of more profit-taking in the near future on large-cap tech stocks. Meanwhile, gold and oil prices were off by about one percent as well.

Chart watchers may logically wonder why the markets sold down somewhat if the NFP report was actually good news. It's a good question. The dollar dynamic is one important reason, but the other is that investor expectations are tricky things.

The chart below helps explain what happened. Ever since the pandemic panic hit the markets, analysts have routinely overestimated how bad the impact would be on employment conditions. To be sure it has been bad, but over the previous three months, the NFP reports came in much better than expected (left panel). Today's numbers were still better than expected, but not by nearly so much as the past three months have been. Meanwhile the weekly Jobless Claims report (right panel) reported two days ago had come in below expectations. This set up the expectations for investors to believe that today's NFP report would be another blowout. It wasn't.

SPONSORED BY STATE STREET SPDR ETFs

Explore Low-Cost ETF Trends

This quarterly insight illustrates how ETFs measure up to mutual funds, plus low-cost implementation ideas based on what we see in the market.

ETF Trends >

Good Business, Bad Merger

If investors are going to start reacting to missed expectations or disappointment of some kind, that could trigger some frightful moves for the buy-and-hold faithful in various stocks. Consider the case of Teledoc (TDOC) and Livongo Health (LVGO) in the chart below. These two companies announced a merger on Wednesday. Since that moment these stocks are down 20 and 25 percent respectively. That move only took three days! The simple interpretation of these moves is that investors hate this merger.

This sort of thing happens among institutional investors when they feel like a particular bit of news marks the culmination of optimistic expectations. In this case the thinking goes something like this: "let's buy these companies because they are going to merge and that will make them more valuable." Once the announcement is made, the thinking changes: "now that they have merged, it will be a while before they really start to show profit from the deal." That kind of thinking causes the more opportunistic set of investors and traders to sell their shares and move on for greener pastures.

In the chart below it is clear that this sort of thing has hit TDOC shares before with some remarkable volatility. It may be that the current move lower is only just getting started. Could such a thing happen to larger companies as well right now?

Uber (UBER) Sells Off After Greater-Than-Expected Q2 Loss

Bitcoin Curve Flattening Lifts Transportation StocksPropels Square's Earnings

No Fundamental Protection in Speculation

If the profit taking becomes a more prevalent occurrence in the days and weeks ahead, one company particularly vulnerable to it would have to be Tesla (TSLA). The reasons for this are simple. The very thing that has allowed TSLA shares to quintuple over the past year may be the very thing that could plague the share price in the near future: nobody really knows how to set a value to this multi-faceted company.

The chart below analyzes the trading volume in the previous quarter compared to the current quarter so far. The heaviest bit of trading last quarter took place at $800 per share. Since Tesla's recent earnings announcement, the company's shares have fluctuated around a $1500 per share anchor. However, if traders decide that stocks in general are not likely to produce fast gains like before (remember the outcome of the NFP report mentioned earlier), they may decide to take whatever profit they can get from TSLA's last quarter. Though certainly unexpected right now, such a move would be frightening for most unseasoned investors.

The Bottom Line

Stocks fell a bit after the Nonfarm Payroll report's news was good, though not as good as hoped by many investors. Profit taking usually comes along in such circumstances, as it did today in small measure. Profit taking can take an ugly toll, as demonstrated in the Teledoc and Livongo merger. Investors holding more speculative stocks like Tesla need to be alert.