Tesla Proves Our Point

In yesterday’s piece, we pointed out the top-heavy nature of the current equity market rally and that might be posed by the upcoming earnings season.  Being so focused on statistics, tables, and charts caused me to overlook the real-world case study that was appearing contemporaneously.  Tesla’s (TSLA) delivery numbers showed us how a rough day in a megacap tech stock could adversely impact the NASDAQ 100 Index (NDX).

To recap, TSLA announced first quarter deliveries of 422,875.  This was a record, but there were disappointments within the data.  Reuters reported that the number was below an analyst consensus of 430,008, though Bloomberg reported it was slightly above their survey of 421,164.  Even if the result did manage to beat estimates, it did so by a slim margin.  Investors were eager to hear whether the recent price cuts spurred demand.  While that was clearly the case, the statistic was hardly a blowout.  It may or may not have beaten estimates, and it is indisputable that the company produced more cars than it sold, adding to inventories.

The takeaway should be that in-line, or simply OK, is not good enough for excited traders.  On Friday, TSLA rallied over 6%.  It was believed at the time, and is more evident in hindsight, that much of the move was predicated on enthusiasm about deliveries.  Some of the rise could be attributed to the overall bullish sentiment that was in place that day, but there is an element of feedback that is difficult to separate.  The market’s bullish tone partly influenced by the rally in TSLA, while TSLA’s jump partly influenced the market’s bullish tone.  Either way, the abrupt rise put the stock on more precarious footing ahead of a much-anticipated report.

Long story short, thing didn’t go well for TSLA yesterday.  The stock gave back all of Friday’s gains and a little more.  This morning, we saw some knee-jerk buy-the-dip activity on the open, but it has since given back its fleeting early gains to trade lower still.  It is much more difficult to impress investors who come into an event with high expectations.

TSLA 5-Day Chart, 15-Minute Bars

Source: Interactive Brokers

TSLA’s effect on NDX could be seen in early trading yesterday.  It was leading the index lower, along with concerns OPEC’s production cuts.  Sometime during the latter part of the afternoon, however, traders decided that megacap tech stocks were relatively insulated from higher oil prices.  Another round of the perceived megacap flight-to-safety trade pulled NDX off its lows and allowed SPX to stage a late rally:

NDX 5-Day Chart, 15-Minute Bars

Source: Interactive Brokers

While the reaction to TSLA’s delivery numbers does not prove the thesis we put forth yesterday, it does offer some evidence toward it.  Even though TSLA is an enormous company by any standard, it represents about ¼ the weight of Apple (AAPL) and Microsoft (MSFT) in key indices.  A similar disappointment in one of those companies would have 4X the effect. Furthermore, TSLA is an idiosyncratic company.  Although they have set an impressive technological standard, they are first and foremost a manufacturer.  None of the other megacap leaders have anything remotely to do with auto deliveries.  Yet if one of the other megacaps show pervasive weakness in something like cloud computing, internet advertising, software or services, then the problems of one will reflect negatively on the others.

To be clear, I can’t offer specific insight into the upcoming results of the companies that have led the indices higher.  But I can say with some assurance that if these stocks enter earnings season on a high note, it makes it even harder for these companies’ results to impress.  There is a reason for the phrase “buy the rumor, sell the news.”  If traders are too aggressive at buying the rumor, or coming up with too high a “whisper number,” that raises the stakes dramatically for individual stocks and the market as a whole.