Tesla's Impact on Consumer Discretionary

Tesla's Impact on Consumer Discretionary

Posted on November 02, 2021
Technology had a good run last week, carrying the market indexes higher.  As has been stated in these updates plenty of times, technology-related stocks make up 44% of the S&P 500 (info tech & communications sectors, plus Amazon & Tesla).  Naturally, as technology goes, the market indexes will follow.  That does not mean that every other market segment will follow. 

Last week saw a few large moves from a few large names: Microsoft (MSFT) was up 7%, Google (GOOG) was up 7%, and Tesla (TSLA) was up 22%!  Those stocks pushed the Nasdaq index to end the week up 3.2% and the S&P 500 up 1.3%.  What about value stocks?  The S&P 500 Value Index was actually down slightly for the week.  That is not very good for market breadth.  A rising tide should lift all ships.  You do not want to see the generals out in front while the troops retreat or fall back.

Here is a chart of S&P 500 and the S&P 1500 Advance-Decline Line, which shows the flat A/D Line with a rising market.  The A/D line (market breadth—participation) has gone sideways for 6 months now while the market has risen.  That is a clear divergence.

Source: AIQ Trading Expert Pro

Consumer Discretionary
It was alluded to earlier in this write-up, but Tesla has seen a significant run-up in a very short period of time.  In fact, since its year-to-date low on May 19th, the stock is up 97%.  Due to the recent parabolic advance, Tesla now makes up over 20% of the Consumer Discretionary sector.  When combined with Amazon, the collective weighting makes up north of 40% of the sector.  Thanks to Tesla’s recent run-up, it is now the largest stock in the Consumer Discretionary.  Not bad for a security whose underlying company hadn’t reported a year’s worth of positive earnings until last year.

This makes us weary of the Consumer Discretionary sector.  Forty percent of the sector is concentrated in just two securities.  Amazon just missed analysts estimates on earnings and revenue, citing supply chain issues.  Those supply chain issues are expected to persist into the fourth quarter, according to CNBC.  More importantly, the technical on Amazon are not ideal.  Currently, the stock is in a long-term trading range.  It attempted to breakout of this range over the summer but failed when testing for support.  Right now, it continues its sideways pattern.

Source: AIQ Trading Expert Pro

Tesla has experienced a parabolic advance.  Any sharply increasing parabolic advance will eventually end the same way.  I am not saying that will happen tomorrow or next week or next month, but there is an above average probability of a pop and a drop. Most other Consumer Discretionary stocks actually look good. But, due to Amazon and Tesla’s heavy tilt and control of the sector’s movement, any fluctuation in these 2 stocks will have a large impact on its movements—good or bad.

Bottom Line
I keep seeing several negative reports on the economy.  Our friend and expert economist, Bob Barone, has been expecting the economy’s slowdown for the past several months.  This week, he wrote in Forbes that:

The much-anticipated Q3 initial GDP estimate (+2.0%) came in lighter than expected on Thursday (October 28) (consensus was +2.6%; it was only a month ago that it was +6.0%, and it was +7.0% in early July). But, perhaps, from an economic point of view, more important news occurred after the market closed. Both Apple and Amazon missed Wall Street top line revenue estimates, confirming that the slowing economy is for real. Amazon also badly missed its profit numbers as sales growth decelerated. – Bob Barone, Economic DDT Keeps Growth Low, Forbes.

Right now, the markets are higher.  The reason why—Technology.  Tech-related stocks have carried the markets in a way similar to that of 2000.  Back then, Tech stocks made up 40% of the index just like they do today.  Value stocks, on the other hand, have moved in a sideways pattern for several months, and small cap stocks are in a squeezed down trading range, as we wrote about a few weeks ago. When you couple this with Bob’s comments, there is reason to be concerned for the markets. 

We are not saying the market will fall apart right now.  Remember, the trend is your friend. But trends don’t last forever.  Things will eventually shift, and that shift will more than likely be driven by technology.  That is why we practice Adaptive Portfolio Management.  The Canterbury Portfolio Thermostat is designed to navigate changing market environments—bull or bear.  
Canterbury Investment Management: Tom Hardin

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As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

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Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

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