Monday’s Decline

The stock market has been on a rampage in the past few weeks. It has been due for a correction. Personally, I expect the start of 2020 to be volatile and see 3% to 5% gains in 2020. If you buy at the correction trough, it will be like a normal year of returns. The market got the volatility started early by declining on Monday December 30th. 

S&P 500 fell 0.58% which pushed up the VIX 1.39 points to 14.82. CNN fear and greed index only fell 1 point to 90 as it is still at extreme greed. That should quickly reverse in the next few weeks when stocks selloff.

Review Of Monday’s Action

Nasdaq fell 0.67% and the Russell 2000 fell 0.29%. Small cap index is now on a 3 day losing streak. Every single sector fell. Biggest losers were communication services and consumer discretionary which fell 1.02% and 0.72%. Even though tech and the Nasdaq fell, Apple stock was up 0.59% to a new record high. 

It’s up 84.6% year to date. Tesla stock fell 3.64% on a report from Cowen which predicted Tesla will miss the low end of its sales forecast by 4,000 cars. Tesla’s full year guidance range was between 360,000 and 400,000 cars.

Jeff Osborne of Cowen believes they will sell 101,000 cars in Q4. That’s based on expected weakness from Model S and X. It’s weird that the stock fell, because technically he raised his forecast from 95,000 cars. He also raised his price target from $190 to $210 which is about half the current share price. 

If I owned Tesla stock, I wouldn’t care about a slight miss on Model S and X sales. I’d be 100% focused on how Model Y does in the first half of 2020. It should be Tesla’s biggest car since crossovers are so popular.

10 year bond has had a seemingly endless struggle with passing above 1.94%. That struggle continued on Monday as the yield increased 6 basis points to 1.94% in the morning and then gave it all back in the afternoon, closing at 1.88%. 2 year yield closed at 1.57%. As you can see from the chart below, the difference between the 10 year yield and 2 year yield reached almost 32 basis points which is the largest difference since October 2018. 

Usually, when the yield curve steepens this much after an inversion, it signals a recession is ongoing. Clearly, there is no recession in Q4 2019. The further the curve steepens without economic weakness, the more likely the inversion didn’t mean anything. Steepening is good because it rolls back the recession time clock. Bears will need to wait for another inversion to call for a recession. With the decline in the 2 year yield, there is now only a 46.9% chance of a rate cut in 2020.

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2020 Prediction: Sell Apple

My predictions for 2020 line up. They rely on each other. My short prediction of the year is Apple. In a previous article, I mentioned how Sanders is being ignored by the markets and that Biden could win the general election. If Sanders wins some early states, it could be bad for Apple because it is one of the big tech names left leaning candidates will go after for antitrust reasons.

Another reason to sell Apple is it is very overbought. As you can see from the chart below, its weekly RSI is at 85.62. That’s the highest level since early 2012. To start the year, it had its lowest weekly RSI since early 2013; that correctly predicted this year’s rally. If you’re curious, its 14 day RSI was 78.41 on Friday. Its current PE ratio is 24.6 which is the highest since August 2008 which was right before the worst of the financial crisis.

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Operationally, I love the direction of services, Apple Watch, and AirPods/AirPods Pro. They are winners. However, I’m worried about competition from Google’s mid-range phones. Google Pixel 4a should be an amazing mid-range phone. The 3a costs $399 and the 3a XL costs $479. I’m also interested to see how much folding phones eat into Apple’s market share on the high end. 

These phones will improve drastically upon the first few which were basically concept phones. First strong competitor is Motorola’s Razr. Apple (AAPL) definitely won’t be one of the first to produce a folding phone as the company usually waits until the technology matures before jumping in. A final potential risk factor is Apple waiting until 2021 to produce a 5G enabled phone. This is the least worrisome factor because Apple could easily enable 5G on its 2020 phones.

Bullish On Energy Stocks

Many are bullish on energy stocks because we see a global cyclical turnaround. Plus, if a Democrat wins, they will make it tougher to drill for oil. Ironically, as America produces a record amount of oil, energy stocks have been duds because high production drives down prices. 

We’ve already seen an increase in prices in the past few weeks in anticipation of the upturn in the economy. WTI was at $52.64 on October 2nd and now it’s at $61.63. I see it going to $70 in 2020. My long bet of the year is the XLE energy ETF which is only up 2.09% year to date in 2019. Energy doing well and Apple doing poorly would be a reverse of 2019.

Higher 10 Year Yield, No Recession, No Rate Cuts

Also, I’m predicting the yield curve to continue to steepen in 2020. Personally, I think the 10 year yield will increase to 2.5% because of higher oil prices and higher economic growth. And I also think the 2 year yield will only increase modestly because the Fed won’t hike rates in 2020 despite increased inflation. 

Obviously, I see no rate cuts next year and no recession. For the past couple months, I have been saying the next Fed decision will be a hike in 2021. Finally, I can’t see the Fed hiking rates in the first half of 2020 since the effect of its 3 cuts in 2019 won’t be fully shown in the economy yet.