Not So Magnificent

A week ahead of the end of July, I urged readers to take profits on Tesla (TSLA). Was I speaking to those who owned TSLA, or to those that were short it? Yes! The article was posted before the market opened, and the stock was down 8% ahead of the market open due to a negative reaction to the Q2 earnings report after the market closed. TSLA was 226.56 then, and it closed 8/2 at 207.67, down 8.3% from where it was trading when I posted the article.

Why was I telling shorts and longs to take profits? Well, I am and remain quite bearish on Tesla due to its valuation. The stock lifted from about 140 and shot to about 270 in just three months. Though it was down from that peak when I wrote that last article, it had gotten up year-to-date in July. For folks that have big profits in the stock, I was suggesting reducing exposure due to my view that the stock was going to decline, which it has.

So, if I thought the stock were going to drop, why would I suggest that shorts cover? I suggested that the stock was too low temporarily and had left a big open gap. This gap has not yet been filled, but the stock did move above 234:

I covered my short entirely on the dip and shorted again at a higher price. I have covered some of that but remain short now. While it did not fill the entire gap from the trading on 7/24, there is one open below from April . It did fill two gaps from the way up in July. I don't believe that the upper gap needs to get filled, but one never knows!

In that last piece, I discussed that Tesla is part of the Magnificent 7, which also includes Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT) and NVIDIA (NVDA). TSLA then was the only one not up more that 16.9% year-to-date then, as it was down 1% then. Now, TSLA is down 16.4%, and the rest are all up a lot but less than they were then.

There is nothing wrong with these companies. The problem is that the stocks have become overvalued. Since July 3rd's close, they are all down, some by a lot:

Since July 3rd, the market has come down, but not by nearly as much. Here are the charts for the ETFs of the three indices that I follow most closely, the S&P 500, the NASDAQ 100 and the Russell 2000:

So, it's not just Tesla! One of the other weakest ones, NVIDIA, is still up 117% year-to-date, almost 10X the 12% gain in SPY. The first article I wrote on this blog about stocks was a warning about NVIDIA and a peer, Super Micro (SMCI). In Get Out Now, I warned that these stocks could come crashing down. Well, SMCI has dropped 42%, but NVDA is up 26% since then. I am very short NVDA right now.

How low can the market go? I wrote about this in April, when the market was getting pounded. I shared predictions for SPY to decline by a lot over an extended period of time. It's up 7.6% since then! I am still negative in my outlook and still aware that I (and know one) can predict the future accurately.

I am not short SPY. Instead I am short 2 of the Magnificent 7, NVDA and TSLA, along with QQQ. I am not just short either, as I own three stocks in my trading portfolio and seven in my IRA.

QQQ is up less than SPY now (9.6% vs 12.1%), but I think QQQ has more downside. Sice the end of 2022, it is up a lot more than SPY or IWM:

The Magnificent 7 have a big contribution to QQQ, making up almost 43%. I think that the Magnificent 7 are not so magnificent. The economy's growth is slowing, and there is too much hope that a lower Fed Funds will fix things. I don't think so.