Morning Market Thoughts
Good morning. This morning CarMax ($KMX) reported strong Q1 results that beat estimates. An article in IBD notes that delays in tax refunds shifted some sales from Q42016 into Q12017. The stock is up about $5 (7.5%) pre-market and very close to the May high of $66 bucks. I always discourage buying gaps like this because they tend to fail. The short interest (“days to cover”) is nearly 12 days. So we should see a lot of shorts scrambling to buy the stock. It may hold the gap…but it may not. There is widespread, and widely known, deflation in car prices. That’s why the charts of Ford ($F), General Motors ($GM) and Toyota ($TTM) look the way they do.The auto market is being hit with a lot of crosswinds. New car sales are down, and used car prices are falling, right? So that makes the sector one to avoid. But I don’t think it’s one to ignore. Here’s why. Rates are rising, and a wave of leased vehicles are coming off lease. So there’s a glut of cars on the used car market. I look at CarMax, and I think — could this be a bad thing for KMX? After all, they’ve got a no-haggle price, and they don’t buy cars that they won’t make a profit on. They don’t look to make a killing on any given car. They just churn ’em through the parking lot. So an argument could be made that a glut of used cars would be good for KMX. But I, not being a used car expert, am just thinking with my fingers on the keyboard. Let’s just watch this chart and see what develops.
Also, one stock in the auto parts sector that’s worth a look is Dana ( $DAN). This company makes driveshafts, suspensions, axles, gaskets and associated parts for off-road vehicles and heavy haul trucks. The earnings growth rate over the past 3 years has been 14%, which isn’t bad for a stock with a P/E of just 10. And contrary to other companies in the industry, Dana’s earnings growth over the past four quarters is actually acceleration, going from 10% in Q2 last year to 85% in Q1 this year. Their earnings are due in a month, so watch the chart. It’s been printing new lows and highs for the past couple of months. Now, all we need is a good opportunity to buy.
Last night I suggested caution in your trading actions. Over the last eight trading days on the Nasdaq Composite, 6 have been negative, with trading volume on 4 of those days much higher than average. So these are distribution days. Also, recall the dramatic selloff on June 9th. This is looking more and more like a shot across the bow. No, the uptrend didn’t break. But this high volume distribution day took a lot of shares lower, and that reflects institutional selling.
Big money is selling tech. Sure, there are bright spots here and there, but that’s the way markets trade. Yes, there is a rotation going on, with money flowing into some financial and industrial stocks. But this takes place over time. It’s not a “trade” — it’s a theme. And with technology being a significant driver of the equity market, a breakdown in semiconductor stocks will be a drag on the entire market.
Narrow your focus to the few stocks that are working. Own those…and keep ’em on a short leash. I have been raising a lot of cash in my trading account simply due to various positions not working. Rather than hold a stock that’s going against me, I’ll just sell the stock and take the stress out of my day. That works for me. But then, I stopped being an adrenalin junkie quite a while ago. Not sure whether it was after my second or 3rd anterior cruciate ligament reconstruction…but I no longer have the “need for speed.” I just want to make money without losing my mind over the swings. And that means that I only trade lightly or not at all when the market becomes murky.
See you in the forum.
–Dan
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