Correction time…Maybe?

Brit Ryle

Posted July 10, 2023

We’ve gotten a few “developments” over the last couple of days that the stock market doesn’t seem to like very much…

First, there were the minutes from the most recent FOMC meeting. You know the one, on June 14, where the Fed opted to leave rates where they were, at 5%-5.25%. But the bigger news came at the press conference following the decision to pause, where it was suggested that rates might rise maybe two more times before the end of this year — something Fed Chair Powell basically confirmed a week later during his biannual testimony before Congress.

The thing is, economic data has been coming in consistently strong. New home sales, GDP and Nonfarm Payrolls have surprised strongly to the upside. 

Normally, investors cheer strong economic data. And part of the reason the stock market exploded higher in mid-May through June is because of the bullish narrative that inflation was mostly defeated, the Fed is basically done with rate hikes, and the economy is ready to surge…

In other words — the mythical soft landing had been achieved. Maybe…

But the minutes from June 14 showed that most of the Fed governors didn’t want to pause – they wanted to hike in June. Surprise!

The recent market and economic action is exactly what John Maynard Keynes meant when he coined the term “animal spirits.” He was referring to the environment of overwhelming bullishness, when caution is thrown to the wind. 

Back in January, the animal spirits were hibernating. Even though the market had rallied nicely off the October 2022 lows, nobody wanted to hear me say things were looking bullish. One of the first stocks I recommended for the 2023 bull market was EV maker Rivian (NASDAQ: RIVN)…

Betting on Animal Spirits

I called Rivian a strong buy under $20, saying: Rivian is on the cusp of a massive 203%  jump in revenue, from $1.76 billion this fiscal year to $5.37 billion in fiscal 2023.

It is the cheapest of all of the upstart American EV makers. It has the most cash ($15 billion), by virtue of that ridiculously high-priced IPO. And it has virtually no debt.

It was cheap – and it got cheaper, trading down to $12 back in April. Because sentiment was incredibly negative for the “upstart” EV companies, as production ramp ups hit snags. Sentiment was also incredibly short-sighted as production numbers were cut. I had to restrain myself from openly mocking the Motley Fool writer who went so far as to say Rivian should try to sell itself while there was any value left for the company. 

But that’s exactly the kind of thought process you expect when sentiment is bearish and the animal spirits are absent. “Things can never get better, it’s just gonna get worse and worse…”

It took the emergence of AI stocks to awaken truly bullish sentiment. And over the last 6 weeks or so, it has spread to all corners of the stock market. The animal spirits are stampeding – just look at what shares of Rivian have done over the last week…

Rivian ramped higher after second quarter production numbers suggested the company would make 50,000 electric trucks and delivery vans this year. Of course, back in January, sentiment turned negative after Rivian lowered production guidance for 2023 to…50,000 vehicles.

50,000 was bad news then. But it’s good news now. And of course the reason for the shift in sentiment is fairly obvious: investors figured the bad story would get worse. That’s the bearish mindset.

But with the stock market breaking out with help from the bullish AI story, investors saw in Rivian a story that could get better. And for the record, the Rivian story will get better. 

On its last earnings conference call, the CEO hinted that full year production would likely hit 60,000 vehicles. Which means the $4 billion in revenue that is expected from Rivian  for this year will be higher. 

Rivian might look a little expensive right now, at 10X trailing revenue. But it’s trading for only 5X full year 2023 revenue. And around 3X 2024 revenue. 

Now, I’m not telling you it’s time to jump into Rivian shares. Not after the run they’ve been on. If you can’t resist the animal spirits, the story hasn’t turned bullish for Fisker (NYSE: FSR) just yet…

A Matter of Perspective

I’ve been telling you for a couple weeks now that stocks look a bit overbought. I’m frankly a little surprised that investors have been so willing to ignore the Fed. Even though Friday’s Non-Farm payroll came in below expectations – the first NFP report to do so in many months – the unemployment rate still ticked down slightly. And service sector hiring remains very strong.

We get June inflation numbers courtesy of the Consumer Price Index (CPI) and Producer Price Index (PPI) this week, Wednesday and Thursday. And second quarter earnings earnings reports start this week too. And there have been some profit warnings already, from FedEx (NYSE: FDX), Nike (NYSE: NKE) and Exxon (NYSE: XOM) – three benchmarks for business environment, consumer spending and energy. 

There is a lot of potential for negative surprises in the immediate future. It’s a good time to corral those animal spirits.

Here’s the updated S&P 500 chart we’ve been watching

I added a horizontal line at the top to illustrate what may be a double-top. And the highlighted circle shows the gap up from 4,221 to 4,241 that led to the bull market declaration from early June. Filling that gap requires a 4% drop for the S&P 500. 

That’s it for me today, take care and I’ll talk to you on Wednesday.

Briton Ryle
Chief Investment Strategist
Pro Trader Today