Short Squeeze Friday What Now

DJIA 52-wk: +14.06% YTD: +0.44% Wkly: -0.60% 

S&P 500 52-wk: +26.51% YTD: +1.03% Wkly: +0.48%

NASDAQ 52-wk: +35.10% YTD: +1.61% Wkly: -0.51%

Health Care Select Sector ETF: 52-wk: -0.12% YTD: +1.01% Wkly: +0.01%

During the holiday-shortened week from December 30, 2024, to January 3, 2025, U.S. stock markets experienced mixed performance.

Weekly Performance:

• S&P 500 Index: The SPDR S&P 500 ETF Trust (SPY) closed at $591.95, reflecting a modest increase over the week.
• Dow Jones Industrial Average: The SPDR Dow Jones Industrial Average ETF (DIA) ended at $427.16, showing a slight uptick.
• Nasdaq Composite: The Invesco QQQ Trust (QQQ) finished at $518.58, indicating a notable gain, particularly driven by technology stocks.

Key Highlights:

• Friday Rally: On January 3, markets rebounded after earlier declines, with the S&P 500 rising by 1.3% and the Nasdaq Composite by 1.8%. This surge was led by significant gains in technology shares, including Tesla and Nvidia. Financial Times
• Economic Indicators: Positive U.S. manufacturing data exceeding expectations contributed to investor optimism. Additionally, the re-election of Mike Johnson as Speaker of the U.S. House of Representatives provided political stability, further boosting market sentiment. Financial Times
• Sector Performance: Technology sectors outperformed, with companies like Tesla experiencing an 8% surge and Nvidia gaining 4%. In contrast, some sectors faced challenges due to mixed economic indicators and high interest rates. IBD

The first trading day of the year and the first slump into the red—but history shows it’s no reason to panic. The S&P 500 has fallen on day one in three of the last four years but still notched more than 20% annual gains. On the other occasion, in 2022, it rose on the first day but fell 19% for the year.

The message here is: ignore the first day. That mantra seems to extend to specific stocks—Tesla tumbled 6% Thursday after missing deliveries estimates. However, the electric-vehicle maker also had a poor start to 2024 and that didn’t stop it notching a 63% yearly gain. The same goes for Apple AAPL -0.20%, which fell 2.6% yesterday. The tech giant’s shares dropped 10% in the first quarter of last year before recovering to post a 30% rise.

But the pair’s opening-day slump does expose a far bigger concern for investors— the weakness of the Magnificent Seven group of stocks. Nvidia NVDA +4.45% is the only member to have risen this week, but that’s after a more pronounced year-end fall than its peers.

The MAGS exchange-traded fund, tracking the group that also includes Amazon, Alphabet, Meta Platforms META +0.90%, and Microsoft, is down around 4% this week. It’s no coincidence that the S&P 500 is 1.7% lower over the same period. It’s hard to see the broader market having a good year without a strong performance by its biggest companies. The group accounted for 57% of the index’s market-cap gain last year, and 65% in 2023, according to Dow Jones Market Data.

Market breadth has also been terrible recently, putting even more reliance on the megacap stocks. Just 48 of the index’s stocks have risen over the past month, and the S&P 500 Equal Weight Index is down 6% over the period.

Of course, Big Tech companies could rebound—as they often do—but the recent trading days straddling 2024 and 2025 lay bare what would happen if they don’t. Things could get ugly for the stock market.

Tesla investors seem less worried about the electric vehicle maker’s lower-than-expected fourth-quarter and full-year deliveries and declining market share and more hopeful about CEO Elon Musk’s close relationship with President-elect Donald Trump and its potential benefits for Full Self-Driving technology and Musk’s other companies.

• Tesla shares slid for a fifth straight day on Thursday after the EV company reported deliveries of 495,570 vehicles in the fourth quarter, up about 2% from the fourth quarter of 2023. While a record number for the quarter, it was still below Wall Street’s expectations.
• For the full year, Tesla delivered 1,789,226 cars, down about 1% from 2023 amid waning consumer enthusiasm for EVs. It was Tesla’s first year-over-year sales decline since it introduced the Model S Sedan in 2012. Analysts expect Tesla to sell 2.1 million vehicles in 2025.
• Despite the lack of growth in EV sales for the year, Tesla stock finished 2024 up more than 60%, nearly all of the gains coming after the Nov. 5 presidential election. Investors anticipate that Musk’s proximity to Trump could ease federal regulations that could help expand Tesla’s autonomous vehicle opportunity.
• BYD, China’s largest EV maker and a Tesla rival there, delivered about 595,000 all-electric cars in the fourth quarter, and 1.768 million in 2024, up 12% for the full year. Among other Chinese EV makers, XPeng’s deliveries rose 34% in 2024; NIO’s increased 39%; and Li Auto’s rose 33%.

What’s Next: Tesla is expected to release a new lower-priced vehicle that Musk said could help increase sales volume 20% to 30% this year. Musk has big plans for his robotaxis and his Optimus humanoid robot. An end to $7,500 EV tax credits for purchasers could hurt rival companies’ sales.

Staples have certainly been unloved. The Consumer Staples Select SPDR exchange-traded fund’s (ticker: XLP) 9% gain in 2024 lagged behind the market, despite the fact that two top holdings—retail giants Costco Wholesale and Walmart —surged. Other staples stocks, such as Coca-Cola, PepsiCo, Mondelez International, and Target, underperformed in 2024 and may now be attractive.

Healthcare stocks have fared even worse. The Health Care Select SPDR ETF (XLV) was relatively flat in 2024 as the strong gain for Mounjaro maker Eli Lilly wasn’t enough to offset declines in UnitedHealth Group and pharmaceutical companies like Merck and Johnson & Johnson. Worries about the potential for an increased regulatory crackdown on insurers—and fears about what may happen to drug stocks if vaccine skeptic Robert F. Kennedy Jr. is confirmed as head of the Department of Health and Human Services—have weighed on the sector.

The concerns may be overdone. The Health Care and Consumer Staples sector ETFs are trading at about 16.5 times and 18.5 times earnings estimates for 2025, respectively. That’s below their five-year highs and represents a bigger-than-usual discount to the S&P 500’s nearly 22 times. So there is room for upside, particularly within healthcare.

SentimenTrader Chief Research Analyst Jason Goepfert noted that the selling in healthcare has been so extreme that a rebound is probably in the cards this year. “When so many components of an index are doing well or poorly, we usually see the index make a counter move,” he wrote in a report, adding that there are enough reliable technical indicators “suggesting better days ahead for this downtrodden sector.”

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At some point, investors will likely recognize the big disconnect between fundamentals and valuations. Wall Street’s consensus price target for Moderna, a Barron’s pick as a stock to buy for 2025, implies a nearly 75% gain. Biotechs Biogen and Regeneron Pharmaceuticals each have more than 50% upside as well, based on current consensus forecasts.

Staples and healthcare stocks also pay fairly large dividends, which could bode well for them if the Federal Reserve continues to cut short-term interest rates in 2025. “Defensive/income-oriented sectors…should continue to respond favorably to the Fed’s less-restrictive policy stance,” said U.S. Bank Chief Investment Officer Eric Freedman in a recent report.

Don’t be surprised to see the market rally broaden out beyond tech and other momentum stocks to include these sleepier value plays as well in 2025.

CLOSING REMARKS:

In my opinion, Friday was a short covering rally. Doesn’t mean the rally can’t continue. But it does mean that the investment community must put real money to work at these still high levels at the beginning of a new year.

Factors I'm focusing on this week:

1) Mag 7 and Semi stocks action

2) IWM and Bank stocks especially regional banks reflected in the KRE

3) Friday’s employment report.

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DATA: Barron’s print edition page 28 9/23/24 Market Week Avi Salzman

Paragraph: one ChatGPT market recap for the week of 12/30/24-1/3/25 As stated above

Paragraph: two Barron’s online 1/3/25 AAPL TSLA terrible start Callum Keown

Paragraph: three Barron’s online 1/3/25 EV Maker’s Investors Focus on Musk Rather Than Delivery Numbers Al Root and Janet H. Cho

Paragraph: four Barron’s print edition 1/6/25 page 29 The Trader Paul R. La Monica

Paragraph: five Closing remarks Richie Naso opinion