Sucker rallies. The most dangerous situation for an individual investor is caused by these moves - unwarranted by fundamentals - in individual stocks. The inclination to chase such rallies can lead to buying high and selling low, or, just as dangerously, not selling a stock when fundamental momentum has shifted to the downside. I am not a technician, but there is more to chart-based trading than buying stocks that have gone up in the past few weeks. Fundamental analysts know when a shift has occurred, and it is at these inflection points that returns in excess of those driven by systemic factors - known as alpha in the industry - are generated.
In analyzing the market as a whole it is possible to point out a sucker rally, and I believe we are in the middle of one right now. The Nasdaq has been flying this week on the back of Friday's atrocious jobs number, and - while I certainly never overreact to one piece of data, especially a non-scientific one like the BLS non-farm payrolls report - that makes me believe we are in the midst of a sucker rally for tech stocks. I choose not to opine on the status of U.S.-China trade talks here, but I would caution that of the hundreds of talking heads featured on CNBC discussing relations with China in any given week, there is only one - former CNBC star and current Chairman of the Council of Economic Advisers Larry Kudlow - that knows what he is talking about. The rest is just noise, and in a market full of noise, it pays to focus on individual fundamentals.
So, here are a few micro situations and my analysis:
General Electric (GE) : I saw nothing positive in CEO Larry Culp's presentation this morning. If the market is bidding up GE shares on Culp's positive "tone," I would advise potential GE owners to dial up a replay of former CEO Jeff Immelt's' prior analyst presentations. He was a beacon of positive feelings...and also possibly the worst CEO among S&P 500 companies in the past 20 years. Culp noted this morning that GE would produce negative free cash flow of as much as $2 billion this year, and that should offset any brightness in tone. Ace JP Morgan analyst Stephen Tusa was critical this morning of Culp's "myriad of promises," and he made his name on The Street by not buying the rationale behind what Immelt was acquiring, most of which - in the troubled Power division, anyway - still remains part of GE.
Snap (SNAP) : After this morning's move on upgrades from analysts at BTIG and Jefferies, Snap shares have nearly doubled this year. Yet, they still remain more than 30% below their March, 2017 IPO price. I don't believe Snapchat is a defensible platform - with as BTIG's analyst Rich Greenfield stated this morning while tripling his price target from $5 to $15 - "sticky users." I believe Snap has no moat, and will continue to see competitive pressure and flaccid user growth owing to completion from Facebook's (FB) Stories feature, and also Facebook's Instagram, which easily aped Snapchat's key features last year. I would sell into this rally and look to actively short SNAP into the end of the quarter.
Oil: Crude has quietly registered a strong rally this year as fears of a Chinese economic slowdown seem to be overblown, Saudi continues to limit shipments (the amount Saudi ships is a more important driver of oil prices than what they produce,) Venezuela spirals into chaos and U.S. inventories fell this week despite production registering an all-time high of 12.1 million units. The oil market is in balance right now, and thus I don't believe this rally - $60/barrel oil is now indicated by the October 2019 contract - is a sucker move. You should be adding to your positions in integrated majors such as Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A) (RDS.B) , and playing a continued bounce back in crude with more risky domestic independent names such as Diamondback (FANG) , Callon Petroleum (CPE) and Evolution Petroleum (EPM) .
Apple (AAPL) : This is the toughest call of them all. It seems that Apple's recent stock price jump has been driven- as SNAP's has - almost entirely by renewed enthusiasm among sell-side analysts. I was one for 11 years, and I know how fickle that affection can be. I think AAPL shares are ahead of themselves here at $183, and I certainly wouldn't buy more at these prices. If you are long-term holder, though, I wouldn't sell and lose that stream of dividends and the tailwind caused by share repurchases.
One of my favorite phrases is 'cash flow never lies.' Apple - even in an environment of shrinking iPhone sales - certainly has it and so does Exxon Mobil. GE still doesn't, as its CEO reported this morning, and Snap never has. It's a simple method, but if that's how you separate suckers from winners, I like the way you invest.