Every year about this time Wall Street expects a Santa Claus rally. This year we are running out of time as bulls are snorting but afraid to run. Headlines, rising rates and a runaway U.S. dollar caused a severe souring of sentiment. So rallies are short and traders are quick to book profits.
Case in point, this week the Federal Reserve is likely to raise rates and this is surely going to affect the stock markets. Traders will once again have their fingers on the sell buttons as they await their statement. Markets will once again dissect every word to decipher the Fed’s bias for next year. Meanwhile, the company-specific fundamentals are held hostage by the macro headlines.
While there is some evident softening, the economy is still running strong. This is still time to accumulate positions in what has become too cheap or momentum stocks that are likely to rebound fast.
Nio Inc (NYSE:NIO) is a momentum stock that has performed well in a tough market and even on tough days. Its fundamentals are weak from the traditional sense but its bullish thesis is hard to kill in the short term. It is riding a rising trend of autonomous e-vehicles.
Tesla (NASDAQ:TSLA) did the hard work to legitimize the electric car market much like Toyota (NYSE:TM) did for the Hybrids with their Prius. Now Nio can benefit by throwing itself into the market.
It has already attracted high-profile investors. Most recently it won over the potential investors that were supposed to be the bidders for the Tesla private controversial private takeover that Elon prematurely announced this year.
This is not a conservative investment. Buyers of the Nio stock do so on faith that management will prevail in the long run. Tesla did pave the way but Nio leaders will have their challenges. There are still many potential extrinsic potholes.
Growth will be facing financing hurdles. The central banks are starting to tighten the flow of money. So borrowing will become more difficult. The U.S. is already in the throws of raising rates. In addition, they are also further tightening money flow by selling off assets off their balance sheets. Central banks across the globe will soon have to follow. Just last week the ECB announced the ending of its bond-buying program.
So far, there are no critical liquidity issues and none are guaranteed to materialize but the risk is there.
In addition to the fundamental thesis behind the company, the Nio stock chart technicals offer potential looming upside in the next few weeks. The bad news is that Nio is about 40% below its high. It rocketed higher off its public offering but then came crashing down below $6 per share. Since then, the stock has been trying to break out but $8 per share has been a wall to tough for the bulls.
This time it could be different. Nio has been setting higher lows and in a tough tape. While markets, in general, are falling apart, it strung along several green days.
Click to Enlarge Eventually, the $8 wall will break and the bulls will overshoot $2 past it. The daily chart pattern is a bullish complex inverse head and shoulders. When those trigger, they target the depth of the inverse head. In this case, it spans from $8 to $5.80.
So even though investor sentiment is bad, risk appetite is alive and well. Scared markets do not buy stocks that are perceived as frothy then flock to safety trades.
Nio is not one of those where money hides. The fact that there are buyers of it on days when the S&P 500 falls 1% is proof to the thesis to buy it even here. While the immediate trigger for the upside in NIO is technical, the trade is for the long-term potential that lies in this stock.
Electric vehicles and especially autonomous ones like Nio builds are on their way to capture market share at an exponential rate. I was once skeptical but this trend is not likely to reverse. They are cool, fast, and perception is that they are better for the planet than internal combustion engines.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
