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Are Auto Stocks Running Out of Gas?


The major auto ETF is in an uptrend, but we have no way of knowing if that trend will continue.

Auto sales have been on a roll lately as vehicle demand has now swung back to pre-recession levels. On September 5, the Wall Street Journal summed up the industry's current situation quite well with its headline "US Car Sales Soar to Pre-Slump Level." The purchase of 1.5MM new vehicles in August solidified a month that was up an astounding 17% from a year ago as all the major carmakers saw double digit growth.

The Fed's beige book, released as a precursor to the Fed's Open Market Committee meetings, agreed that the auto industry is on solid ground as it found economic growth "remained modest to moderate, led by demand for cars and housing-related goods."

Meanwhile share prices of most of the car companies were up across the board in the first week of September, with Ford (NYSE:F) up over 5%, Toyota (NYSE:TM) up 4%, and General Motors (NYSE:GM) up over 6%. Newcomer on the block, Tesla (NASDAQ:TSLA), was the lone outlier, down for the week, but up 354% YTD as expectations for the company remain extremely elevated.

So should you buy these equities or the auto ETF, the First Trust Global Auto Index Fund (NASDAQ:CARZ)?

The Technicals Are Strong

The chart below of CARZ sure looks good. The ETF that tracks global auto stocks has been in an uptrend since 2012 and has also been outperforming the S&P 500 (INDEXSP:.INX) over the same time period. This relative strength means it has been a better investment than the S&P 500 over the last year.

That outperformance continues today, but it has started to wane somewhat as the bottom portion of the chart shows the relative strength has recently been tested. However, as long as its price action can maintain above these two trendlines, CARZ will remain in an uptrend. CARZ owns all the major carmakers (see table below) and the froth of this sector is perhaps no better reflected than Tesla now being a top 10 holding.

Wall Street's casino players have driven up Tesla's market value to $20 billion. That makes Tesla larger than Fiat-Chrysler (OTCMKTS:FIATY) and Peugeot-Citroen combined!

Looking at the holdings, all the major car company stocks have been rallying. But after such a strong run it is only natural for the trend to end at some point.

Watching the trendlines on the first chart above will warn of a trend that is ready to lag the S&P or even turn down. For now, though, the trend remains up, but for how long?
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