Stock Market Commentary
The stock market’s dip into oversold territory lasted a day. Subsequent trading has carved out a new divergence. Big cap stocks like Apple (AAPL) and Microsoft (MSFT) helped bullrush the S&P 500 into an all-time high while a wide swath of stocks were left behind. Accordingly, market breadth is languishing again. The following stocks charts are snapshots of the resulting post-oversold divergence. The lingering damage in the technical health of the stock market remains quite evident.
Stock Chart Reviews – Below the 50-day moving average (DMA)
DoorDash (DASH)
Recall that DoorDash (DASH) confirmed its topping pattern by slicing right through support at its 200-day moving average (DMA) (the blue line below). The ugly oversold bounce did not benefit DASH. However, given the near oversold conditions in the stock market, I claimed DASH was a short on fades. DASH ended last week with a fade from 200DMA resistance and looks poised for new lows for the month.
Stitch Fix, Inc (SFIX)
I am a fan of Stitch Fix, Inc (SFIX) because of CEO Elizabeth Spaulding. However, it seems that the stock, and perhaps the company, will not perform to lofty expectations. A slowdown in new user growth forced Stitch Fix to cut its revenue guidance. SFIX plunged 23.9% in reaction. The resulting 19-month low makes SFIX one more casualty of the collapse in formerly expensive, high-flying growth stocks. The growth has transitioned to what the CEO calls a “multiquarter transformation.”
Perhaps SFIX is priced properly for such a holding pattern. SFIX trades at 1x sales and 4.8 times book. Near the peak in January, aspirational investors bid SFIX up to 5.7 times sales and 23.7 times book. Shorts are 13% of SFIX’s float, but I would not short this stock down here. Instead, I am on watch for signs of stabilization and renewed buying interest.
Elastic NV (ESTC)
A 15.0% post-earnings loss plunged Elastic NV (ESTC) backward into the company of so many other premium priced software stocks. The loss came on the first day of the oversold bounce. ESTC took two more days to bottom out with a hammer type pattern. A 5.3% gap up confirmed that bottoming pattern. Follow-through buying the next day pulled me in with a covered call position; the Dec $125 call expires this coming Friday.
I picked this configuration to play two potential scenarios: 1) ESTC continues rallying and the position gets called away with a small but decent profit, or 2) the short call expires worthless, and I get into ESTC at cheaper price. Based on the 2-day pullback that closed the gap, scenario #2 is looking like the eventual winner. I am assuming the hammer bottom will hold. I will stop out if it does not hold.
Chipotle Mexican Grill, Inc (CMG)
Chipotle Mexican Grill, Inc (CMG) was in a precarious spot in the previous week with a confirmed 200DMA breakdown. CMG stabilized with the oversold bounce and proceeded to sprint above its 200DMA. With the rally stalled around the 20DMA (the dotted line below), CMG looks like a fade between current levels and 50DMA resistance (the red line below). A confirmed 50DMA breakout would return CMG to a bullish position.
iShares Expanded Tech Software Sector ETF (IGV)
With expensive, growth stocks falling out of favor, I am watching iShares Expanded Tech Software Sector ETF (IGV) more closely. IGV is full of expensive software stocks with high aspirations of getting even more expensive. However, thanks to the dominance of higher quality and proven holdings like Adobe (ADBE), Microsoft (MSFT), Salesforce.com (CRM), Oracle (ORCL), and Intuit (INTU), IGV is holding up better than the large selection of broken down growth software stocks. Indeed, quite unlike the lower quality cohort, IGV even hit an all-time high last month. Still, I like using IGV as a small hedge against bullishness in this period of post-oversold divergence. I re-entered a bearish position with a put on Friday.
Coupa Software Incorporated (COUP)
Speaking of broken down growth software stocks, Coupa Software Incorporated (COUP) closed the week at a 20-month low. COUP suffered a 2.9% post-earnings loss and even rebounded the following day. However, sellers picked up where they left off and punished the stock the last two days of the week. COUP now has little “natural” support above the April and then March lows from 2020.
As part of a hedge against bullishness, I opened a weekly $150/$155 calendar put spread. At the current pace of selling, I may take profits on the position in the coming week ahead of the expiration of the short side of the position. Like most calendar spreads I trade, my expectation was for COUP to churn in the first week of the trade before directional (downward) momentum resumed.
Meta Platforms, Inc (FB)
Meta Platforms, Inc (FB) rebounded from a 7-month low to rally right into 50DMA resistance. The rules are simple for trading this price action. FB is a short on a lower close because that move suggests resistance will hold. FB is a buy on a close above the 50DMA and the recent intraday highs because that move suggests continued upward momentum. Note that FB has consistently battled through critical technical challenges, so I expect only small windows of opportunity for the shorting scenario.
Anaplan, Inc (PLAN)
Anaplan, Inc (PLAN) is a cloud-based “connected planning” software company. This company is one of those software providers that is hard for me to understand without careful study. Here is how Anaplan describes itself:
“Anaplan (NYSE: PLAN) is a transformative way to see, plan, and run your business. As used by leading enterprises globally, only our Saas platform with proprietary Hyperblock™ technology lets you contextualize current performance in real-time, and forecast future outcomes for faster, confident decisions. We believe connecting strategy and plans to execution and results dynamically across your enterprise is required for leaders to move business forward. So you can be ready, as market conditions inevitably change, to rapidly pivot strategies, redeploy resources, and optimize plans for growth, efficiency, and demand. With Anaplan, you can equip your teams to overcome the obstacles and seize the opportunities you see right now and the ones you could never see coming.”
The solutions overview says: “Orchestrating business performance to convert change to your advantage. More than ever, success depends on integrating insights and agile scenario modeling with executable operational plans.”
I guess I need a demo to understand better.
In the meantime, PLAN’s chart is much clearer. PLAN struggled like so many other expensive software companies after peaking in February. A 10.3% post-earnings pop in September failed to generate follow-through interest. November earnings turned around and delivered a 15.1% plunge. PLAN is now struggling to hold support at a consolidation pattern from summer of 2020. The stock is severely under-performing the market with a 36.2% year-to-date loss and is still valued at 12.1 times sales and 25.6 times book. So while PLAN looks like it could be working on a tradeable bottom, it is exactly the wrong kind of stock for this post-oversold divergence where expensive software stocks are falling out of favor.
Etsy, Inc (ETSY)
In the previous week I identified Etsy, Inc (ETSY) as a potential fade from 50DMA resistance. ETSY followed a 4.7% pullback from resistance with a 3.9% loss. I took profits on the put spread. I am now watching to see whether ETSY falls into a test of 200DMA support for a potential bounce trade. Otherwise, ETSY is in limbo here.
Foot Locker, Inc (FL)
Karen Finerman on CNBC’s Fast Money keeps describing Foot Locker, Inc (FL) as a ridiculously cheap stock. Yet, every time I look at the chart, I sit on my hands. FL looks like it is working on reversing all its gains from 2021 after confirming a 50DMA breakdown and now closing at an 11-month low. Even if FL triggers a buy signal by breaking out from its recent consolidation, I see limited upside to converged resistance at its 20 and 50DMAs. Still, I have great respect for Finerman’s long-term investing acumen, so I am keeping an eye on FL for an opportunity.
FIGS, Inc (FIGS)
I recently became of a fan of the medical scrubs made by FIGS. The pants are comfortable, feature multiple pockets, and work very well as “work pants.” I am good wearing FIGS sitting in front of the computer and running about the town. When FIGS, Inc (FIGS) soared shortly after its IPO, I thought I missed my buying opportunity.
Well, FIGS quickly flared out and churned for 5 months. I made some fortuitous trades near the bottom of the trading range. However, after news broke on September 14th of a secondary offering for 8,826,703 shares, I became hands off. I already hate seeing companies returning to the till so soon after an IPO, but also this massive sale was from FIGS’s largest shareholder, a company called Tulco. I did not even bother triggering my rules for trading secondary offerings although FIGS nudged over the $40.25 secondary price. FIGS fell 7.6% and drifted downward from there. A mysterious 23% one-day pop ahead of earnings quickly erased the post-secondary losses but could not save FIGS from losing 12.5% post-earnings and resuming its drift downward.
I nibbled on stock in the post-earnings drift, but the big opportunity came on Friday. FIGS announced the retirement of its CFO Jeffrey Lawrence. Lawrence came out of retirement to help FIGS on its IPO. FIGS did not provide updates to its guidance, so the resulting 21.0% plunge makes no sense to me. I sold two Dec $25 puts into the selling. I assume the downward momentum puts a drop to the $22 IPO price into play. Also note that this extremely negative reaction makes the timing of the secondary offering…curious.
Zillow Group, Inc (ZG)
A bottom finally looks at hand for Zillow Group, Inc (ZG). Investors were encouraged by Zillow’s announcement of “…significant progress in winding down Zillow Offers inventory…” Likely more significant is the authorization of $750M for stock repurchases. Still, the 2-day fade to close the week places ZG in divergence from the oversold bounce.
Rio Tinto Plc (RIO)
Just as the Federal Reserve gets more serious about addressing inflationary pressures, the collapse in the price of iron ore may finally be ending. China did an about face last month and imported its highest volume of iron ore in 16 months. Rio Tinto Plc (RIO) responded with a 3.3% gain but failed to make further progress for the week. Accordingly, I am still waiting for follow-through (and a 50DMA breakout) to buy back into RIO.
Coinbase Global, Inc (COIN)
Coinbase Global, Inc (COIN) diverged from the oversold bounce with a 2-day slide to a new closing low for December. COIN’s $250 reference price for its direct listing continues to act like a magnet. Given the failure to challenge 50DMA resistance, COIN looks vulnerable to a test of and breakdown below its all-time lows. The $210 to $220 range is COIN’s support.
Intel Corporation (INTC)
I bought my between earnings call options in Intel Corporation (INTC) as a play on the market’s oversold conditions. I took small profits as INTC surged 3.5% toward 50DMA resistance. Overhead resistance concerned me more than wondering whether “something” was up.
Sure enough, some trader(s) must have received the drop on Intel’s announcement of a spin-off of its Mobileye unit. As a result, I missed out on a large gain as INTC gapped up 7.2%. However, sellers took over from there. Not only did they reverse all the gains on the news, but also they pushed INTC right back to its 20DMA. Both responses look extreme. I am looking for the next between the earnings entry.
Upstart Holdings, Inc (UPST)
Cloud-based lending platform company Upstart Holdings, Inc (UPST) broke out in August on a 26.2% post-earnings gain. The subsequent rally lasted two months before peaking. Sellers took over from there including an 18.2% post-earnings drop and 50DMA breakdown. Now, UPST is struggling against a 200DMA breakdown that positions the stock to fill the August post-earnings gap up. The post-oversold divergence is working against UPST.
American Outdoor Brands, Inc (AOUT)
Is the outdoor recreation trade coming to an end? Retailer American Outdoor Brands, Inc (AOUT) plunged 13.4% post-earnings and put an exclamation mark on its persistent 5-month downtrend. The downtrend started with a telling 22.0% post-earnings loss. On the positive side, American Outdoor Brands announced a $15M stock repurchase program through the end of 2023. The authorization is just 6% of the current market cap so the 2-year time horizon may not impact trading much at any given moment. However, the move is at least a symbolic gesture of confidence in the business. I will keep an eye on AOUT for an entry whether it is a completed reversal of the earnings gap up from a year ago or a close above the post-earnings intraday high.
Dicks Sporting Goods Inc (DKS)
Recreational retailer Dicks Sporting Goods Inc (DKS) is in a similar category with AOUT, so I am now watching the stock more closely for clues on the sector. I have been a fan of DKS ever since I thought it was thrown out with the bath water when Sports Authority went bankrupt almost 6 years ago. I have traded in and out of DKS and never imagined it could benefit so much from the pandemic. Now, DKS may have finally topped out per the chart below. After November earnings, sellers pressured DKS into a fresh reversal of the gains from August earnings. A bounce from 200DMA support holds promise, but the stock sits in limbo for now.
Roku Inc (ROKU)
Alphabet (GOOG) and Roku Inc (ROKU) pulled back from the brink of a breakup and signed a deal to keep YouTube TV on the Roku streaming device. I guess hand-wringing over this deal helped drive recent weakness in ROKU because excited traders and investors drove ROKU up 18.2%. However, post-oversold divergence took over from there. First, sellers reversed all the incremental gains and then reached into the gap with a 2.5% pullback on Friday. The trading in ROKU is a reminder that the current market is not likely to sustain upside extremes in the short-term for high valuation stocks, thus offering opportunities for fades.
Stock Chart Reviews – Above the 50DMA
Apple Inc (AAPL)
Apple (AAPL) is a beast. The stock invalidated two stark topping patterns on the way to a series of all-time highs. Friday’s 2.8% surge did not allow me to trigger the Apple Trading Model (ATM) at an attractive entry. Now, AAPL looks poised to keep running to $200 in due time. Money must be rotating into the relative “safety” of AAPL and away from riskier, high valuation stocks. The transfer of money from the many to the few is a key feature of the post-oversold divergence. Needless to say, AAPL remains a buy on dips from here.
Microsoft Corp (MSFT)
Microsoft (MSFT) is vying to join Apple in supporting the post-oversold divergence. MSFT was a sleeping giant until Friday’s 2.8% gain. The stock missed the all-time high by less than a point. I am a buyer on a breakout as I expect such a move to generate a fresh rally.
Lucid Group, Inc (LCID)
It was a rough week for Lucid Group, Inc (LCID). News of an SEC investigation into Lucid’s SPAC deal took the stock down as much as 19.4% before rebounding into a -5.1% close. This SEC action could be a standard review as the SEC scrutinizes more and more SPAC deals.
LCID looked ready to stabilize until the company announced a massive $1.75B convertible bond deal. The stock promptly dropped to a an 18.1% loss the next day along with a 50DMA breakdown. Buyers recovered support on Friday. At that point, I opened a covered call position with a $38 strike to trade around my remaining core LCID shares. This position will either get taken out this week for a small profit or I add to my position at a net $35.50 price. If I keep the shares, I will be looking for another opportunity to sell a call against them. Note that LCID sits on the losing side of the post-oversold divergence given its premium valuation.
Toll Brothers, Inc (TOL)
The seasonal trade on home builders is on schedule and on target so far this Fall. Toll Brothers (TOL) demonstrated the strength by recovering from a brief post-earnings pullback to close with a 0.6% gain. TOL went on to make three all-time highs in a row from there. With a hawkish Fed on the scene, I am a bit surprised at this persistent strength, but I am glad to see home builders joining the winning side of the post-oversold divergece.
Be careful out there!
Footnotes
Source for charts unless otherwise noted: TradingView.com
Grammar checked by Grammar Coach from Thesaurus.com
Full disclosure: long ESTC covered call, long IGV put, long FIGS shares and short puts, long ZG shares and short call and long/short puts, long ROKU put spread, long LCID shares and long a covered call position, long COUP calendar put spread
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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.