Stock Market Commentary
In last week’s decision on monetary policy, Federal Reserve Chair Jerome Powell directly and fully acknowledged inflationary pressures in the economy. Perhaps lost in the inflation buzz was Powell’s quick commentary on financial stability during the Q&A session: “…asset valuations are somewhat elevated, I would say.” Of course, various folks in the Federal Reserve have talked about potential or likely exuberance in financial markets since at least March. However, markets can blithely ignore such jawboning when the Fed runs extremely loose monetary policy. Such assessments matter more when the Fed embarks upon a tightening policy like now. Suddenly, investors need to care a little more about valuations and the premiums paid for taking on risk.
This adjustment period could present markets with higher volatility than usual. Accordingly, the market may look more manic than usual. The charts below show snapshots from a manic market that first celebrated then wrung its hands after the Fed’s decision.
“…we have very high inflation and we’ve had it since the labor market was in terrible shape. It had nothing — So this — So far, this inflation has really nothing to do with tightness in the labor market. It does have to do with strong demand and strong demand was supported by the Fed, it was supported by Congress.”
Jerome Powell, Chair of the U.S. Federal Reserve, December 15, 2021, Q&A during press conference
Stock Chart Reviews – Below the 50-day moving average (DMA)
DoorDash (DASH)
The selling pressure continued on DoorDash (DASH). In just a month’s time, DASH lost 39.5% from its all-time high. The plunge confirmed 200-day moving average (DMA) resistance (the blue line below) and maintains DASH’s status as a fade on rallies. DASH is one of the great snapshots from a manic market: the stock travelled from post-earnings exuberance to Fed tightening blues in a flash.
Tesla (TSLA)
It is hard to believe that Tesla (TSLA) was in a bearish position for much of the first half of this year. TSLA spent much of its time between February and July trading under its 50DMA (the red line below). So I sat up and took notice last week after TSLA confirmed a 50DMA breakdown. The confirming 5.1% loss was even a bearish engulfing pattern. At its low on Friday, TSLA essentially finished reversing the important gap up on October 25th. If TSLA makes a close below Friday’s intraday low, an eventual test of 200DMA support comes into play.
Zoom Video Communications, Inc (ZM)
Zoom Video Communications, Inc (ZM) is another of the great snapshots from a manic market. Out of nowhere, ZM soared 9.5% on Friday. Given the preceding double-bottom ending with bottoming-type hammer candlestick patterns, ZM looks like it is making its strongest stand for a bottom since the bullish engulfing pattern in May. The path to this latest test has been fraught with manic trading and false bottoms. I am a buyer on a higher close with a first profit target at overhead 50DMA resistance.
Opendoor Technologies Inc (OPEN)
I referred to Opendoor Technologies Inc (OPEN) in my October housing market review. At the time, OPEN looked like a beneficiary of Zillow Group’s (ZG) gaffe with iBuying for homes. That optimism faded into earnings, revived for a day on a 15.6% post-earnings pop, and then completely disappeared with near non-stop selling since then. A 7.2% surge on Friday firmly placed OPEN among the snapshots from a manic market.The move looks like an attempt at a bottom. I am a buyer above the most immediate high around $15.75.
iShares Expanded Tech Software Sector ETF (IGV)
I continue to look for opportunities to fade iShares Expanded Tech Software Sector ETF (IGV) as a hedge on bullishness. A surge into 200DMA resistance looked like one of those opportunities. I purchased a single January $375/365 put spread. This position should fare well among snapshots from a manic market: I gave it a month to play out, and I greatly reduced the volatility premium.
United States Oil Fund (USO)
When I opened a pairs trade position in the United States Oil Fund (USO), I thought it would make a decisive move up or down. Instead, USO stalled after a two day spurt to the upside. On Friday, I extracted residual value from the call option. I left the January put spread intact. I might return to call options on a fresh test of 200DMA support.
Foot Locker, Inc (FL)
In the previous week I expressed reservations about following Karen Finerman of CNBC’s Fast Money into Foot Locker, Inc (FL). The stock wasted no time in validated my wariness. FL opened last week with a 5.1% loss and fresh lows. FL now looks ready to finish wiping out the rest of its 2021 gains. Needless to say, I will continue to stay on pause.
Dicks Sporting Goods Inc (DKS)
Recreational retailer Dicks Sporting Goods Inc (DKS) continues to weaken. Last week, DKS closed below its uptrending 200DMA support for the first time since the early days of the pandemic in June, 2020. With a double-top confirmed, the run-up in DKS looks done for now. This is a chart with no easy entry points for buying.
SPDR S&P Retail ETF (XRT)
DKS has plenty of company among wavering retailers. The SPDR S&P Retail ETF (XRT) is at a critical juncture. XRT began December with the first significant close below its 200DMA since the early days of the pandemic in May, 2020. While XRT went into a major holding pattern for much of 2021, it represented the strength of a consumer bolstered by the one-two punch of accommodative monetary and fiscal policy. With a new variant of COVID-19 ushering in a new normal, XRT is feeling the friction of increasing headwinds. I bought a January 90/93 call spread as a play on a manic market favoring an eventual test of converged 20/50/200DMA resistance.
Airbnb, Inc (ABNB)
Airbnb, Inc (ABNB) is feeling the pressures of a manic market. Like DASH, ABNB quickly went from post-earnings exuberance to technical failures. ABNB suffered two 50DMA failures and two 200DMA failures. While ABNB printed a potential bottoming pattern on Friday, I am not a fresh buyer until a fresh 200DMA breakout. I have relatively low expectations for upside in ABNB given what looks like a double-top from the November peak and an expensive valuation of 21 price/sales.
Roku Inc (ROKU)
Roku Inc (ROKU) became a poster child among the snapshots from a manic market. On December 8th, ROKU soared 18.2% just on the news of an agreement with YouTube TV to keep the streaming service on Roku devices. Just as suddenly, sellers took ROKU down 8.2% the very next day. The reversal was a major red flag. Four trading days later, ROKU traded down to a 15-month intraday low and a loss as large as 14.1% after news that Universal Electronics (UEIC) won a patent infringement judgement. The results sounded serious. From the Universal Electronics press release:
“The ITC’s opinion made clear that Roku’s products infringe six different claims of UEI’s U.S. Patent No. 10,593,196 and rejected Roku’s plea to avoid the ITC ban. Referring to UEI’s evidence as “substantial,” “impressive” and “dispositive,” the Commission issued a limited exclusion order precluding Roku from importing any infringing “televisions, set top boxes, remote control devices, streaming devices and sound bars.””
I happened to have a put spread that suddenly surged in value on this news. I decided to hold, but analysts and quickly subverted my attempt to stay patient. While Morgan Stanley slashed its price target on ROKU from $295 to $190 right before the news, Oppenheimer rushed to the rescue after the news. Ironically, the defense had nothing to do with the patent ruling. ROKU gapped up the next day and gained 7.4%. An 8.0% surge on Friday looks like it put the sellers to bed. Still, this setup looked like a good situation for a January fade to hedge my otherwise bullish outlook on the market. I got a January 195/180 put spread to eliminate the volatility premium. Moreover, I doubt ROKU will slide much lower than $180 in the next month on any short-term negative scenarios.
Microsoft Corp (MSFT)
I often talk about waiting for confirmation of price direction before making a trade. Such discipline could be even more important among the snapshots from a manic market. After Microsoft (MSFT) joined an important market divergence with a 2.8% gain toward the all-time high, I put MSFT on the buy list. Sellers took over from there, and the buy signal never received confirmation. Suddenly, MSFT is trading below 50DMA support for the first time since the brief September/October swoon. I am not interested in shorting MSFT, but I no longer see a good entry point for a buy.
Stock Chart Reviews – Above the 50DMA
Apple Inc (AAPL)
Apple (AAPL) suddenly looks vulnerable again. After a bullish invalidation of two topping patterns, AAPL has stalled out. A 3.9% reversal on Thursday swung control back to the sellers. Still, especially with 20DMA support nearby, I triggered my Apple Trading Model (ATM) rules by buying weekly call options.
SPDR Select Sector Fund – Consumer Staples (XLP)
Some products consumers buy in good and bad times. Companies selling these “consumer staples” often have pricing power and can thrive in an inflationary environment. So perhaps it is no surprise that the SPDR Select Sector Fund – Consumer Staples (XLP) is having a banner month. After dropping 2.6% to end the month of November, XLP is up an impressive 7.0% month-to-date in December. The breakout to an all-time high received strong follow-through buying until Friday’s 1.7% pullback. I am looking for an entry point anywhere between here and $73.50 or so.
Martin Marietta Materials, Inc. (MLM)
I never should have sold Martin Marietta Materials, Inc (MLM), plain and simple. MLM benefits from economic growth, inflation, and government spending on infrastructure. MLM is well-positioned to be a core holding. I am looking to re-establish that core position on the next pullback.
Lennar (LEN)
The air quickly fizzled on the seasonal trade on home builders. The first warning came from Lennar (LEN) when, ahead of earnings, the stock lost 3.2% off its all-time high. LEN held firm with an 1.8% gain directly ahead of earnings as the stock market manically rallied in the wake of the Fed’s monetary policy decision. LEN went on to lose 4.1% post-earnings and lost another 2.4% on Friday. Suddenly, LEN is back to challenging 50DMA support. I am watching closely for a new entry point for the seasonal trade, but I suspect the selling will not slow until a test of 200DMA support.
iShares U.S. Home Construction ETF (ITB)
The iShares U.S. Home Construction ETF (ITB) is not yet testing its 50DMA, but it is feeling the weight applied to the home builders. ITB is my core holding for the seasonal trade, and I plan to hold it through whatever pressure is coming.
Roblox (RBLX)
The topping pattern in Roblox (RBLX) continues to unfold. RBLX spent the last three days manically pivoting around its 50DMA support after suffering a gap down and 9.0% loss. Despite an outrageous valuation of 40.4 price/sales, RBLX is worth a speculative buy to bet on a relief rally. The stop-loss would be a close below Thursday’s closing low. Such a move would confirm the 50DMA breakdown.
Pubmatic, Inc. (PUBM)
Pubmatic, Inc (PUBM) has a signature from the snapshots from a manic market. PUBM is pivoting around its 200DMA in sometimes wild swings. Last week’s tests of 50DMA support represent a critical juncture. The 50DMA separates PUBM from the prospect of a rebound and a complete reversal of its post-earnings gains.
II-VI Incorporated (IIVI)
Slowly but surely, engineered materials and optoelectronic components company II-VI Incorporated (IIVI) seems to be attracting fresh interest. Last week, IIVI broke out above its 200DMA resistance shortly after confirming support at its 50DMA. With a gain above the last two earnings events, I am looking to IIVI to continue a slow bottoming process.
Be careful out there!
Footnotes
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long IIVI, long AAPL calls, long IGV put spread, long ROKU put spread, long ITB, long XRT call spread, long USO put spread, long ABNB, long ZG
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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.
Grammar checked by Grammar Coach from Thesaurus.com