Stock Market Commentary
The stock market is scraping by just above oversold territory. The churn of last week has created a mosaic different trading conditions. The bears are salivating at the all-time lows. The hopefuls like me are finding slivers of opportunity in the breakouts. The stock charts in this review cover some of everything. Earnings season promises to sift out more oversold pretenders from the contenders.
Stock Chart Reviews – Below the 50-day moving average (DMA)
Amazon.com (AMZN)
Amnazon.com (AMZN) was one of the most surprising charts I reviewed in the prior week. Buyers stepped into the downward gap to start last week’s trading and delivered a 1.3% gain. From there, AMZN joined the churn of last week. Accordingly, the churn zone setup applies to AMZN. Thus, earnings on February 3rd could become a major pivot point.
Shopify (SHOP)
If AMZN demonstrates how quickly online shopping has lost its pandemic-era glow, Shopify (SHOP) symbolizes how the market overpaid for the experience. Just two months ago, SHOP sat at all-time highs. Last week, at the closing low, SHOP was down 50% from those highs. Yet, SHOP’s valuation remains sky high at 26 times sales. Thus, I doubt SHOP has much short-term upside even in a bounce from oversold conditions. With a forward P/E of 166, SHOP investors will surely heavily scrutinize Shopify’s growth prospects during earnings on February 16th. SHOP is exactly the kind of expensive stock I want to avoid before observing a post-earnings reaction in this new “valuation matters” environment.
Caterpillar (CAT)
My hopes for industrial and construction equipment maker Caterpillar (CAT) were bulldozed once and for all after a 5.2% post-earnings loss. CAT went from a bullish 200DMA breakout, to a hopeful stand at 200DMA support, to a bearish 50DMA breakdown. I expect CAT to hold the 2021 lows, but I see little upside potential in the short-term.
lululemon athletica inc (LULU)
Lululemon athletica (LULU) provided earnings guidance on January 10th. The market sold the stock down immediately. Buyers provided a temporary respite by salvaging the day for a 1.9% loss. Sellers took over after LULU almost finished filling the gap down. In other words, investors are all too happy to get out of the stock for now. LULU provided sellers fresh reasons to leave with an SEC filing to dump 5.2M shares (valued at a whopping $1.6B at Friday’s close). Somehow, LULU held up by joining the general market’s churn. I am eager to see what kind of pricing LULU is able to generate.
DoorDash, Inc (DASH)
Delivery company DoorDash, Inc (DASH) made a dash for three all-time lows last week. Buyers finally stepped in on Friday for a spirited 7.9% rebound. The sharp reversal creates a well-defined speculative trade with a stop below the intraday low. However, I think such a trade is too risky until the market proves ready to start a bounce away from oversold conditions. Fortunately, at 7.6 times sales, DASH may be close to the end of its valuation compression. Now earnings need to reassure investors that people remain interested in this kind of delivery service as the pandemic alleviates.
Qualtrics International Inc (XM)
Earnings gave Qualtrics International Inc (XM) a 6.0% boost. Buyers even followed through going into the end of the week. XM is the kind of stock that looks good for a run to downtrending 50DMA resistance. However, with no profits on the books, XM’s valuation at 13 times sales qualifies it for more valuation compression at some point.
SPDR S&P Retail ETF (XRT)
The SPDR S&P Retail ETF (XRT) got my attention when it started the week with an impressive 6.0% surge. However, buyers had zero follow-through. Sellers took XRT right back to the week’s intraday low before buyers stepped in again. Similar to the churn zone setup, XRT needs to hold the intraday lows to avoid putting much deeper losses into play.
Microsoft Corp (MSFT)
Earnings from Microsoft Corp (MSFT) provided a glimmer of hope last week. MSFT fought through a fade to hold a 2.9% post-earnings gain. The buyers saved MSFT from a 200DMA breakdown. Buyers reversed the fade with Friday’s 2.8% gain. MSFT is big enough to provide some stabilization to the stock market with a churn between 50DMA resistance and 200DMA support.
Home Depot, Inc (HD)
Home Depot, Inc (HD) managed to pull off a successful test of 200DMA support. This key technical achievement provided one more ray of hope for the stock market in general.
The Sherwin-Williams Company (SHW)
While HD stood against the storm for housing-related plays, the Sherwin-Williams Company (SHW) failed its 200DMA test. Post-earnings selling sliced through that critical component of support. Buyers DID step in to defend support from the September intraday low. Further selling puts a complete reversal of the March breakout into play. From current prices, I do not consider SHW a buy until it confirms a 200DMA breakout.
Tesla, Inc (TSLA)
Earnings were a major test for Tesla, Inc (TSLA). The stock failed with an 11.6% post-earnings plunge. However, buyers stepped in on Friday to prevent a 200DMA breakdown. Since TSLA already traded below the former all-time high in January, 2021, the stock is at risk for a lot more selling if 200DMA support finally gives way. TSLA’s sky high valuation of 23 times sales and 100 times forward earnings puts the stock at risk of further valuation compression. A first downside target would be a complete reversal of 2021’s gains. TSLA closed 2020 at $705.67.
LendingClub Corporation (LC)
The deflation of fintech growth stocks took another victim with LendingClub Corporation losing 29.2% post-earnings. The plunge finished closing the July post-earnings gap up. I do not see a clear directional trade from here. Chasing a lower low is risky given it would further stretch LC below its lower Bollinger Band (BB). I see short-term upside limited to a test of the prior intraday low.
ARK Fintech Innovation ETF (ARKF)
The LendingClub Corporation (LC) is a small holding in the ARK Fintech Innovation ETF (ARKF). Yet LC might as well be symbolic of ARKF’s problems. Last week, ARKF effectively finished reversing ALL its pandemic era gains with two intraday approaches to this key line of support. A swing trade makes sense here with a stop below the pre-pandemic high. However, I chose to buy a March $26 put option as a refreshed small hedge against my otherwise short-term bullish bias. Read “Cathie Wood: A Doozy of A Correction” for more background on why I now like picking on the ARK funds as hedges in this moment.
Roblox (RBLX)
The all-time low blues hit Roblox (RBLX) last week. Its membership in the metaverse hype failed to slow down a steep slide from November’s all-time high. From there, RBLX lost 57% and counting. At 22 times sales and no current profits, RBLX could suffer even more valuation compression from here.
Spotify Technology (SPOT)
I have given up on Spotify Technology (SPOT). I was hopeful that SPOT would eventually rebound from negative analyst pressure in November. Instead, SPOT is close to wiping out the rest of its pandemic era gains. The stock trades at prices last seen in May, 2020. The latest weight on the stock is growing pressure on the company to remove Joe Rogan’s podcast. Neil Young participated in the flurry by threatening to remove his music from Spotify if the company fails to act. SPOT used to spike high on news of podcast additions. Now, SPOT has negative headline risk.
CEO Daniel Ek posted a piece indirectly addressing the controversy. The quote below demonstrates that Spotify is trapped in the classic content moderation problem that platforms suffer:
“We know we have a critical role to play in supporting creator expression while balancing it with the safety of our users. In that role, it is important to me that we don’t take on the position of being content censor while also making sure that there are rules in place and consequences for those who violate them.”
Looking back, I see a stock that essentially had two strong but brief spurts in 2020 to build the entirety of its overall gains.
NVIDIA Corporation (NVDA)
Support at the 200DMA called in NVIDIA Corporation (NVDA). The stock did well to hold support through the week’s churn. Count NVDA as a point of hope for semiconductors in particular and the market in general.
Semiconductors remain at the top of my shopping list for entry points. The Commerce Department just released the results of its Request for Information (RFI) on the persistent supply crunch in the semiconductor industry. The results are telling and provide an investment blueprint:
- “Median demand for chips highlighted by buyers was as much as 17% higher in 2021 than 2019, and buyers aren’t seeing commensurate increases in the supply they receive. This is a major supply and demand mismatch.
- The median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than 5 days in 2021…These inventories are even smaller in key industries…
- The primary bottleneck across the board appears to be wafer production capacity, which requires a longer-term solution.”
Waste Management, Inc (WM)
Waste Management, Inc (WM) came into this year just barely off its all-time highs. The sellers of 2022 did not spare WM. The stock is down 11% so far this year, including a 200DMA breakdown. I am watching the results of earnings just because WM is the kind of defensive stock that should maintain favor during this period of valuation compression for expensive growth stocks.
Stock Chart Reviews – Above the 50DMA
Apple Inc (AAPL)
One of the brightest point of light in the stock market is Apple (AAPL). AAPL went from struggling to hold support from its last breakout point to a post-earnings 50DMA breakout. Even with the 20DMA (the dotted line) in decline, AAPL’s display of strength can serve as a stabilizer for the S&P 500 and the NASDAQ. Of course, a swift reversal in AAPL could undermine what strength he market has left to stay out of an extended visit to oversold conditions.
Corning Incorporated (GLW)
I like high-tech glass company Corning Incorporated (GLW) even better than AAPL here. GLW earned an 11.2% post-earnings gain and finished the week at a 7-month high. The stock confirmed a 200DMA breakout. Accordingly, GLW is a buy on the dips from. The stock trades at a reasonable 17 times forward earnings and 2.3 times sales.
Kohls (KSS)
The acquisition hype over Kohls (KSS) demonstrates that even retail holds value in this market. Following confirmation of an offer for the company, news continued to roll out about additional offers and investor activism. I do not see a trade going forward, but the action is a reminder to avoid getting overly negative in established retail companies. The action in KSS immediately brought to mind the charts I posted on Macys Inc (M) and Dillard’s Inc (DDS).
Be careful out there!
Footnotes
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long CAT calls, long ARKF puts
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!
*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