Stock Chart Reviews – Rubbernecking the Market’s Crashes and Accidents

Stock Market Commentary

I earlier wrote about a promising divergence between anxiety and breadth in the stock market. However, I cannot help rubbernecking the market’s crashes and accidents. They tell dramatic stories about the folly in price action that can come with easy monetary policy and free money. The market goes through cycles of excitement about the latest and greatest ideas, services, and products where valuation means little to nothing. The deflation is inevitable yet few dare predict it because the force of momentum is powerful. The doomsayers look more and more foolish as prices just keep rising. Yet, here we are. Entire swaths of growth stocks have crashed and returned all their pandemic era gains. The lessons of old still reign supreme. The next lesson is to remember that market sentiment goes to extremes on the upside and downside. So now is the time to contemplate what gold nuggets are trying to shine through the rubble of these crashes and accidents.

Stock Chart Reviews – Below the 50-day moving average (DMA)

Apple Inc (AAPL)

A week ago I was “Apple Wary.” Apple (AAPL) provided brief relief with a two-day rebound back to resistance at its 50-day moving average (DMA). My wariness quickly returned as AAPL confirmed resistance with two lower closes. AAPL even finished the week with its lowest close of the month. A good amount of market sentiment hangs in the balance of what AAPL does next.

Meta Platforms, Inc (FB)

Sellers remain relentless in Meta Platforms, Inc (FB). With the stock trading well below its pre-pandemic high and with no sign of stabilization, the lows from the stock market crash are actually in play. Such an event would be a fresh calamity, so I still consider it an extreme of extremes. In the meantime, I expect the pre-pandemic high to act as stiff resistance to relief rallies.

New Relic, Inc (NEWR)

Dev ops software company New Relic, Inc (NEWR) is a different case of a stock that crashed into and then below its pre-pandemic high. NEWR never quite broke away from that threshold until a near-parabolic run into its November earnings report. Buyers were rewarded with a 38.5% post-earnings gain. Yet, as in so many similar cases, NEWR gave an early warning by failing to close at a fresh high. Now NEWR is right back in the middle of the churn that has defined most of the pandemic-era trading in the stock.

Twilio Inc (TWLO)

The selling continues in Twilio Inc (TWLO). Incredibly, even TWLO is now on the edge of a full reversal of its pandemic era gains. At 12x sales TWLO is getting more “fairly” valued. However, operating losses are growing faster than revenue: from 2020 to 2021, Twilio’s operating losses ballooned by 107% versus 61% revenue growth. This negative dynamic needs to show signs of reversing before I go from rubbernecking to buying this accident of fortunes. A greater discount in the valuation can also make up for the poor operating numbers.

Shopify, Inc (SHOP)

I consider Shopify, Inc (SHOP) to be one of the grand darlings of the pandemic era. E-commerce naturally soared and more and more people looked to running their own businesses as an alternative or supplement to a pandemic burdened economy. However, even SHOP is on the verge of testing its price from its pre-pandemic high. SHOP is still a pricey 25x sales even though it is growing operating income. I am content to keep rubbernecking on this one.

1. Shopify stock is down 50% over the past 12 months. Its mission may be to "arm the rebels," but it is giving us muskets in a war that is increasingly being fought with machine guns.

👇👇👇

— Moiz Ali (@moizali) February 16, 2022

Warner Music Group Corp (WMG)

After a secondary offering, Warner Music Group Corp (WMG) delivered a disappointing earnings report in November. WMG has not been the same since that 6.2% post-earnings loss. My rules on trading around secondary offerings saved me from getting caught. WMG had a poor response to its February earnings report (down 6.9%), so I have cooled my heels on looking for a new entry point to buy shares. I do not know yet at what point I will stop rubbernecking on WMG.

DoorDash (DASH)

DoorDash (DASH) punched its ticket along with other high profile stocks that first surged post-earnings and then crashed. DASH gained 26% after hours following earnings. DASH opened the next day with a 22% gain but a strong fade took DASH down to an 11% post-earnings gain. Sellers on Friday wiped out the rest of those gains. If TWLO is an example of what happens after such a vicious post-earnings fade, sellers will take DASH to new all-time lows in the coming week. DASH can return to a bottoming pattern by closing above its post-earnings intraday high. A confirmed 50DMA breakout would be even better.

Fastly, Inc (FSLY)

Edge cloud platform company Fastly, Inc (FSLY) not only sliced through its pre-pandemic high, but also the stock is nearing its $16 IPO price. At the time of the IPO, May 17, 2019, FSLY closed the day at $23.99. I had my eye on the stock and the company, but I was unwilling to pay up. From there, I traded in and out of FSLY but failed to enjoy the full run-up to the stratospheric all-time of $128.83. I have been rubbernecking ever since. After the most recent post-earnings disaster, this time a 33.6% loss, FSLY seems fairly priced at 9.5 times sales. As with so many of these profitless, growth software companies, the looming question is when will the company figure out how to earn net profits. The word “profit” only appeared once in the transcript of the earnings call:

“I think the other thing is we’re seeing a lot more discipline from some of the competitors in this space. We’re seeing a renewed focus on ensuring that the business that they do is profitable. And that’s good for, I think, for everyone.”

Given the now year-long downtrend, I have a simple buying rule for FSLY: do not argue with sellers, celebrate with buyers.

Amplitude, Inc (AMPL)

It sounds strange, but the best IPOs are those that return to rational pricing as soon as possible: fewer individual investors get caught up in the misplaced hype. Product analytics software company Amplitude (AMPL) rolled out a direct listing in the final weeks of the market’s interest in expensive growth companies. AMPL soon soared 54.7% to its all-time high right before its first earnings report. A second earnings report later and reality has taken AMPL to a 75.6% collapse from that all-time high. The stock still trades at 31x sales, so the stock still has plenty of valuation compression to go in this market. With operating losses, negative cash flow, and a need to keep investing in the business, the juicy 70%+ gross margins may not be enough to keep current buyers interested. From the Seeking Alpa transcript of the earnings call:

“As a result, loss from operation in the fourth quarter was $5 million compared to a loss of $0.2 million last year. Operating margins at negative 10% compared to negative 1% in the same period as we accelerated growth, the investment for growth. Net loss was $5.4 million compared to $0.5 million in the fourth quarter of 2020. Net loss per share was $0.05 based on 107.9 million shares compared to $0.02 in the fourth quarter of 2020 based on 26 million shares.

Turning to free cash flow. Free cash flow was negative $12.2 million or negative 25% of revenue compared to negative $3.8 million or negative 13% of revenue. In the fourth quarter of 2020 and full year 2021, free cash flow was negative $34.9 million or negative 21% of revenue. Note that Q4 and full year 2021 free cash flow includes approximately $6.5 million and $18.2 million in direct listing expenses respectively. Adjusting for this, our free cash flow margin would have been negative 12% in Q4 and negative 10% for the year.”

Crocs, Inc (CROX)

A friend and I had a running joke about last year’s simple winning formula: pizza and Crocs (CROX). Pizza referred to Dominos Pizza (DPZ) which gained 47.2% in 2021. CROX enjoyed an eye-popping, year-to-date 188% gain at its all-time high before gravity took over. If only simple ideas were so obvious before hindsight. Both stocks are now coming back down to earth at a rapid clip. CROX sold off sharply to end the year and is down another 38% year-to-date on the heels of a poorly received earnings report. Suddenly, CROX is closing in on a full reversal of its hard-earned 2021 winnings.

Roku, Inc (ROKU)

I am now in the habit of checking ETF ownership of stocks that suffer big losses. I was quite surprised to see that ROKU is a main holding of two ARK funds: ARK Innovation ETF (ARKK) has a 6.3% allocation to ROKU and ARK Next Generation Internet ETF (ARKW) has a 5.8% allocation. These are the two highest allocations among ETFs. I am not sure what is so innovative about Roku relative to other streaming platforms, but I do know that consumer hardware products and companies have a very difficult time staying viable over the long-term. The market is brutally competitive market with margins often under attack.

On Friday, ROKU suffered a 22.3% post-earnings loss and swiftly left behind its pre-pandemic high in the rearview mirror. Here is what ARK had to say about ROKU’s punishment (from their email report):

“Shares of Roku traded down 22% Friday after the company reported fourth quarter earnings with lower than expected 33% revenue growth and guidance for further deceleration to 25% for the first quarter. Management cited supply chain bottlenecks and inventory shortages at its TV OEM partners that have impacted sales of smart TVs. Management noted that active accounts increased to more than 60 million, surpassing the number of video subscribers combined at all the cable companies in the US. Although US consumers spend 45% of their viewing hours on streaming TV today, advertising on streaming TV accounts for only 18% of total TV advertising budgets, a gap we expect to close. Roku is the leading TV operating system in the US and is beginning to scale internationally.”

Clearly, ROKU will remain a major allocation in the ARK funds for some time to come as they await the promise of the international expansion. ROKU is at least now below 10x sales.

Okta, Inc (OKTA)

Authentication and software company Okta, Inc (OKTA) closed the week at a 21-month low. That puts OKTA within a 14% loss of its pre-pandemic high. After its February, 2021 peak, OKTA actually looked like it was stabilizing going into the close of 2021. Unfortunately, with a high valuation of 23x sales and big operating losses, odds favor OKTA finishing its reversal of its pandemic era gains.

Moderna, Inc (MRNA)

Moderna, Inc (MRNA) helped bring us out of the pandemic with its vaccines, so the euphoria expressed in the shares was understandable. Now MRNA is 70.0% off those euphoric all-time highs. The crash in shares has taken MRNA back to April, 2021 levels. Given the extremes, MRNA is back on my radar. The valuation is even down to reasonable levels at 5.1 times sales and an 8.7 P/E. The question of course is whether Moderna can extend its success past COVID. That goal is exactly on the company’s docket. From a Friday press release:

“…expanding its mRNA pipeline with three new development programs. This announcement reflects the Company’s commitment to expanding its portfolio building on Moderna’s experience with Spikevax^®, its COVID-19 vaccine. The development programs announced today are mRNA vaccine candidates against herpes simplex virus (HSV), varicella-zoster virus (VSV) to reduce the rate of shingles and a new checkpoint cancer vaccine. HSV and VZV are latent viruses that remain in the body for life after infection and can lead to life-long medical conditions. Moderna now has five vaccine candidates against latent viruses in development, including against cytomegalovirus (CMV), Epstein-Barr virus (EBV), Human immunodeficiency virus (HIV), HSV and VZV.”

The lack of market response is telling of just how negative sentiment has gotten on MRNA. I am moving from rubbernecking to looking for an entry.

Zillow Group (ZG)

Real estate services company Zillow Group (ZG) crashed and burned in November. The moment was one of reckoning for a broken business model. The moment also flagged why we technicians care about trends. Since ZG’s peak with February, 2021 earnings, sellers told us everything we needed to know. I wish I left ZG at rubbernecking, but I thought the initial panic over iBuying was the extent of the reckoning. I bought in too early, but I dared to accumulate post-earnings. Fast forward to the latest earnings and Zillow Group (ZG) finally put in a good report. ZG gained 12.7% and has a confirmed 50DMA breakout. The stock may not have much more short-term upside from here given the headwinds in the housing market, but at least ZG looks like it is stabilizing.

Caterpillar, Inc (CAT)

Caterpillar, Inc (CAT) provided a brief bullish episode in January with a soaring 200DMA breakout. CAT looked set to provide a profitable place to “hide” from the crashes and accidents in tech. The respite was brief and a 5.2% post-earnings loss brought CAT right back to the bottom its recent trading range. There was a time when I would buy put options on CAT around here as a (partial) hedge against bullishness. However, such hedges have worked much better on the parts of the market going through persistent crashes and accidents.

ARK Innovation ETF (ARKK)

The ARK funds have occupied the epicenter of crashes and accidents since their collective peaks a year ago. As such, these funds have provided the right place for hedging. All but one ARK fund is closing in on a complete reversal of pandemic era gains. These funds are the ultimate symbol of what worked so well during the pandemic and what is now completely wrong. The ARK Innovation ETF (ARK) closed the week at a 20-month low. Another 6.7% loss will take ARKK right to the point of a complete reversal. At some point, ARK’s leader Cathie Wood will be right about these funds representing “deep value.” However, I see no need to fight the trend. Instead, my adage “do not argue with sellers and celebrate with buyers” holds quite well with ARK. ARKK may not even represent a buy until it manages a fresh 50DMA breakout.

iShares MSCI Brazil ETF (EWZ)

In September, the iShares MSCI Brazil ETF (EWZ) triggered my buying rule on a 20% correction. I added one more tranche as EWZ rebounded from a test of the November, 2020 lows. Last month, I pointed out how EWZ is benefiting from a rebound in the price of iron ore. With EWZ back to the price of my first tranche and a small stall under 200DMA resistance (the blue line below), I decided to take profits on the trade. A confirmed 200DMA breakout might pull me back in depending on the general market context.

Stock Chart Reviews – Above the 50DMA

SPDR S&P Metals & Mining ETF (XME)

I bought the SPDR S&P Metals & Mining ETF (XME) last month as a play off the bottom of the trading range. Subsequently, I was too quick to take profits at converged 50 and 200DMA resistance. My bullishness on commodities should have kept me in. Now, XME is in a bullish position with a breakout above the trading range. I am looking to get back in on a test of the previous all-time high as support. A drop back into the trading range would be an opportunity to stop out of such a position.

Grindrod Holdings, Inc (GRIN)

It is hard to find parabolic moves in this heavy market. International shipping company Grindrod Holdings, Inc (GRIN) provided some rare fireworks with a parabolic 19.4% post-earnings gains. The gap down and 10.3% pullback the very next day confirmed once again the dangers of parabolic price action. If GRIN stabilizes from here and creates a base, I might consider a (speculative) buy. GRIN is profitable and revenues have soared recently.

Be careful out there!

Footnotes

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long ARKK put calendar spread, long ZG

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