Bad Spot

Despite two positive weeks to end January, February started off with a flop. The SP500 declined 3% on the week and while we have preached caution it seemed some kind of relief could have been ahead. Of course its always possible we turn and rip from here, but the current posture puts us in a bad spot.

SP500 Weekly Line Chart

I like to look at line charts often. They take much of the noisy price movements out of the equation as they only reflect closing prices. As Charles Dow always suggested, closing prices matter the most.

When looking at the weekly closing prices of the SP500 we can see that the market ran right into resistance at the prior support level from the August and September lows. Last week's bounce came right into that level and this week rejected it for lower prices.

When looking around the market maybe we get a good shakeout next week and then see a bounce. Its just that so many groups are very extended to the downside. It should be stated though that markets generally crash from already oversold levels.

Weighing the market scenarios, we have to consider that while there could be a relief bounce to somewhere near the declining 20 WMA (2,0000), the chance that stocks completely fall out of bed from here is very possible as well. It appears many market participants have been expecting a rally and have positioned for it (considering the dip buying that occurred at the end of January). Last week's selloff has seemingly caught the "oversold" buyers by surprise. When these setups fail, they can fail spectacularly.

I always like to say that bad things tend to happen below a declining 20 WMA. Its not that they have to occur, but when they do it tends to come from already weakened conditions. These conditions exist right now. It doesn't mean we are doomed to collapse, but if we did it shouldn't catch anyone by surprise.

There was heavy selling in the high growth names this past week; the famous F-A-N-G stocks saw large downside moves. There were also some tremendous beatings done to some prior bull market darlings after they reported earnings. I want to take a look at some of these and see what damage was actually done.

Amazon (AMZN)

Amazon has declined more than $200 in 6-weeks. After the seemingly endless rally of 2015 it is now  working on a correction. I drew the Fibonacci protections of the previous rally and it appears we will test the 50% retracement and possibly down to the 61.8 Golden Ratio retracement. The Relative Strength trend also broke this week as AMZN declined 14.5%, well outpacing the general market. For now this stock is broken and we need to give it room to rebuild support and heal its trend. 


Google (GOOGL)

Google announced strong earnings this week but saw that announcement sold. The stock formed what is called a bearish engulfing bar and outside reversal pattern. This is where the stock makes a higher high and then closes below the entire range of the previous bar. Volume on the move was extremely high and I see this pulling back or consolidating more going forward.


Netflix (NFLX)

NFLX was a huge winner in 2015 but over the course of the last 9-weeks has declined -38%. I received exit signals in my Growth portfolios on 1/15 and the skid since has been relentless. This appears to be another broken stock that will need much repair before it finds itself on my radar again.

Facebook (FB)

FB is the one FANG stock holding up quite well. This week wasn't ideal but it remains above a rising 20 WMA and in a steady uptrend vs the SP500. Our stops are trailed to the 94.97 swing low and will remain holders above that level.

LinkedIn (LNKD)

Now we get into the fun stuff. LNKD has been a very volatile name since its IPO rally of 300% from 2011. The stock has traded between a range of $275 and $140 for the better part of 3-years. This week however blew any hopeful longs out of the water by declining -43% on Friday after reporting earnings on Thursday afternoon. Just to be clear, you don't see moves like this in healthy markets. While the market has been stressed for some time, the moves we saw this past week reek of massive liquidations and a bear market environment.  


Tableau Software (DATA)

DATA was another epic meltdown this week. They too reported earnings and received a -50% haircut as a result. Again, moves you don't see in healthy markets.

This stock is a great example of how following trends and price action protects your account from massive, life altering losses. DATA traded in a beautiful uptrend from the middle of 2014 through summer of last year. I owned this stock within that period but was stopped out rather violently on 7/31/15 when the market was not pleased with their earnings. This is generally how trends go, when they're done, they're done. There is little to be gained hanging around hoping for them to recover. Its best to step aside and reenter if/when it resumes a new uptrend.

Also you can see that except for the initial shock (7/31) all of this damaged has occurred with the stock trading below a declining 20 WMA. I hate to say it, but anyone holding this name into this last week had this coming. Maybe they didn't understand the degree of risk they were taking, but this comes from an inability to read the market and detach emotions from positions. There was just absolutely no reason to have been long this stock into this week's announcement.

Salesforce.com (CRM)

CRM is another example of a trend ending and the fallout that usually comes. Since its failed breakout and 20 WMA violation (Growth accounts took exits on 1/8) its gone on to decline another -20% from our exit and -30% off its all-time high back in November.

This week the stock dropped -14%. When its over, its over.

Linn Energy (LINE)

I wanted to show this example of Linn Energy. This stock is one I owned for much of 2012 when it was trading in the mid-$30's and $40's. I exited in December of 2012 as it began to break trend and weaken. At the time the company paid a dividend of 7.5%; there seemed to be little risk holding a position in LINE. The stock was stable, growing and paying a hefty yield just for owning shares.

However like all seemingly "sure" investments, conditions can change very quickly. Fast forward 4-years and the stock has lost more than 95% of its value and the dividend no longer exists. The first lesson here is that regardless of how something seemed in the past, the future is always uncertain. This is why acknowledging trend and risk management is out top priority. Only price pays, price has to be our primary focus. The other side of acknowledging trend and price is ignoring noise from financial media and especially from company executives. Here is the press release from Linn Energy's CEO following Friday's 58% decline:

"Efficient management of our stable asset base and aggressive cost management are driving meaningful value even in today's difficult commodity price environment," said Mark E. Ellis, Chairman, President and Chief Executive Officer. "However, given commodity pricing pressure and the impact that market challenges are expected to have on our industry and the long-term financial outlook of our Company, we believe it is prudent to explore opportunities to strengthen our balance sheet and ensure we have adequate financial flexibility to manage through prolonged commodity price headwinds. By proactively undertaking this process now with the help of our advisors, we believe we can implement a comprehensive solution that will position LINN for long-term success."

Ellis continued, "We have a very talented workforce, and I am proud of everything that this team has been able to accomplish. We currently have adequate resources to continue the efficient operations of our assets with the support of all our vendors, suppliers and partners while we work through these strategic alternatives."

This is just complete and absolute bullshit. Company executives never come out in a press release saying their stock is garbage and shareholders should run for the hills. NEVER take what you hear from a corporate executive as trustworthy or actionable information. Also note this comment is coming when the stock that just the day before was trading barely over $1. Yeah real "stable asset base" and "driving meaningful value". Classic. 

The second lesson is that even when a stock looks to be too cheap that it can't possibly go any lower, it can. I've heard many times recently how the price of a stock is so small that its a great value. I want to impress on you that "small" and "cheap" are not the same thing. Just because a stock is trading at $1 doesn't mean it can't go lower. As we saw with LINE above, a decline from $1 to $0.50 is exactly the same as a stock trading at $100 and falling to $50. There is no difference in the loss your account suffers in that event. Remember that all stocks that go to zero, and there are a lot of them, all traded at $1 before going bankrupt.


The bottom line this week is to remain very cautious. This market is acting in a way that most new investors have never seen. When the only stocks leading the market are Utilities, Cigarettes, and Consumer Goods companies, there is a problem. When high growth stocks, those that have been leaders of the entire bull market, begin taking massive losses and warning of forward guidance...There is a problem.

We are in a bad spot currently and much will have to be repaired to create viable trade candidates going forward.

Thanks for reading
-ZT