Behind The Street - Issue #10
January 10, 2022
January 10, 2022
Behind The Street Newsletter
In this weeks Behind The Street Newsletter I want to run through a list of stocks and get technical. Technical analysis is an important part to trading the financial markets, however fundamentals trumps all. I use technical analysis when trying to understand and identify the main trend of the market or a specific stock.
Technical analysis can be used as a guard rail to keep you in an uptrend and help you get out at the start of a major trend change in the market. The S&P 500 is currently trading at 4,600, NASDAQ 14,585, and Dow Jones Industrial Average comes in at 35,770.
Markets are currently under pressure as fears of higher interest rates and faster tapering from the Federal Reserve weigh on investor confidence. High beta growth stocks continue to sell off as markets price in a higher interest rate environment, multiple compression is well underway.
Will the selling bleed over into the major indexes? Let’s find out.
I use the 50 – week moving average as a guard rail to keep me in a major uptrend and to exit positions should a stock break below the 50 – week moving average on higher-than-normal volume.
A free tool that I would recommend everyone utilize is tradingview.com. You can create an account for free and track a portfolio of stocks, bonds, and commodities in real time.
You can also set up various technical indicators such as the ones we will talk about in this newsletter.
Look at Block (formerly Square) $SQ, the chart pictured below shows a weekly time frame of $SQ with a 50 – week moving average line snaking throughout the chart.
You will notice that the 50 – week does a good job at helping us identify the major trend in this stock. In general, when price breaks above the 50 – week the stock tends to begin a new uptrend and when price action under cuts the 50 – week, the stock enters a new down trend.
If you notice the week of November 1, 2021, $SQ closed below its 50 – week moving average on higher-than-normal volume. A sign that institutional investors are distributing shares. The weeks that follow shows the beginning of a massive downtrend in $SQ.
This is just one example, but it’s not all about technicals. It’s important to have a firm understanding of the fundamentals of the company, and the macro picture on the U.S. and global economy.
Ask yourself? What is the Fed doing? Are they signaling interest rate hikes? Are they signaling an unwind of the balance sheet? We need to be able to put all the pieces together in order to make a sound investment decision.
Also be aware of valuation. Is your particular stock richly valued? Has its multiple expanded since the start of the bull run? What stage base has the stock broken out of?
Stage 1, 2, 3? Data shows that more often than not, stage 4 and 5 bases have a higher probability of failure. This is usually when the bull market is getting extended. It is also important to note that these price signals will not work all the time, they are but a guard rail to help you stay on the right side of the trend and identify that new bull market.
EXAMPLES
Another good example shows up in $PTON. A stock that just a year ago no one could stop talking about.
Just a side note, whenever there is a particular stock that everyone seems to be talking about, you should usually stay away, just as fast as they go up, they always come down.
$PTON undercut its 50 – week moving average on heavy volume the week on May 3, 2021 and has been in a mega bear down trend ever since.
$PTON is down 80% from its all-time record high made on January 12, 2021. Paying attention to key price signals and watching volume is extremely important and can save you from life changing losses if you are in the business of actively managing a portfolio of stocks.
Listening to the trend will help you live to trade another day. I avoided $PTON because I have a very strict rule that I will not buy stocks who don’t have earnings.
$PTON went on its meteoric rise all while not generating a single profit. Look at the earnings box pictured below for $PTON. Earnings matter! Nine times out of ten, if the company has no earnings, it’s best to stay away until they start generating profits.
EARNINGS
Do you notice something interesting about the current stock market sell off? The names that are down 50%+ are the names with no earnings or very few earnings.
We are seeing a flight to quality now that the market has started to price in interest rate hikes. $GOOGL, $MSFT, and $AAPL are all coming under pressure, but not to the degree of smaller cap companies with very little to no earnings.
I am not saying don’t take risk in stocks that are not yet profitable, but if you choose to buy stocks without earnings, just know that you will have to deal with and manage higher than normal volatility.
If you do not want the hassle of actively managing your portfolio, you should look to only invest money that you do not need to use for the next five years, and invest it into an index fund. Peter Lynch, former Mutual Fund manager at Fidelity Magellan recommends to never invest money that you may need to spend in the next five years. This will help you avoid the need to sell your positions because you need to pay the bills or send your children to school and so on.
Last example I want to look at is $GOOGL and direct our attention toward the earnings block. In 2014 $GOOGL earned $19.82 in full year EPS. In 2020 they earned $52.88 and in 2022 they are slated to earn $113.92. It is no wonder why institutional investors have piled into this name over the years. Institutional investors look for two things.
1) Consistent Earnings Growth
2) Liquidity
And $GOOGL is both extremely liquid and has consistent earnings growth. Large institutions are moving billions of dollars around and they need the liquidity to enter and exit positions with ease. Another example of a liquid leader is $NVDA. More on that later.
Shifting over to the technicals we see $GOOGL holding strong above its 50 – week moving average and has held steady with few exceptions for years, the long term trend still remains up. Please see chart at the bottom for a weekly chart of $GOOGL.
Usually, the stocks that have held up strong during market sells offs will be the leaders during the new bull cycle. This is called relative strength, it’s important to run RS screens during market sell offs to identify stocks that institutions are holding onto and even adding to their positions.
Earnings Season Kick Off:
It’s that time of year again, earnings season kicks off this week with the major Investment Banks and Financials reporting Q4 earnings. JPMorgan Chase & Co, Citigroup Inc, and Wells Fargo & Co. report earnings on Friday.
Pay close attention to credit card/debit card spending data from the large issuers to get an idea of the strength of the U.S. consumer. Should spending come in strong we can forecast that earnings at major retailers will come in strong and perhaps even beat expectations.
In last week’s issue of Behind The Street we took a deep dive into S&P 500 earnings and profit margin expectations. We should know what to expect and if things are on the right track once we have the financial sector reports disclosed by week end. Generally speaking, a high interest rate environment is positive for the financial sector.
VIX Update:
Explosion and hard fade, that is probably the best way to describe the price action in the VIX today. On the open we saw the VIX jump as high as $23.31 but reverse hard and close at the dead low of the day at $19.41. As you know, it is historically wise to short volatility when we have these major spikes in the VIX.
It seems smart money was short VIX today by buying growth stocks from morning all the way into the close. Now I am not saying we are out of the woods yet, but today institutional investors we absolutely nibbling in a select few names. You can look at the VIX here: VIX Index (cboe.com)
Notable Price Action:
Monday gap down rally day. On the open, stocks across the board gapped down big but many names rallied hard into the close. $TEAM (Atlassian) was at one point trading down to $284.69, reversed course and went gangbusters into the close on thunder volume to end the day at $312.98. Nearly a 30 point move off the lows for a 9.96% rally for the day. $TEAM closed up 3.05% to end the trading day.
Now that we are talking technicals, Atlassian is also forming something call bullish RSI divergence, where price is making a lower low but the RSI is making a higher high. This is a sign of accumulation. Please see chart attached. We saw similar price action across the board: $NOW, $ZI, $NET, $GOOGL, $DDOG, $CRWD, $ZS, and $MSFT just to name a few.
Take a look for yourself and pay close attention to today’s price action followed by the volume bars at the bottom, strong price reversals on massive volume is a signal that large operators were buying stock.
Inflation Data:
The Bureau of Labor Statistics reports the consumer price index for December. Many are forecasting a year over year jump of 7.1% after a 6.8% print last month. Inflation continues to be a major issues for consumers and businesses. In my business dealing with many OEMs and the like, they tell me that they cannot raise prices fast enough.
Many routers needed for SD-Wan have gone up significantly and prices are changing on customers by the month. In my view it is important to invest into companies with strong brands and pricing power during times of inflation. This is because companies with strong brands will be more likely to pass price increases onto consumers.
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
Distribution Days: (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: Uptrend Under Pressure
Leaders up in volume: $BPOP, CUBI 0.00%↑
Leaders down in volume: DHI 0.00%↑ LEN 0.00%↑
Thank You