Morning Market Thoughts
Good morning. The futures are set to open lower this morning, with several of the tech stocks trading lower in pre-market trading. For example, Nvidia (NVDA) is down about two bucks from yesterday’s close. This is important. The FANG, “et al” stocks ($FB, $AMZN, $NFLX, $GOOGL, $NVDA, $MSFT, and $AAPL) that have been leading the way over the past year all sold off substantially over the last week or so. Not enough to break their multi-month/year uptrends…but enough to either break through, or test, their 50-day moving averages. Many institutions tend to buy stocks that they like right around the 50-day moving average.It’s not an absolute rule…but it is a useful reference for relative strength. For example, look at the daily charts of Facebook and Nvidia. Facebook has been trending along the 50-day moving average all year. Nvidia has been doing the same since breaking out of a trading range in May. They’ve both now broken through those key levels on heavy volume. Stocks under institutional accumulation don’t do this. Instead, they fall on heavier volume, and then rebound on lighter volume as the selling backs off and retail traders come in to take advantage of the dip.
Yesterday, many tech stocks rebounded after steep pullbacks. Look at $PYPL. After a 13% pullback over 5 days of trading, the stock held at the 50-day moving average and rebounded a bit yesterday…only a bit (23 cents). This morning it’s trading lower.
These are the types of signs that you’ve got to pay attention to. The “buy the dip” strategy has been a winner for quite a while. At some point, that won’t work anymore. And the steeper the drop, the weaker the pop. Why? Because institutions are no longer snapping up these stocks on any weakness. They’re selling — if they weren’t, we wouldn’t see steep declines on high volume. Volume reveals institutional activity. An absence of volume reflects an absence of institutional activity, and high volume is a consequence of a lot of institutional activity.
It can take quite a while for uptrending leaders to actually reverse course. The only difference between consolidation leading to higher prices and a top is what comes after the existing uptrend takes a breather. So I wouldn’t write these stocks off just yet, but I do think it’s important to recognize what’s happening now. I doubt we’ll see much follow through from yesterday’s oversold bounces. I’m sure avoiding them…because institutions are liquidating. There is no need for further analysis.
Also, don’t buy the argument that these stocks are still cheap. “Business is great! These businesses are not in decline…they’re picking up steam.” Look, fundamentals don’t predict price movements. Price movements anticipate fundamentals. If it were otherwise, value investors would be great traders. They’re not. High flying stocks always turn down when the future is so bright that you’ve got to wear welding goggles over your dark sunglasses. When things can’t get any better, institutions are selling…and looking for the next growth story.
Here’s an example: Over the past 4 quarters, Nvidia’s EPS growth has been really solid…but the growth has actually been decelerating. Compared to the same quarter in the prior year, the last 4 quarters of EPS growth were 183%, 126%, 124%, and 60%. Now, 60% growth during the quarter ending Oct. 31, 2017 over the same quarter last year is outstanding! But not when you compare it to the 183% EPS growth in the quarter ended January 31, 2017.
So beware of the same old story. The higher stocks go, the greater the tendency to become fans rather than prudent traders. Look for new ideas. Be creative. Be disciplined. Let institutions sell their merchandise to someone else who isn’t as smart as you are.
Do that, and you’ll make more money. You may not be “early”…but you definitely won’t be “late.”
–Dan
Market Update