MorningWord 10/28/13: On a daily basis I scroll about 200 large cap one year charts of stocks that I trade. I use this scroll to get a quick sense for where stocks have been and possibly try to draw the smallest clues for where they may be going based on a whole host of technical inputs. As many readers know we do not rely on any one input to inform our trading. We consider our process a bit like making a mosaic, and at the very least technicals help inform our strikes when trading options.
Through this quick technical work I am seeing what appears to be increasingly troubling price action by a small group of cult stocks that are starting to look stretched no matter what input you want to use to evaluate the underlying stock/company. This morning’s edition of Stock Market Vertigo is brought to you by WFM. A stock that we tried to make a bearish bet on back in mid August when the stock was nearly 20% lower than current levels (here).
The five year chart of WFM is truly a work of art – it looks like AAPL leading up to Sept 2012, with 1700% gains off of the 2009 lows, yet AAPL only saw 780% gains from the 2009 lows to its 2012 highs.
The breakout earlier this year above $50 (red line), and the ability for the stock to hold that level on a few tests suggests that the level will remain significant support for some time, especially when you consider the stock’s 200 day moving avg (yellow line) is also at that level. Here is the thing – the stock is now 28% above that momentum indicator, most of those gains coming in the last 2 months alone, and the 14 day RSI reading (circled) is hitting severely overbought territory.
That type of overbought condition has generally been a precursor to further long-term strength throughout this bull market, but once in a while, it can indicate buying capitulation as well. The 50% advance for WFM over the past 6 months has occurred without a major change in the company’s fundamentals (earnings and sales growth are actually decelerating year over year). WFM is now a $25 billion supermarket company valued at around 30x 2015 earnings. Perhaps the most expensive supermarket stock of the past 10 years. The stock reports earnings on November 6th after the close, and the stock’s reaction to the news, rather than the news itself, will likely be the best sign of the market’s appetite for more and more momentum stocks.