MorningWord 2/10/14: Mind the Gap(s) $BA, $C, $TWTR

by Dan February 10, 2014 9:32 am • Commentary

After what felt like a one way freight train in 2013, U.S. equities for the first five and half weeks of 2014 seemingly got derailed.  Obviously that sounds a bit dramatic, as we were only down about 6% from the all time highs made in mid-January, but there was some serious damage done to prior market leaders. While much of this has been explained away as “stock specific” or the result of an overly “crowded trade”, it would be foolish to ignore the moves and be mindful of the strength of the bounce.

In some ways, BA was the poster-child for the 2013 U.S. equity rally.  Investors ignored any and all bad news and piled into “story stocks”.  BA’s trials with the Dreamliner in early 2013 were very well documented at the time, but since the financial press moved on in late Q1, the stock took off and gained nearly 60% in the final three quarters of the year.   Since making new all time highs on Jan 22, the stock had a peak to trough decline of almost 18%.  That is 18% in 10 trading days, before bouncing last week.

Looking at the 1 year chart below, the stock stopped right where most technicians might have guessed – at the $120 break-out level from October (green line), and right at my chartist Carter Worth of Oppenheimer’s sturdy and preferred 150 day move average (yellow line).

BA 1yr chart from Bloomberg
BA 1yr chart from Bloomberg

SO being mindful of the bounce, I would suggest that a re-tracement back to the 50- day moving average, also filling in the earnings gap, is probably as good as it gets, and the notion of new highs in the very near future may be extremely hard to achieve.  Near crashes from all time highs, on volume, is the sort of price action that should get antennas up on raging bulls!

Another widely held stock that had a very similar run in 2013 only to fall on hard times in 2014 has been Citibank (C).  For all of 2013 the stock made a series of higher lows and higher highs closing very near the highs of the year.  In January C made new multi-year highs, only to drop almost 16.5% in 16 trading days.  The one year chart below shows the stock’s quick bounce back to be significant short term technical resistance at $50 and quickly approaching the all important 150 day moving average.

C 1yr chart from Bloomberg
C 1yr chart from Bloomberg

The health of the broad market bounce will be measured by how these prior market leaders respond as they approach key short term resistance.

On another note, it appears that the volatility in more speculative stocks seems to be reaching a fever pitch.  Last week saw some fairly dramatic one day moves, Friday ICPT was up 17% and EXPE up 14%, on Thursday TWTR down 24% and GMCR up 26%, on Wednesday DDD was down 27% at one point eventually closing down only 15%, P down 10% and YELP up 19%, on Tuesday KORS up 17% and the prior week saw 22% one day gains in UA, 23% one day gain in ZNGA….I could go on, but you get the point.    This sort of price action is not normal people, and while the bulk of the large one day moves appeared to be gains from the list above, it tells me that investors are starving for out-performance at what could be the exact wrong time to be increasing their risk profile.

We want to be mindful of how the widely held stocks attempt to fill the gaps, but also an increase in the sort of volatility in momentum names would increasingly make us worried about the health if the bull market.