MorningWord 5/7/14: Still closer to the start of something than the end of something.

by Dan May 7, 2014 9:06 am • Commentary

WFM reported fiscal Q2 results after the close yesterday that disappointed investors. The stock is down about 15% in the pre-market, making fresh 2 year lows.  This is perhaps to be expected given the terrible price action in WFM over the past 6 months. Back in late February, we flagged WFM’s relative under-performance in a post titled WFM’s Triangle of Death, with the intent of highlighting the fairly well defined head and shoulders pattern that appeared to be very close to being resolved.  Our chart from Feb 26th:

The two year chart …… reinforces just how important the $50 support level is dating back to the  May 2013 breakout to new all time highs.  A break below would put that gap in jeopardy.

WFM 2yr chart from Bloomberg

Flash forward to last night’s close.  The stock ended below the $50 neckline prior to the all-important Q2 report that was sure to be a catalyst one way or the other:

WFM 2 year chart from Bloomberg
WFM 2 year chart from Bloomberg

Why am I bringing this up now? Certainly not to take a victory lap, as the trade that I conceived of in March was only a modest winner since I chose to close it after losing patience in waiting (here).  I bring it up now to remind readers that it’s not just social media, 3d printing, SaaS and biotech stocks that are already in or approaching bear market territory. Many once-loved growth stocks, considered to be “non-speculative” household names like WFM, NKE, SBUX, COST, CMG & WYNN, are all forming similar head and shoulder patterns.  Are they also about to exit the Triangle of Death??

While many fundamental investors scoff at technical and momentum indicators, we are firm believers that aggregating a whole host of different inputs is the best way to look and evaluate the ever changing risk/reward profile of an individual position.  In the case of WFM, we laid out the pro vs con of trading the stock into the print in a post on Monday Gluten’s Law of Gravity:


-The stock is severely oversold heading into the print, down 26.5% from the all time highs in October, and down 16.5% on the year.

-While the stock remains expensive to many of its peers, it is far cheaper than it was six months ago, investors seeking for growth at a reasonable price may start to dip their toe in the water


-The technical set up is a disaster, in a clear down trend making a series of lower highs and lower lows since the October highs, and recently breaking key long term support at $50 (charts below).

-Expectations for the second half of the year seem fairly rosy given the dramatic slowdown in earnings growth, and despite Q3 looking down substantially year over year, there is a fairly healthy re-acceleration of earnings and sales in the back half of the year.

Without strong conviction on a directional basis, it is hard to press an oversold stock into and event, so this was a non-trade.  BUT we think it is going to be increasingly important over the next few months to rely on multiple inputs, both qualitative and quantitative to continuing re-evaluate why you are holding what you are holding.  The corrections in the market seem to be slowly working their ways from overvalued sector to sector.

We feel we are still closer to the start of something than the end of something.