I know I sound like a broken record but I have to tell you that the bifurcated price action in U.S. equities leads me to only one conclusion – we are going much lower at some point this year. I can’t tell you that we are going to crash, or that we will enter a bear market but as long as I have been in the business I have never seen a period where so many stocks have erased this amount of prior gains in such a short period of time without broader market implications. There was a time earlier in the year where I was in the camp that a rotation out of high valuation stocks like 3D printing and social media stocks into more defensive tech or staples was healthy. At this point though, high valuations stocks have lost most, if not all of their mojo, and are being sold on the slightest of rallies no matter the news.
Just yesterday, there were four stocks on my quotron that were down about 20% following disappointing results (AOL -20%, FEYE – 23%, GRPN -20% & WFM – 19%). To state the obvious, that is some serious hate selling. While the tech weakness catches most of the headlines, the one stock that should cause those crowded in large-cap non tech to be concerned should be WFM. By no means was WFM considered a defensive stock, but it was a widely held stock was considered a sort of poster-child for the equity run of the last 5 years.
The five year chart below shows the stock’s 650% rally from the 2009 lows to the October 2013 highs. The stock has now given back 40% from the highs and just broke the uptrend that has been in place since the bottom. And on MASSIVE volume. Without some sort of take-over (which is very unlikely), the stock will probably take a very long time to get back above $50. The chart is broken, and as I’ve said before, it seems that IT’S OVER:
So while NFLX, TWTR & TSLA will continue to capture most of the daily headlines, I am focused on looking for trading opportunities on the short side of former market darlings like SBUX (we put a short biased trade on last week here), NKE, COST, HD, all of which failed to confirm new highs in the SPX last month, and many of which put in their all time highs months ago.
For those of you who have had high valuation stock exposure in your portfolios and have witnessed the pain first hand, I would say that the price action, while extraordinary, is not particularly unique to other periods in time that preceded market tops. Specifically, many high flying Nasdaq stocks topped well before the SPX in 2000 (read our bearish trade on the QQQ here), and many bank and home-builder stocks topped out in 2007, well before the SPX top in October of 2007.
There is a reason why major bull markets are rarely led by utilities, staples, and REITs. A 15-20% annual return is a very strong year for any of those sectors. If that’s the return of the best performing group, then the broader market index is going to have a tough time marching significantly higher. Fund managers are not buying those sectors because of exciting potential returns. Rather, they don’t want to sit on cash. And given the carnage elsewhere, for the first time in a while, they’re more concerned with return OF capital than return ON capital.