Today’s price action, SPX unchanged, Nasdaq down marginally but high valuation sectors like Solar (TAN -2.6%, SCTY -5%), Internet stocks (SOCL -1.5%, TWTR -4.5%, YELP -3%) and SaaS/CRM stocks (CRM -3%, NOW & WDAY -4%) acting noticeably weak is reminiscent of the dramatic declines we saw in April into early May.
While we have done our best to avoid trying to pick a top in the S&P500 we remain steadfast in our beleif that no matter where the SPX goes, investors have showed their hands, and despite the recent short covering rallies over the last few weeks in many of the sectors listed above, many of these stocks will not make new highs for a very long time and most are destined for lower lows in the near future.
All bounces are not created equal though and the violent rallies in NFLX, PCLN and Z has caused us on more than one occasion to question our thesis, but we prefer to consider these as outliers, special stories for reasons unknown to us. NFLX’s nearly 40% bounce off of the intra day low on April 28th was nothing short of extraordinary:
While Zillow making new all time highs this week is nothing short of preposterous (somebody knows something they shouldn’t here):
On the flip side there were plenty of high valuations stocks that have had much weaker bounces, showing very poor relative strength as the SPX made new all time highs this week and likely suggest will see lower lows in the coming weeks/months.
SCTY is one that sticks out to us, after having a peak to trough decline of nearly 50% from the March highs, the stock is now only 13% above the recent lows and just got rejected at both its 50 (purple) and 200 (yellow) day moving averages and now flirting with massive support at $50:
And then there is NOW, a stock that had almost a 40% peak to trough decline from the March highs nad is only up about 16% from the recent lows, bust also rejected at its 200 day moving average (yellow) and at key resistance at $55, a prior breakdown level:
There are plenty of examples of large cap stocks acting well, but to us this speaks to the continued rotation out of high valuation stocks, not speaking to why the SPX has to follow on the downside. As far as shorts, we will continue to avoid top picking in strength and be opportunistic on continued weakness.