The ascent of the SPX over the last few years seemed so effortless that the 10% decline in the S&P 500 (SPX) from August 20th to August 25th may have been nothing more than complacent investors contemplating the end of one of the greatest bull markets in modern times. What must have really spooked people is realizing how crowded the swarm to exit door was. In other corrections over the last few years the first bout of selling came in stocks/sectors with concerns over mundane things like valuation and sentiment. This time around the panic was in some of the most loved, safe, and largest stocks in the SPX (AAPL, DIS, FB & GOOGL). If that action were to follow through that would represent the most dramatic and damaging change to the bull thesis.
The internals of the U.S. stock market had been weakening into this sell off. So it makes sense that the stocks that had been performing the best, powering the broad market performance, and therefore hiding a lot of bad performance elsewhere could no longer carry the load. But sentiment was white hot in these stocks and earnings estimates all incorporated the most rosy outlooks possible in what would need to continue to be a bifurcated global economy.
While the recent bounce off of last week’s panic lows was encouraging, it’s not necessarily safe to get back in the water. The trading opportunity (from the long side) in the stock’s listed above, may have already played out. If one or more of these stocks was on your shopping list, the bounce means it’s time to be patient again on entry.
Take DIS for example. The year to date chart below shows the escalator up from $89 in February to $122 in early August and then the elevator down to the recent panic low around $90. Unless you had your Good Til Cancel buy orders ready (read here) the entry opportunity was fleeting:
I don’t think last week’s panic and bounce was the correction. Traders looking for short entries to re-test last weeks lows may just have been gifted some of the best trades on the board. A 50% retracement of the DIS selling puts the stock back to $105/106 and provides an ideal entry back to $90 support. Few investors, no matter what they were looking at, fundamentals, technicals, sentiment found reason for concern until just a few weeks ago. But the stock overshot all off the above and it will take time to work off the excess.
The five year chart shows the very steady uptrend that had been in place since late 2011, the massive breakout in early 2015, and the stock’s subsequent parabolic move that took the chart too far above trend. The sharpness of the recent correction suggests that rallies should be sold until proven otherwise. A break below the uptrend and last week’s lows near $90 could put the 52 week low just below $80 back in play on further broad market weakness:
The main point here is that DIS is no longer in the hands of the true believers. The theme park performance, a hit like the Avengers, excitement about the upcoming Star Wars movie or ESPN’s premium demographics seemed to justify a massive premium to the market and peers. But that may no longer be the case. Because now it’s a market story and there are very few positive headlines that will change that until the global-macro concern fades.
We’ll be looking how to express these views with defined risk. Stay tuned.