Bulls made an effort to show signs of life Monday, but that didn’t last long, says Jon Markman, editor of Strategic Advantage.
If sellers retain the upper hand, a round-trip to the June lows has to be considered in play.…In our biweekly focus on technology, learn why gaming retailer Gamestop may finally meet its maker.
Bears began Monday on the offensive. The S&P 500 (SPX) turned weaker as news of covid lockdowns in China spread across the globe. By the close, the benchmark S&P 500 was down 1.2% to 3,854.
The weakness means that bears finally recaptured the pivot point for the index at 3,865. It also puts the bulls back on defense.
I was skeptical last week because the rally seemed premature ahead of the second quarter financial reporting season. I understand that bulls have been encouraged by falling commodity prices and more stable bond yields. Many bulls are planning for the end of the bear market.
All of that is nice, except companies are likely to reduce their yearend forecasts later this week when the corporate report cards start rolling out. Mike Tyson used to say that “everyone has a plan until they get punched in the mouth”. I doubt bulls are going to stand in the way of a batch of weaker forecasts, yet I don’t really have to make that wager. And neither do you.
Be patient. Let the tape unfold.
The weakness Monday opens the door to support at 3,742. If bulls are unable to hold that level, the next important line in the sand is June low at 3,637. Overhead resistance is the declining 50-day moving at 3,966.
SA TradeView: The ProShares UltraShort S&P 500 (SDS) closed at $48.49 Monday, up 2.3%. The bears should be able to build on Monday’s momentum. A close for the SDS above $50.50 would go a long way.
Current: Long ProShares UltraShort S&P 500 (SDS) from $48.70. Target is $57.10; stop is $46.40 (after 11:00 am ET).
The Backstory: The Dow (DJI) declined 0.5% to 31,173.84 on Monday, and the Nasdaq (IXIC) sank 2.3% to 11,372.60. Communication Services (XLC), Consumer Discretionary (XLY), and Technology (XLK) led decliners, with only Utilities (XLU) and Real Estate (XLRE) the only two sectors in the green.
The US ten-year yield slumped 11.7 basis points to 3%. West Texas Intermediate futures dropped 1% to $103.71.
Equity market breadth favored decliners three-two and there were 299 new lows vs 23 new highs. The leaders were Cigna (CI), Vertex Pharmaceuticals (VRTX), Humana (HUM), FTI Consulting (FCN), and Murphy USA (MUSA).…Basically health care, consulting, and gasoline are in the lead.
Investors are bracing for a "US inflation report that could force another super-sized hike in interest rates, and the start of an earnings season in which profits will be under pressure," a research note from DA Davidson said Monday.
Big banks that are due to report their financials on Thursday are JPMorgan (JPM), Morgan Stanley (MS), and Charles Schwab Corp (SCHW), while Wells Fargo (WFC) and Citigroup (C) are expected to release their earnings reports on Friday.
Other mega-cap companies reporting this week are PepsiCo (PEP) on Tuesday and UnitedHealth Group (UNH) on Friday.
Following Friday's jobs report in which nonfarm payrolls beat expectations, a confluence of economic reports this week is likely to, at least, complicate optimism the economy is strong enough to withstand restrictive monetary policy, a research note from Stifel said Monday.
On Wednesday, the latest read on consumer prices is likely to solidify market expectations for a second-round 75 basis-point hike in July, Stifel Chief Economist Lindsey Piegza said in the note. Stifel said the consumer price index likely rose 1% in June and 8.8% over the past 12 months, which would mark a new four-decade high. Some analysts are expecting the inflation rate to clock in as high as 9% annualized.
In other company news, Wedbush cut its price target on Twitter (TWTR) to $30 from $43 after Elon Musk called off his acquisition of the social networking service. Shares of Twitter sank 11.4%, the worst performer on the S&P 500.
A long and ugly court battle likely lies ahead, potentially through year-end. Shares of Tesla (TSLA) dropped 6.6%, among the steepest decliners on the Nasdaq 100 and the S&P 500.
Wynn Resorts (WYNN) and Las Vegas Sands (LVS) were among S&P laggards after Macau authorities ordered a weeklong lockdown due to rising Covid-19 cases in the city. Shares of the two companies were down more than 6% each.
Why It’s Finally Game Over for Gamestop
Shares of Gamestop Corp. (GME) shot up 15% on Thursday after executives announced a four-for-one stock split. The next day the company fired its chief financial officer, a definite red flag.
For the first time in a year, it might be safe to bet against Gamestop.
I’ll start with the obvious. Short selling is hard work. Getting the fundamentals correct is not nearly enough to ensure trading success, especially when the bet is against the long-term trend for stocks. Understanding the larger trend is key.
Gamestop is a fundamentally flawed business. The company’s 4,573 stores sell new and used video games and merchandise across the United States, Canada, Europe, and Australia. Unfortunately, the video game world has moved on to digital distribution. Games are downloaded, or increasingly streamed directly from the cloud. There is almost no need for physical games, nor the infrastructure to distribute them. Gamestop is an analog business in a digital world.
Bears get it. And yet since 2019, they have mostly been destroyed.
The Dallas, Tex.-based retailer was the subject of an epic 2021 short squeeze. Shares zoomed up 1,500% during two weeks in January after so-called meme stock traders on Reddit coordinated to target professional short-sellers. CNBC reported that Melvin Capital, a hedge fund, lost billions.
Losing is commonplace for bears, yet you would never know this from listening to the pundit class. Bears talk a good story, and their voices gain pertinence in the financial media when stock markets are falling. Their track records tell the real story, and it is not pretty.
Gordon Johnson is a noted Tesla (TLSA) bear. He has become a go-to source for the bearish viewpoint on the electric vehicle maker. Johnson reasoned during 2017 that Tesla was doomed and that it is only a matter of time before shares collapsed. Adjusted for a stock split, the stock was then trading at $56 per share. Today shares of the EV titan fetch $752.29.
Even Jim Chanos, the famed short-seller who predicted the collapse of Enron, has a spotty record. Chanos is a gifted analyst, with a keen eye for financial sleight of hand and lousy business models. The 65-year-old founder of Kynikos Associates predicted in 2021 that shares of DraftKings (DKNG) and DoorDash (DASH) were headed for imminent collapse because they couldn’t make profits in the best of times. Both of these calls turned out well for Kynikos. However, Institutional Investor reported Apr. 2021 that his fund lost 50% of its assets the previous year.
In fairness, stock prices are so much more than economics, and a strong gut feeling.
Shares can rise exponentially when investor sentiment is bullish. Crowd psychology encourages irrational exuberance, like screaming until your voice is hoarse at a sporting event, or buying into questionable investments because everyone else is doing it. The investment adage “when the wind blows strongly enough, even the turkeys fly” is legit.
Wall Street is an aiding abettor.
Analysts at RBC Capital Markets said in December that DoorDash shares were set to outperform the market, and were worth $260. The firm says today that investors should expect no more than $142 during the next 12 months. Getting there would be amazing. Doordash stock currently trades at only $74.96. Sure, lockdowns ended and the global pandemic subsided, but that was predictable in 2021, at least it should have been.
The real change is investor sentiment.
The tailwinds that lifted stocks have become headwinds. Investors say they are worried about inflation, corporate earnings, and the Federal Reserve. But mostly, they are just worried other investors will keep selling shares. Exuberance has been replaced with fearful inertia.
Gamestop is still in a really bad position. Firing the CFO when the business is underperforming usually means an impending crisis. The company has missed its forecast earnings estimates in each of the last four quarters. Net income reported in April tumbled 136.4% year-over-year, to a loss of $157.9 million.
At a current price of $128.54, the stock could easily fall to $80 or lower during the next 12 months.
