In the span of just 48 hours, traders hit the exits as momentum waned in many of the high-beta stocks. Suddenly growth is now a concern to the market. Or was this all just a flush, weak hands unloading their shares which is then exacerbated by machines?
Netflix gave traders many warnings before correcting. First it failed to hold a major Fibonacci extension after it was momentarily breached. Essentially, there was a lack of follow-through. For two weeks, sellers continued to dump shares at the highs, exhibiting that supply outstripped demand (around the $455 level). And when buyers finally gave up, it turned ugly.
Even as Netflix continued to rally, momentum indicators like the RSI showed a negative divergence. While not a foolproof indicator, it should have flashed a small warning sign to any traders paying attention. Fast forward two months later and the RSI is now trading at levels last seen in May 2012 or what some might call “significantly oversold”. However, a low RSI reading does not imply that the sell-off is over. Price is king. If the stock continues to trend lower, a low RSI reading is irrelevant. Demand needs to return in order for price to stabilize.
The ‘flush’ began when prices breached the Fibonacci 150% extension, which coincidentally was also a major support level. But Netflix actually warned traders a day before the chaos began, when it failed to close above $425.50. As we saw at $455, sellers outpaced buyers, thus leading to lower prices. Now Netflix sits at a crucial level, in-between two Fibonacci levels and a massive 10% gap.
Investors in Icahn Enterprise (IEP) showed no mercy as one of Icahn’s positions (Netflix) tumbled more than 13% in two trading days. While prices outpaced the fundamentals at $150, Icahn Enterprise looks like compelling buy as it bounces off of its Fibonacci 61.8% retracement and $99.00 support level. But can the same argument be made about Netflix? While I believe Netflix has eye-popping future liabilities (which will ultimately have to be funded through more debt or share sales), the stock is clearly overreacting to Apple competition rumors. An Apple set-top box could be months, maybe a year down the road. Why price in a rumor when it lacks any concrete details?
If this sell-off was really about deteriorating fundamentals, you would think credit would start to tick back up. Instead CDS prices have barely budged, pointing to another reason … a shift in sentiment and money. Since the start of 2014, inflows into the technology sector have outpaced every other sector by a wide margin. Why? Because that’s where all the growth and momentum continues to be. The tech sector is expected to grow its revenue by 5.4% this year, versus a meager 3.3% for the overall S&P. If anyone is to blame for this sell-off, it’s the hot money. Despite what the pundits are preaching, this is likely just a short/medium-term shift in sentiment. Carry on!
Questions and/or comments?