Facebook’s Stock Is Testing a Key Support Level

As we wait for the stock market to open this morning, a lot of today’s focus will be on the testimony (from several people) in Washington DC.  The one that we’ll be focused (at least for the markets) will be the testimony of FaceBook COO Sheryl Sandberg.  She is a very smart and polished executive, so there is every reason to think that she will come across quite well in her testimony………This will be important…because the stock of FaceBook (FB) stands at a VERY important technical juncture.

We all know about the more than 20%+ decline FB saw back in July after they reported their earnings.  Yes, it did bounce 7% off those lows, but since it only retraced 1/3 of its decline, the bounce was not as impressive as some tried to portray.  More importantly, the stock has since rolled over…and yesterday’s poor action (after a downgrade by Moffett) took it down to its “reaction lows” from July…….In other words, the stock has seen a key “lower-high” (which was a MUCH lower-high)…and if this is followed by a key “lower-low” below those July lows, it’s going to be quite negative on a technical basis.  (Chart attached below.)

We’d also note that a break below the July lows will be particularly concerning because experience tells us that whenever a stock falls 20% or more over just 1-3 days, it usually involves some “forced selling” (margin calls, etc).  These kinds of severe declines over just a few days usually leads the stock to get “washed out”.  This, in turn, usually signals a bottom for the stock that lasts for a long time (6 months or more).

However, sometimes a stock will not see a multi-month bounce.  Sometimes it rolls back over and takes out those panic lows rather quickly.  When that happens, that tends to tell investors that another shoe is going to drop…and both momentum AND fundamental investors get very nervous.  This frequently leads them to throw in the towel and sell….and look for much lower levels to move back into the stock.

This is why we believe that the July lows ($170-$171) is a VERY important level for FB…and any “meaningful” break below those July lows (a small break will not be enough) could/should lead to another significant leg lower in the stock.  (2nd chart below.)

As always, we HAVE to wait to see if the stock breaks this level or not before we send a red warning flag up the flag pole!!!!  If FB can hold this important support level, the stock will be fine!!!…and Ms. Sandberg is the perfect person to defend the stock at this key juncture.  However, if FB breaks below that level (either now…or after any initial pop after her testimony), it will indeed raise a red flag in our minds.  Therefore, the action in FB over the next week or two is going to be very, very, very important.  (Click the link below to see our comments from a CNBC interview on this subject.)

https://www.cnbc.com/2018/09/05/facebooks-chart-looks-dicey-during-key-week-for-the-social-network.html?&qsearchterm=matt%20maley,%20facebook

Ignore the European Bank Stocks at Your Own Peril!

A lot has been made of how the U.S. stock market has been able to shake-off negative news in the market place in recent months…and “climb the wall of worry” to new all time highs.  However, not all markets around the globe have been strong…highlighted by the bear market in emerging markets (and China in particular).  That said, there is one other area that is also in bear market territory, but it is not getting the attention it deserves…and therefore, it could become the issue that finally catches the bulls off guard as we move into the frequently scary time for the markets (September & October).

As long as the list is on the above-mentioned negative news, the list on the bullish side of the ledger has become just as long.  U.S. economic growth remains strong, U.S. earnings are fabulous, consumer confidence is near all-time highs, key economically sensitive groups (like the transports and the retailers/consumer discretionary stocks) are making new highs, almost all of the major stock averages have hit new record highs, etc.

Therefore, the negative issues that people (including ourselves) have been harping on for months now are being more than offset by the positive ones…and thus there are a lot of reasons to think the rally will continue going forward.

As we stated above, however, there is one other issue that could cause some compelling problems in the not-too-distant future.  (It’s also a key reason why we believe that continuing to shift to a more defensive posture in one’s portfolio is a good idea right now…especially since so many defensive groups and stocks continue to act so well.)

Again, the issue we’re referring to is the action in the European banks.  We have been harping on this issue for a long time now, but we’re surprised how little attention it is getting around the Street.  The STOXX Europe 600 Banks Index is down over 20% from its January highs and has NOT BOUNCED AT ALL recently…even though most other global stock markets have been able to see some recent strength.  (Heck, even the EEM emerging markets ETF…which was also down 20% from its January highs recently…has seen a 6% bounce over the past two weeks!!!)

Even though the recent “holiday” seemed to take the problems Turkey is seeing off the table for many investors, the issues they’re facing are far from solved.  Similarly, Italy’s credit problems are also far from solved.  Even today’s news that they’re requesting help from the ECB has not helped Italy’s spreads to tighten up…or their 10yr yield to fall.  (We’d also note that the Italian bank stock index is down more than 28% from its April highs.)

It’s funny, a lot of pundits frequently point out (correctly) that it’s the issue that nobody sees coming that’s the one that finally knocks a bull market off its kilter.  However, sometimes it’s the issue that was staring everybody in the face…but was ignored…that does the damage.

Is AMD Too Over-Bought to Help the Semis Further?

The semiconductor stocks have been a key leader for the tech group and the broad market since the 2016 election, but it has been lagging a bit lately.  This is not a major concern yet because the group saw a short period under-performance during the spring-time…only to bounce-back strongly.  However, on a technical basis, the SOX semiconductor index has formed an “symmetrical triangle”, so whichever way it breaks out of this pattern should be important over the coming days and weeks.

One thing that could hurt the index is Advanced Micro Devices (AMD).  That might sound like a very strange assertion…given the fact that the stock has rallied so VERY strongly over the past 4-5 months.  It has rallied a whopping 168%…but it has now become very over-bought.  In fact, its weekly RSI chart has moved above 85…which is more extreme that it reached at the early 2000 highs!!!

That’s not to say that a reading above 85 is unheard of.  It reached a similar extreme in early 2006…but we cannot take much solace in that because that extreme reading in 2006 was followed by a major decline (of more than 50%).  In fact, almost every reading above 80 on the weekly RSI over the past 20 years has led to a substantial decline in AMD, so we think the stock has gotten way ahead of itself and should be due for a short-term pull-back.  (We’re certainly not calling for another 50% decline, but since the stock has already fallen 6% below its midday highs already today, it’s not too much of a stretch to think that a compelling pull-back will begin soon…if it hasn’t already begun.)

Moving back to the broader SOX semiconductor index, we do need to point out that the correlation between the SOX and AMD is not anywhere near as strong as the SOX has been with other semiconductor stocks over the years, so any pull-back in AMD does not insure that the SOX will not be able to break its symmetrical triangle pattern to the upside.  However, any decline in the this particular stocks might mean we’ll have to wait a little while before the semis can help engineer another leg higher for the broad tech group.

If the FAANGs Fall Further, the Broad Market Will Feel the Pain.

If the FAANG stocks (and other big cap momentum names) continue to decline, it will have a much bigger impact on the broader stock market than it has so far.  The simple reason for this is that as the leverage that has built up in these momentum names will have to be unwound (again, if these stocks continue to fall).  That, in turn, will spill over into the rest of the stock market…just like it always does.  This does not mean the market will crash…or that it will even fall into bull market territory, but leverage creates powerful moves…and it works in both directions.

One of the big problems we continue to hear from those who study the stock market today is that they concentrate too much on “extremism”.  Either the stock market is going to go to the moon…or it’s going to crash. There doesn’t seem to be any room for anything in the middle for many of these pundits.  Despite the fact that the last two bear markets took the S&P 500 Index down by 50%, history tells us that “something in the middle” is exactly what we usually get when the stock market goes through a painful period.

This is why we don’t care when these pundits try to say that this is not 1999 all over again. They are correct when they say this, but they also seem to imply that since it is not 1999 once again, then the stock market cannot go down a lot if these stocks roll-over.  The only thing it really means is that the stock market will probably not fall 50%.  However, it could still see a deep correction or even a bear market.

The recent action in the FAANG stocks might not be the beginning of a sustained decline in those leadership stocks, but whenever a sustained decline DOES take place, it will almost certainly be negative for the broader stock market.

We all know that margin debt remains at/near all-time highs (and much higher than it was in 2007). Given that Facebook (FB) was up over 700% over the past 5 years (at its recent high), Amazon (AMZN) is + 620% over that time frame, Apple (AAPL) +250%, Netflix (NFLX) +1,200% and Alphabet (GOOGL) +230%…it’s not a big stretch to think that a lot of leverage has been built-up into those stocks over the past five years.

One only has to look at the action in FB over the last few trading day!!! FB did not have a valuation that was anywhere near bubble proportions…and yet it has fallen a whopping 21% in just three trading days!!!!! This was not a situation that faced companies like Enron or Bear Stearns…so we would argue that the main reason it fell SO far, SO fast…and has not bounced at all since that initial sell-off…is due to “forced selling” (margin calls, etc). (Don’t get us wrong, there’s no question that FB’s news was negative, but we would argue that only “forced selling” would account for the kind of extreme move we’ve seen over the past few trading days.  In other words, the negative news knocked the stock down, but “forced selling” played a roll in keeping it down.)

The problem is that history tells us when you get broad based “forced selling” (which would come to fruition if more of these momentum names roll over…and if FB, NFLX, TWTR, etc. fall further), the buyers disappear in those names…and thus the “forced sellers” have to start selling other stocks/assets to meet their margins calls.  Thus “forced selling” almost always spreads far beyond the stocks that were initially impacted.

This doesn’t mean that the FB cannot bounce…or that it has to fall further from current levels. It also does not mean that the big rally in the FAANGs (and other momentum names) has definitely come to an end. However it DOES give you an idea of what will happen when the bull market in these names does indeed end.

You don’t have to go very far back into the past to see what “forced selling” can do to the broad market.  Earlier this year the very crowded and highly leveraged “short volatility” trade needed to be unwound. That development caused a quick/sharp downdraft in the broad stock market…which was a decline that has yet to be fully retraced by the DJIA or the S&P 500 Indexes.

So what are we trying to say here? Well, even though the decline in these momentum names so far has only taken the S&P down 1.5% and the Nasdaq 4.2%, we believe that if it continues over time, it WILL have a negative impact on the broad stock market…..The key word in that last sentence is “if”. It is not a lock that these momentum names will continue to decline right now. However, it does show that a significant and sustained correction in the momentum names WILL have a negative impact on the broad market…whenever it does come (whether now…or in the future some time)…….Leverage is a VERY powerful force…and it works in both directions!!!!

That’s the BAD NEWSand it’s why we continue to suggest that investors should be adjusting their portfolios to a more defensive posture (which is working well since the defensive names have been rallying nicely over the past two months). They should also be raising a little bit of cash…which leads us to the GOOD NEWS.

The GOOD NEWS is that whenever “forced selling” takes place, it creates unbelievable opportunities for investors (because the baby gets thrown out with the bathwater). If investors have some cash on the sidelines, they will be able to take advantage of that kind of situation. Those who are fully invested will not.

Is Ford’s Stock Ready to Rally?

Ford Motor is becoming very oversold and could be poised for a compelling rally before long…especially if we get any kind of positive news on the tariff front.  We do not cover Ford on the research side of things, so we cannot comment on their fundamentals, but the problems facing Ford (GM and other auto companies) have been spelled out around Wall Street and in the financial press in great detail.

As Moody’s pointed out recently, “A 25% tariff on imported vehicles and parts would be negative for nearly every segment of the auto industry–carmakers, parts suppliers, care dealers, and transportation companies.  Should any tariffs be levied, caremakers would need to absorb the cost to protect sales volume while hurting profitability; increase prices to pass the tariff costs to customers, which would hurt sales; or a combination of both.”  They also noted that tariffs would be negative for both Ford & GM due to their dependency on imports from Mexico & Canada.

In other words, some of the benefits that the Trump administration is trying to gain for the U.S. auto companies with some aspects of their announced tariffs will be off-set by other aspects of them…and there is certainly no question that this is having an impact on the U.S. auto stocks.  Both Ford and GM are down more than 10% over just the past 5 weeks…and Ford is also down almost 20% from its January highs!

However, one has to question just how far the President will go when it comes to this particular industry…given how important it is to his “base”.  (As Moody’s points out, it’s not just Ford & GM or other U.S. auto workers who work for foreign automakers here in the U.S.  It also has a big impact on many suppliers, etc.)  Therefore, if the President steps back from his stance on these tariffs, it could/should lead to a pop in these stocks (which have been under so much pressure recently).

This takes us to the chart of Ford Motor….Ford has been stuck in a downward sloping trend-channel since 2013, BUT it has been trying to form a “base” over the past year or so.  The level we’re watching closely is the lows from last August and this February (at $10.25).   If it can finally hold that level in this most recent decline…and then rally strongly (again, off of good news on the tariff front), it could finally give the stock the kind of rally that will reverse this 5-year trend.

In other words, it’s too early to turn positive on the stock just yet, but the potential is definitely there on a technical basis.  The thing is…if/when it pops due to any positive news…it’s going to “gap” higher…so it will be very difficult to buy the stock after any positive news comes-out.  Investors should check with their investment adviser so that they can get a better handle on the fundamentals for Ford Motor, but this could be a good one to look at right now for those who are bullish on the fundamentals of Ford…and/or believe the President will not bury the U.S. auto industry (which is a good bet in our humble opinion).  

There’s no question that his one is a speculative play…but it’s an interesting one in our opinion given that its daily RSI chart is getting very close to the same “oversold” level that it reached back in February…and at other key “bottoms” in recent years.  (BTW, it rallied about 20% off those February lows.)

Netflix Stock Bounce Is Key For Entire FAANG Group

Netflix (NFLX) bounced nicely off a key support level yesterday (Tuesday) and whether it can continue to hold that level going forward should be important for both the stock AND the FAANG stocks in general…..We’ll also be watching Google (GOOGL) closely to see if it can finally break above its 2018 highs.  Whether it can or not should be important for the FAANGs as well.

To be more specific, NFLX opened almost 14% lower on Tuesday after they announced that they added 1 million fewer users than expected in the 2nd quarter.  However, the stock immediately began to rally back strongly after the opening…and closed down “just” 4% from its previous day’s close.

The level in reached in its initial down-draft was important support (near the $340 level).  That level had been the “old resistance” level (the highs from March & April).  It broke above $340 in May…and the old saying (or rule) is that “old resistance” becomes “new support”.  Well, NFLX got VERY close to that level on the opening yesterday…and bounced STRONGLY.  So the fact that NFLX was able to bounce so strongly off of an important support level is quite positive.

This was not only important for NFLX, but for the entire FAANG group over-all.  Let’s face it, this rally has been a VERY narrow one, so IF investors were going to start bailing out of the NFLX and/or the other FAANG stocks, it would have put the broad market rally in serious jeopardy.

These FAANG stocks are obviously momentum names…and several of them are quite expensive.  Therefore, “confidence” is VERY, VERY important to these stocks.  The fact that NFLX was able to bounce strongly off its key support level helped the “confidence” in these names to remain intact..

We’d also note that the 340ish level is now the “line in the sand” for the stock.  If the stock rolls over any time soon and breaks that level, it’s going to be a MAJOR red flag for the stock on a technical basis.

We have more news today (Wednesday) for one the FAANG stocks…as GOOGL was fined $5bn over its Android mobile phone system.  This was not a big surprise…and the stock is trading down less than 1%.  However, this development still gives us an opportunity to highlight the stock’s technical picture.

It’s interesting to note that GOOGL is the only one of the FAANG stocks that has not been able to break above its January highs.  In fact, ALL of the other FAANG names are WELL above their January highs!!!  GOOGL has tested its own January highs several times right near $1,200, but hasn’t been able to break it.  If it can finally break above that level in a meaningful way (by 2% or so), it should be VERY positive for the stock on a techncial basis.  (It has already seen a slight break, but it needs to be more significant…in order to avoid a “head fake”)……However, if it rolls back over in any significant way, it might lead investors to throw the towel-in on this stock.

Again, the action in NFLX Tuesday was quite good, so this was positive for the FAANGs overall…..However, IF (repeat, IF) NFLX rolls back over and takes out its key support level…and GOOGL falls significantly from its key resistance level…it could/should be a sign that the FAANG stocks are finally going to see a compelling correction.  Until then, the green flag will remain flying on these important momentum names.

Long Term Interest Rates are Actually “Positioned” for a Decline.

Despite the fact that everybody seems to think that long-term interest rates cannot go down from here because the domestic economy is too strong, there is evidence…away from the traditional fundamentals…that says the yield on the U.S. 10-year note could actually fall in the coming weeks and months.

Looking at the “Commitment of Traders” (COT) data from the CFTC, the speculators (or “specs”)…who are considered the dumb money because they’re almost always wrong at extremes…had record long positions at the beginning of this month.  Conversely, the smart money “commercials” have very near record long positions.   (This obviously means that the dumb money is looking for a fall in Treasury prices and a rise in Treasury yields…while the smart money is looking for a rise in Treasury prices and a fall in yields.).

We DO have to admit, that these extremes in “positioning” have been with us for several months now…so this data does not mean we’re at an inflection point.  However, as we mentioned in our weekend piece this past weekend, the yield on the 10yr note is close to the “neck-line” of a “head & shoulders” pattern…so any further decline in long-term rates could turn into a much bigger move than anybody is looking for…as those short positions for the “specs” will get squeezed in a meaningful way.

Again, a lot of pundits (most of them) will say there is no way long-term rates can go much lower from here.  However they said the same thing back in early 2017…when we pounded the table calling for lower rates…and the consensus was dead wrong again back then…as rates fell for the next 8-9 months.

We’re not pounding the table this time…and we’re certainly not saying the decline will be a major one (down to 2% or something like that).  However the odds of a move towards 2.5%-2.6% over the next few months are much higher than most investors believe.  (It’s also something the action in the banks & utility stocks has been telling us over the past two months as well.)

BlackRock (BLK)….Sitting at a key technical juncture.

BlackRock (BLK) reported better-than-expected earnings, but its stock is trading a bit lower today on the news of equity outflows and slower inflow into its ETF.  This is a concern given that stock is already down about 15% from its January highs.

On the technical side of things, the stock is at a critical level.  Actually, the stock has already broken below its 200 DMA…which has been solid support for BLK for 2.5 years now.  However, the $500 level is more important support.  That is where the trend-line from early 2016 comes-in…AND where the lows from February and April come-in…so a break below $500 would give the stock a very important “lower-low”.  (We’d also note that those Feb/April lows of $500 is the bottom line of a “descending triangle” pattern.)

Therefore, BlackRock is facing a very simple proposition.  If it can bounce from here (especially if it can move above its June highs of $550), it will show that the stock has re-established its upward trend from early 2016.  Thus that kind of move would be very positive……If, however, BLK breaks below the $500 level in a meaningful way…which would give it an important “lower-low” and take it below its 30 month trend-line…it would confirm that the up-trend it has been in since early 2016 had been reversed.

We do not cover BlackRock on a fundamental basis, so we want to emphasize that this is only a technical look at the stock.  However, there is no question in our minds that the BLK stands at a critical technical juncture…and the direction of its next significant move should be very important.

2018 Second Half Surprise: A Big Decline in Long-term Yields???

A few weeks ago, we asked whether long-term interest rates were going to see a compelling decline this summer (instead of rising the way many investors have believed through most of this year).  Since then, the yield on the 10yr note has indeed fallen a bit more…and now it is getting close to two important support levels on the charts.  Therefore, the odds we will indeed see a surprising decline in long-term yields this summer are rising.

Before we review those levels, let’s touch-on the reasons for the decline (which are several fold).  First, the yield on the long-bond had become over-bought (or should we say, oversold in terms of its price).  However, that condition was worked off many several weeks ago, so the fact that the yield has rolled back over has become more fundamentally based.  Investors are worried about the trade war, but we’d also note that over-all global growth has been softening quite a bit recently.  Therefore, even though U.S. growth remains solid, the weakness in other parts of the globe might slow domestic growth eventually (which, of course, would be exacerbated by a trade war).

We can also site some “flight to safety” reasons.  This is not just a “trade-war fear” issue.  European banks have fallen significantly in recent months (especially Deutsche Bank)…some emerging market stock markets are having problems (and we’re also seeing some significant political tensions in countries like Turkey, Brazil, Venezuela, etc).  Political tensions in places like Italy, Spain…and even Germany are on the rise as well.  Finally, the decline in the Chinese stock market (and concerns over a devaluation of their currency) are also having an impact.

Whatever the reasons, as we said above, the yield on the 10yr note is now close to two key support levels.  The first one is the “neck line” of a “head & shoulders” pattern…and the second one is the trend-line going all the way back to the lows from the summer of 2016.  The first one (the “neck-line”) is very close to where it stands today (at about 2.8%).  The second one (the 2-year trend-line) comes in at about 2.75%.  (Chart attached below.)

Any significant break below those levels would tell us that yields are headed lower.  Therefore, the biggest surprise in the market place in the second half of the year just might be a meaningful DECLINE in long term yields.…..Remember what we pointed out a couple of weeks ago:  There has been some massive call buying in the 10yr Treasury note recently.  As much as $75 million of calls were purchased (with many of those bets calling for a drop to 2.6% by the August expiration!!!)….Also, the poor performance of the bank stocks is telling us something about the direction of long-term rates (and the yield curve) as well.

As always, we have to wait to see if these support levels are broken before we can draw a definitive conclusion, but the odds of a compelling decline in yields taking place in the second half of 2018 is higher than most investors realize right now.  

Has Gold Lost Its Luster As a Safety Play???

The recent decline in the price of gold is quite disappointing given that so many other defensive plays have been working well.  Utilities have rallied nicely (the XLU utility ETF is up 7.3% in the last 3 weeks)…the consumer staples have done the same (the XLP consumer staples ETF is up 5.3% since early May)…and the 10yr Treasury note has rallied as well (taking its yield from 3.10% down to 2.82%).  HOWEVER, gold has not rallied at all.  In fact, it has fallen 4% over the last two weeks…and has fallen 7.5% since mid-April!!!

On a technical basis, we’d point out that gold is sitting just above its trend-line from the late 2015 lows right now.  It is also very close to its late 2017 lows (of $1,242).  (A meaningful break below that level would give the yellow metal its first important “lower-low” since late 2016.)  Therefore, gold is sitting very near important multi-year support level…and any significant further decline from here (below the $1,240-$1,250 range) would be quite bearish for the commodity……..We don’t know if gold has lost its luster as a safety play (can cryptocurrenies take its place eventually?), but we DO know that it needs to bounce soon or its going to be negative on a technical basis.

HAVING SAID ALL THIS, we HAVE to see a break below these key support levels before we’d raise a major red flag on gold.  Let’s face it, it got RIGHT UP to its key resistance level back in April…and rolled back over.  So it might do the exact opposite this time around!!!  Also, its RSI chart is getting deeply oversold on a near-term basis.  Thus we don’t want to get ahead of ourselves.

We also don’t want to get ahead of ourselves in calling for the death of gold as a safe haven…given that it has worked quite well for thousands of years!!!!  However, it IS weird that gold has acted so poorly recently…when other safe havens/defensive plays have been acting so well.