Yet history has shown that such optimistic long term sales and profit growth projected by the stock market rarely if ever, come to pass. For now this is no matter; yet it is important to realize that markets practically always overshoot prices to the upside. It is with this in mind that I would like to examine the technical charts of a cross section of loved stocks that have well overshot their valuation mark based on a bevy of good news, and are probably due for a significant fall when long term business realities become more apparent. It is difficult to determine exactly when this will happen though. Yet although there may still be some more life in the bull, in most cases, the risk of owning these stocks greatly outweighs the reward of any future gains that may still be gleaned.
This summary is divided into three categories of stocks:
Technology and Internet
Following its Initial Public Offering (IPO), Google has been a poster child for market leadership in the trading rallies that have occurred since January 2004. It is now an institutional favorite and it seems as if analysts are tripping over themselves to assign a $400 or better price target to this $300 dollar stock. Nothing can derail this power house, right? That may be true, but following its earnings report that was met with a wave of selling concurrent with Wall Street analysts’ support and upgrades, Google is showing technical weakness that requires attention. The stock has formed and broken to the downside, an ascending wedge pattern. As described by Edwards and Magee, in Technical Analysis of Stock Trends, 8th edition, this pattern appears bullish on the surface because both trend lines are pointing up. However the steeper higher lows versus the higher high trendline may be flashing technical weakness, as demand for the stock may be diminishing. This can also be seen by the diminishing volume and weaker candlestick patterns as the stock is making higher highs. While the chart pattern is flashing bearish implications, it would not be wise to take a large bearish position on this stock because the overall market is bullish. In addition, although the ascending wedge pattern can mark a major top, the ascending wedge as a major top is not as common as when it appears as a continuation pattern within a bearish long term trend. Still, when an ascending wedge is completed, the fall usually occurs quickly. A decisive break back and close above the trendline would probably indicate that the pattern was failing or was setting up for one last gasp upward before falling. A close out of bearish positions would be warranted if a decisive close above the former support line were to occur.
Research in Motion
A review of the one-year daily chart of RIMM, a maker of little devices that go in your pocket, shows an overall bearish pattern in this stock as it now sits below all three popular moving averages. Yet RIMM has provided traders with a wealth of sharp upside tradable rallies within its overall bearish pattern. With the overall market bullish, it would not be wise to risk getting in front of a sharp rally that may be one analyst upgrade away. Yet it is significant that this stock appears to have topped over 9 months ago and its P/E is still almost 50. Who is to say that it will be their little device that will be what everyone wants a year from now?
Apple Computer, Inc.
Apple makes most of its sales from music player devices that go mostly in kid’s pockets and cool desktop computers that run smoothly compared to the competition. While this is an innovative company that has shown the ability to survive bad times and bounce back with new innovative products, it is important to remember that Apple’s P/E is 48, and their competitive advantage in pocket music players is now essentially in their “brand.” It’s a dynamic field that changes practically yearly. Companies, no matter how good, rarely deserve a valuation of 48 times their best earnings year ever.
The long term chart may still be bullish as the stock may be forming a long cup with handle pattern. Yet Apple must advance to decisively above the 45 level first. Since the post-Christmas good news and all time high in February, Apple has made little progress except for tradable rallies and swoons.
A look at the 6-month daily chart shows some reason to be skeptical of the long term prospects of this stock. The action has been sloppy with many gaps and the trading patterns are indicative of uninformed buying. There appears to be little interest for buyers of AAPL in the mid-40’s.
Although this stock is no longer a market leader, Cisco is widely held and still overvalued. The 3-year daily chart shows an important support line at about 17, which if broken, will probably have bearish implications for the entire stock market.
The charts of Sears Holdings, Chicos FAS, Cheesecake Factory, and the Homebuilders index, typify most of the leaders in the consumer related stocks. The consumer is still consuming and the stock market is pretty much suggesting that this will continue forever.
However, some former leaders in the consumer sector are showing technical weakness. After forming a broadening pattern, PF Changs China Bistro gapped down below all of its moving averages Wednesday. There is support at about 53. PFCB closed out today’s market session as a restaurant with falling same store sales and a P/E of more than 40. I suppose that many customers, after having paid an extra $10.00 to fill their SUV gas tank, are opting for tap water with dinner instead of a beverage. “You know what…I think I’ll just have a glass of water with my Kung Pao chicken.” Such occurrences may be significant since Chang’s China Bistro serves primarily the upper middle class, a group that is practically carrying the US consumer spending spree.
A former stock market leader in the easy money Greenspan era, Countrywide now finds itself in a trading range between 30 and 40.
Except for giggles, it’s too early to short or take bearish positions because the overall market is still bullish. One of Winnebago’s competitors, Monaco Coach, reported that sales and earnings would not meet expectations, yet both stocks surged on Wednesday for no apparent reason. Similar action occurred in June when Winnebago announced their quarterly results. It’s a bull market until proven otherwise.
Dynamic Materials (BOOM)
This stock has the most compelling ticker symbol ever – BOOM. Whatever they do, it has sure pleased Wall Street. Here is a 15-year chart of this company indicating that the company finally “figured it all out” in the last 2 years as the stock has gone from low single digits to over 44.
It is rare if not unprecedented that such a move in the stock market doesn’t overshoot significantly. Will the next “BOOM” be a downward one? A look at the 6-month chart may provide some insight.
After the spectacular surge, the stock has traded in a narrow converging triangular range for about 2 months. Given its past behavior, the quiet move in this stock is not likely to continue – it’s likely to go “BOOM.” The “BOOM” could be up or down, but it is likely to be a big “BOOM.” The P/E is over 50.
Martha Stewart Living
Buy on the incarceration, sell on the release. The action in Martha Stewart Living is a retracement fan's dream. In February and March, MSO stock was halved and retraced exactly 62% of the loss, Fibonacci style. After reporting a loss today (with a lot of optimistic talk), it appears that MSO stock again looks weak. MSO closed Wednesday, right at its 50-day moving average. The P/E of Martha Stewart Living is “not applicable.”
Chinese Internet Company, sina.com moved from low single digits to the mid-40’s in late ’02 through 2003. The stock has since settled down and has formed a 9 month converging triangle, while trading volume has dried up, as shown in the 3-year weekly chart. Their next quarterly earnings report is a week from Wednesday, and it appears likely that sina.com will break out of the triangle. Although the direction of the breakout can not be determined with certainty, it appears that the “up” weeks have been on generally higher volume than the down weeks. This would be bullish, however, sina.com has not yet been able to break above its 10-week moving average and this is bearish.
The stock market rally continued as all of the indices were up on relatively high volume. It is notable that of the major indices, the Wilshire 5000, a mix of practically all stocks in the US market, was up 2.32 percent. The next closest winner of the US indices tracked by Yahoo was the S&P small cap index which was up a comparatively paltry 1.33 percent, and the Dow Transportation Index up only 1.27 percent. The best sector was the homebuilders which were up over 3% based on more good news and a bond market rally. As I pointed out before the most spectacular action in the homebuilders has probably not yet been seen as they enter their final parabolic run suggested by a breaking of their uptrend line of higher-highs. Oh, and the spectacular action will also come on the downside too.
Oil continued its rally and now seems comfortable at $60/per barrel, yet there has been a short term complete decoupling between the stock market and the price of oil. Yet if oil were to correct, it would appear to be a good excuse as any for the stock market rally to continue. Breadth was strongly positive today, and yet for some reason, the breadth was not as favorable for the “loved stocks” featured above. Among those loved stocks that were hated today were Apple Computer (down 0.43%), Martha Stewart (down 1.56%), GOOG (down 1.3%), Sears Holdings (down 0.39%), Countrywide Financial (down 0.55%), and BOOM (little changed). There was ample love for Research in Motion (up 2.1%), and Sina.com (up 1.65%).
Note that in spite of the bear case made for GOOG above, if Cramer paints GOOG on his knuckles, or a major brokerage decides to upgrade GOOG (which is likely), all short term bets are off!
The Rec-Vehicle conundrum continued as Winnebago was up almost 5% in spite of poor present and likely future fundamentals. Since a whopping 29% of the entire float is listed as “short,” this may explain the bullish action in the stock in spite of its apparently bearish fundamentals and outlook. A short squeeze would probably be easy to orchestrate in a stock such as this and that is likely what is happening in my view.
The bond market rallied with a fairly decisive down day for the 10-year Treasury note interest rate. Below is an intermediate chart with trendlines and support/resistance levels. Momentum suggests lower interest rates in the near term, and the interest rate also sits on its 200-day moving average, and just above some very minor support levels (at the green horizontal line). Upward momentum has been lost as well.
Gold crashed its 50-day simple and 20-day exponential moving averages and sits just below its 200-day moving average as it decides whether it wants to make its next big move up or down.
Here is the long term chart.
If the next major move is down, they may have to repeal Elliot’s theory.
Finally I talked with a professional money manager who told me that in spite of his bearish fundamental views of the stock market, he was adding to his 50% equity position in the market because of concern that he would lose clients because of “missing” this rally. His volume of unhappy phone calls is going up. You multiply that by several hundred and this rally can continue! (Please note, the professional money manager mentioned was in no way associated with FSO or Puplava Securities.)
Have a great evening.
James J. Puplava Financial Sense™ is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939