Analysis, Perspective, Trading Strategy
Facebook – Is it a Stock thing or something Deeper?
By Joe Duarte on April 2, 2018
Somewhere along the way of every bull market we hear the phrase
– this time is different along with exultations of a “new paradigm.”
Unfortunately for many, even though it seems as if these “new paradigms”
are here to stay, they often only hold up for a few months to a few years
before life reverts to the mean and things change, often rapidly and
Double Barrel Collision - When Markets and Societal Trends
The last time a “new paradigm” crashed was in 2007. For the five
or so years prior to that implosion the mantra on Wall Street, and
Main Street was that anyone could afford a house because of creative
financing. Therefore, it followed; investors would always make money
on collateralized mortgage backed debt securities because no one would
ever miss a house payment.
Of course, that paradigm blew up and the housing market had a generational
change which is now evident via the scarcity of homes for sale, higher
existing home values, lower mobility, and fewer families being willing
or able to afford a home. It turns out that many people, who bought
expensive homes with no down payments because they didn’t have enough
money to make the payment, never had enough money to make the mortgage
payments after all. So they left the houses on their bank’s balance
sheets and the rest is history. Paradigm Lost.
Fast forwarding to today, we see social media as the center of the
lives of millions, perhaps billions across the world. And the centerpiece
of this new dynamic has been Facebook, the hub of the new paradigm
of “eternal connectivity and privacy is a thing of the past.” Yet over
the last few weeks, this once highly heralded market darling and icon
of the digital future is suddenly up against the wall and we may be
near one of those potentially violent periods of social trend reversals.
More to the point; Facebook (NSDQ: FB) shares fell off as much as 21%
from its February highs before bouncing back on 3/29 after reports
Indeed, Facebook is a most salient example of how quickly the market
can turn on a company as questions arise about its business model,
its ethical practices regarding the safekeeping of user’s personal
data, and the company’s management decisions along the way to the brave
new world. Furthermore, even if the stock stabilizes in the short term,
I suspect bigger questions are being raised about the meaning of the
stock’s decline and its connection to the world outside the market.
Does anyone remember My Space?
Major Indexes Find Support at Crucial Levels
Things could change at the drop of a hat, but for now, the market
is still walking a tightrope and the bears are not in total control;
yet. Moreover, although there are some clear and significant pockets
of weakness, such as the big tech stocks, the bears are still in raiding
rather than taking over the entire market mode. Specifically, the New
York Stock Exchange Advance Decline line, the most accurate indicator
after the 2016 election, last week arrested what seemed to be the start
of a down trend, and may be starting a sideways channel, a sign of
consolidation. If this continues, the market will more likely be in
a sector rotation mode instead of an all out bear trend.
This chart pattern is also evident, although to a lesser degree in
the Nasdaq 100 (NDX) and Standard and Poor’s 500 (SPX) indexes. Both
NDX and SPX found support last week, albeit with valid questions about
low trading volume and with both the Accumulation Distribution (ADI)
and On Balance Volume (OBV) showing signs that there are still more
sellers than buyers in the market. Interestingly, of the two major
indexes, NDX is faring better both in price action as well as in the
volume department. History shows that robust volume is better than
weak volume as it is a measure of investor engagement. So, while healthy
volume is the hallmark of bull markets, even in bearish trends, high
volume suggests that a faster resolution is more likely and that the
bear phase will last a lesser period of time.
Making the bull vs. bear market decision harder, there are three
important and specific findings on the SPX chart. First, the index
found support at the 200-day moving average. This is encouraging. Second,
and less encouraging, volume remains very low, suggesting volatility
is not going away anytime soon. And third, the index has yet to break
out of the short term pattern of the last few weeks of making lower
lows and lower highs.
Stay Patient: No Clear Path is Evident at the Moment
The next stock market trend remains murky. If the large technology
names remain under pressure and no clear new leadership group emerges,
I expect more of the same volatile price grind we’ve seen for the past
few weeks. Thus prudent investors should remain cautious: trade small,
keep lots of cash in the wings, and take profits in the short term
when you have them. That said, if we are in a rotation instead of the
early stages of a bear market, we should know which groups are going
to be more attractive than others in the not too distant future.
Don’t forget -Wall Street votes with money. Therefore, it makes sense
to focus on whether Wall Street gives stocks like FB, TSLA, and AMZN
a pass. Indeed, if investors are truly shaken by the events of the
moment and believe that secular, outside the market trends are now
changing and that especially FB is no longer a top of the food chain
company, large amounts of money will continue to move away from it
and others in the same general group.
Paradoxically, money coming out of that complex has to go somewhere.
Once a pattern of money flows becomes more discernible we can all make
better trading decisions. Accordingly, patience is indeed a virtue
as this may evolve into a stock picker’s market over the next few weeks.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.