All Hail the Dipstick Trade! (FB,PRI)
Just to get a sense of how ridiculously slap-happy bullish the market for tech stocks has become, we offer the following look at the PowerShares QQQ Trust Series (NASDAQ:QQQ), a proxy for the NASDAQ 100, for the last two years.
What’s m0st striking about the chart, in our view, is the index’s price action in relation to her moving averages. Have a look –
This is amazing. The last time the QUBES touched their 137 day moving average, indicated by the blue arrows, was back in July 2016 (black circle), and the last time they spent more than a few weeks below that marker was in May of that year. There has simply been no retracement of any meaningful measure for the better part of two years. And in short, the book is overdue.
So what does that mean? After all, if the rise has persisted for this long, who’s to say it won’t continue for another eighteen months without a retracement?
Buy the dip?
There ain’t none…
The financial headlines are packed with slogans and jargon that, in the end, really don’t have any value or importance to those who are focused on what the market is really up to. That includes repeated references to “investors buying the dip” and market players “ignoring the news that caused the ‘selling’” and other such tripe.
The above chart puts lie to the claim that there has been any selling whatsoever for the last year and a half, or that any ‘dip’, indeed, has appeared on the radar during that time.
It simply hasn’t happened.
All of which means that we have no clue how Joe Q. Puddleduck will react when the index drops between five and ten percent, a phenomenon that, historically, occurs several times in an eighteen month time frame, on average.
Will investors panic? Or will they buy the dip, as the mantra out of Wall Street suggests?
And is that day of decision even close?
Let’s have a look now at the monthly chart of the QQQs over the same period for a little more insight.
Here, the rise of the last two years comes clear in both magnitude and sustainability.
And yet, the monthly RSI yet to breach its overbought 80 line (in green), though it is uncomfortably close. And when a monthly RSI read is 80 (or even approaching that level), you have to figure that a technical selling moment is fast approaching.
So, will folks wait until they see the “white’s of the overbought market’s eyes”, or will they pull the trigger early?
It’s impossible to know, but we’ve a hunch that the successful advancement of the administration’s tax package through congress is going to be a ‘sell the news’ event. And we would further expect that the ensuing pullback will not be mild, though it may be short-lived. A ‘dip’ of the dimensions that we’ve grown accustomed to over the last two years is patently not what we’re going to see.
But before we put all this information to work for us in a trade for the week, let’s look back at a single initiative that require your attention.
It was launched just two weeks ago in a letter called Normandy Exec Charged with ‘Manspreading’ – Claims He was Framed! There, we suggested you a) buy the PRI December 15th 95 PUT for $1.10 and sell the PRI December 15th 100 CALL for $1.35, for a credit of $0.25, and b) buy the PRI June 15th 100 CALL for $7.30 and sell three (3) June 15th 85 PUTs for $2.40 each. Total debit on part b) was $0.10. Taken together, we earned a credit of $0.15.
Now, the stock has risen – against our expectations – so we’re going to use the opportunity to cash in on the PRI June 15th 100 CALL, which is now going for $9.20.
That’s not to say things won’t move in our direction later – we’re confident they will. Indeed, we still believe the technicals are working strongly in our favor. But we also don’t want to pass up a bird that’s being offered up as this one is.
Back to the action!
Our trade for the week is a play on the above mentioned overbought condition on the NASDAQ big-caps. But we don’t believe, however, that the best approach is by way of the broad index itself. Rather, we’re looking at a single stock whose moves are even more exaggerated than the action on the QUBES.
It’s a company that literally everyone loves, and that we were touting as the poster child of this last, great bull market as far back as its IPO in the summer of 2012.
The World’s Biggest Time-Waster, friend of spy agencies and oppressive regimes worldwide, the informer’s stock non-pareil, Faceplant Facebook Inc. (NASDAQ:FB) is where we turn for this week’s action.
And we begin with a quick look at just how sexy Wall Street finds this stock. Below, is data on U.S. hedge funds’ biggest holdings –
To put it bluntly, the wiseguys of the hedge fund world can find nothing more attractive in the world of equities to stuff their stockings with. Facebook is their premier holding, despite its bloated P/E of 34 and its bupkus dividend yield.
Have a look now at Facebook’s chart for the last six months.
The story here is RSI’s dive below its midway waterline (in green), a move that coincides with price dropping below its short term moving average, and which appears to be signaling a further test to the 137 DMA.
That line is currently at 165 and rising and would represent a full ten percent decline in prices – should it occur.
At that point we’ll see what sort of mettle the average investor possesses.
The monthly chart for Facebook shows a hugely overbought RSI read (in green) that’s now in the process of correcting.
Have a look –
From here it’s clear we’re likely to give birth to a little baby Facebook bear. Remember, this is an overbought monthly RSI read – an extreme rarity.
Which leads us to the following action –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the FB January 19th 160 PUT for $1.72 and selling the FB January 19th 185 CALL for $1.85. Total credit on the trade is $0.13.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew