Prying Profits from a Return to Risk (FB, IXP, TSLA)

Did anyone catch that drop in Tesla shares last Friday? A drop of over thirteen bucks that sent six percent of the company’s market cap up to money heaven.

And all on the back of our call last Monday to stay the hell away from this puppy.

tsla47

What Caused it?

Good question.

Over the last two days the loss has amounted to nearly ten percent, but according to varying mainstream media reports the decline was either the result of 1) a market that’s gotten tired of high flying stocks, or 2) California’s electric vehicle rebate program running out of cash, or 3) Tesla’s so-called gigafactory being a much bigger gamble than most stock watchers previously thought.

All that notwithstanding, we know the real reason for the decline…

litb

That’s right.

What’s more likely is that we’re simply between earnings reports and folks are getting edgy about whether we’ll see Tesla deliver with its coming quarter’s sales and profit numbers.

This week kicks off first quarter earnings. We’ll see what happens.

Face the Facts, Chump!

Let’s get down to this week’s trade by looking at our favorite bull market poster child, Facebook (NYSE:FB).

You’ll forgive us, by the way, if we feel we have to repeat the following bit of investment gospel once again.

We do not use Facebook. We do not believe it has anything to offer us personally or that it in any way enhances the lives of those who do venture its popular portal. And while we are aware of the potential business advantage it offers its users, we’re but simple soldiers in the employ of publishing juggernaut Normandy Research, so we leave it to our superiors to figure out its worth for the corporation. To our mind, it remains ‘the world’s biggest time waster’, though that shouldn’t be construed in any way as a comment on the stock’s prospects. There are lots of folks out there with time to spare.

More than that, we believe that this bull market will eventually come to be known as the ‘Facebook Market’. When all is said and done, the history books are written and our flesh is but feed for worms, folks will likely talk about it as such – though we don’t expect any credit for the moniker.

What’s the upshot, y’old fool?

Right. In our view, it means that as the fortunes of Facebook go, so, too, the fortune of the market as a whole.

And how does that relate to our current investment position?

It means that Facebook’s current pullback is emblematic of a market that has also pulled back – and, indeed, if you look at Facebook’s retreat against the broader indices, you’ll see an exaggerated move that’s wildly out of proportion to what’s happening with the major market averages.

Indeed, the broad indexes, after retreating briefly, have in the last few days set new highs, both the Dow and the S&P 500. The transports, too, have seen new highs in the last week, as have a number of other sectors, including the telecoms.

Have a look here –

fbdjia

The chart makes the point very clear. Where the Dow has been flat after a month, FB’s shares have gotten whacked by a full bear market measure – a huge 20% from highs set exactly one month ago.

And yet a look at Facebook’s stand-alone chart shows a different picture. Here, we see the company’s shares pulling back to their 137 day moving average for the first time since last July, when the stock gapped higher by some 30%. This, in our view, is a healthy development, and now that we’ve retreated to that level, we’re of the belief that the pullback is complete and the move higher will shortly be underway.

Here’s the chart –

fb47

Some important items here to highlight.

First and foremost, the gap that was opened in late January has yet to be filled (in blue). We’ve stated that without a resolution to this issue it’s unlikely the advance can continue. As of today, we sit about two percent above the bottom end of the gap, and because momentum is down, we could well see that mark struck as early as Monday’s open.

Second, as we mentioned above, we expect the rising 137 day moving average, which the stock just touched last Friday, to provide strong support for the shares (red quadrilateral). This is the first touch in nine months, and because it coincides with the widely accepted 20% ‘bear market’ measure, we’ve a hunch that a turn higher from here is likely (once the gap is closed, of course).

At the same time, we’re well aware that RSI and MACD indications are bearish (in black), and the risk exists that we’ll continue to get more downside from here. Not until both have resurfaced above their respective waterlines will we have confidence that the move toward last month’s all-time highs is back on.

To sum, Facebook’s exaggerated decline is ‘symbolic’ of the latest market weakness, and its coming turn higher will signal a market that’s also ready to resume its uptrend in earnest.

So how do we trade it?

Reason dictates that we play Facebook’s weakness as of late against the strongest sector of the market, the telecoms. The thinking is that the defensive telecoms will fall out of favor as the market begins to gyrate higher, and a rotation toward growth and risk (Facebook) replaces the worry that’s prevailed over the last month.

Have a look at this chart of market breadth for the telecom sector –

mb47

The chart tells us unequivocally that telecom has been in ultra hot demand. When 100% of the stocks in that sector are trending above their 50 day moving averages, you have a situation that cannot get any better, even if it can continue as such indefinitely.

But we believe it won’t.

As the averages (and Facebook) begin to power higher, the defensive trade will lose its appeal, so we’re selling them (the defensives) against a Facebook purchase in order to profit. The trade will make money if/as/when Facebook outperforms the telcos.

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Wall Street Elite recommends the following trade for your consideration – buy Facebook at the market (currently $56.75), and sell the iShares Global Telecom ETF (NYSE:IXP), now trading for $66.94 in equal amounts. Your credit is $1019 for each board lot traded

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With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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