Credit: Shutterstock photoMarket got you nervous? Stay that way for now.
The rapid rise of stocks during 2009 might make you want to jump in on the action. You might be tempted to buy up stocks right before earnings season gets going. But if you look closely at what's going on with Netflix (NFLX), you might find evidence for caution.
Many investors are looking to rebuild their portfolios as rapidly as possible and find it hard to jump back in to a market they got out of in 2008 or 2009. Quite likely there are still many who are wondering if they should be more heavily invested in the market to take advantage of potential new upward moves. With a new quarter’s earnings report kicking off Monday, July 12 beginning with a report from Alcoa, Inc (AA), some investors may feel like now is the time to shop for bargains. Buyer beware.
The past week’s activity featured three strong daily moves on the major indexes. To an eager bull, it looks enticing. An optimistic investor might think that these upward moves are an indication of savvy buyers getting poised to profit from positive earnings reports.
But there may be another interpretation available that is less optimistic. What if the past three days were simply a short-cover rally? Suppose the three days of upward moves were made by a succession of people taking profits from a severely bearish second quarter? If the majority of people buying over the previous three sessions were merely those who didn’t want to risk being in the market when new earnings information came out, that should send us a different signal.
Could we find evidence that the most recent three days of activity were more of a signal for caution than a signal for optimism? Indeed we can.
Consider this chart....
Figure 1. NFLX June 9 to July 9, 2010.
For the first half of 2010 Netflix (NFLX) was the strongest stock among the Nasdaq 100. This company has done an impressive job of gobbling video-rental marketshare from physical-store chains. Hollywood Video has closed many of its stores and Blockbuster Video was recently described as a brand that could disappear in 2011.
To say that NFLX is a success story for the times is an understatement. It is the quintessential business success story, written from the formula that merges improved services, goods, delivery and pricing all at a time when the consumer is desperate to find such things. It was simple to expect it should rise as investors found fewer and fewer businesses to become excited about in the last three months.
But like the rest of the market, the stock spent more days going down than up in June. Unlike the rest of the market, however, the recent selling in June did not break the stock’s year-long upward trend. The company’s success story is not likely to end soon, as more and more consumers become price-sensitive and technological advancements make on-demand video streaming more and more desirable and feasible for consumers.
Figure 2 - NFLX for the last 6 months.
If ever there were a stock that could expect to report and benefit from strong corporate earnings, it would be NFLX. With and earnings announcement looming (July 21st), anyone who expected NFLX to best expectations should certainly be entertaining a buy decision right now, should they not? And yet Figure 1, above, shows a curious pattern. Technicians recognize this as a “lower high,” a relative peak, lower in price than the one before. It is a sign of weakness in a trend, and the first evidence that the trend for Netflix may be changing.
To be sure, a few analysts have pointed out that Netflix may face increasing expenses from an expected rise in postal rates and a costly acquisition. If these were the only reasons for the waning demand for NFLX, then you might expect it to be an aberration from other NASDAQ 100 components. But it is not.
In my opnion, NFLX makes a good bellweather because it is a popular stock, and likely to be a good measure of general market mood. There are other such stocks that show a similar pattern.
All in all, these stocks are showing technical weakness when the market is attempting to show strength. These should be market leaders, yet significant numbers of investors appear to be doing some profit taking. This is a good reason to remain cautious about buying stocks through the coming earning season.
To see detail from additional weak, highly-watched stocks, watch this quick vdeo walk-through.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
