MARKET SUMMARY (7/22/19) – CHOP ZONE

Are we entering the choppy, sideways market I’ve been expecting?

As I mentioned in last week’s e-mail, when I took profits on my market long positions two weeks ago, it was more out of discipline and process as opposed to seeing anything bearish in the market.  

The timing ended up being good, as the market was weak all week.

Was the market action bearish enough for me to change my intermediate-term bullish outlook? Not really.

Remember last week I said my e-mails and Twitter might get boring for awhile. Well, we might have entered that choppy zone I’ve been predicting. And that makes definitive, tradeable market bets really hard.

Times like these are when patience and discipline are important. 

I’ve cited a couple examples (2016, 1984)  where the market rallies hard, then works off overbought conditions by going sideways. The basic premise is that the market will try to frustrate everyone – most people will miss the rallies, and then the sideways action gives no one a chance to make money short either.

The market has rallied relentlessly these past few months, so by many measures its overbought. But I just have a hard time believing that it will make it so easy for bears (of which there are many) and give them a huge crash served on a silver platter.

Bigger picture form the weekly chart is that we’re OK. Technicals are flattening and maybe peaking, but could easily turn up again with a strong week.

So this week will tell the tale. Since I still think the market will be strong well into next year, my gut says we stabilize or rally this week, maybe after another dip early in the week. Let’s not get too bearish until the market tells us to.

3 THINGS ON MY MIND

1. Late July and August are ideal times to just step away from the market if you can and relax. Earnings season, low trading volume, and in the current case, a need to consolidate a strong multi-week rally.

The hardest thing the next few weeks might be to control FOMO if we get some sort of trade news or Fed-related surprise rally. 

2. I’ve always felt that Netflix has a business model problem. When it was the only player in the streaming game, the company made sense. It had first-mover advantage, but it never really had a moat other than its unique content – content that it has, and will continue to, pay billions for. And even with all the billions spent, they’ll still be reliant upon having the occasional blockbuster hit.

To me, I always felt NFLX would eventually just become like the movie studios of the past – studios that used to trade at 10x EV/EBITDA. NFLX trades at 62x EV/EBITDA. (That’s Enterprise Value / Earnings before Interest, Taxes and Depreciation & Amortization – it’s basically the P/E metric that most media investors use for valuation).  

NFLX burned $595MM in the quarter, and guided towards -$3.5Bn Free Cash Flow for the year (That’s NEGATIVE $3.5Bn). That kind of cash burn has been constant for years. And now they’ll have to keep spending just to keep up with the coming competition onslaught of the Disney+ and HBO Max services.

Remember, NFLX peaked in July last year, months earlier than the rest of the market.Its the FANG name that tends to trade uniquely to the rest of tech.

The chart isn’t great, but even after this week’s blow-up it’s not a complete disaster either. Its just a stock I’ll probably always be fundamentally bearish on.

3. Bitcoin – I’ve said it before, when it moves it can move. I always err on the side of caution.

It’s funny how I’m always hearing people complain about the S&P and broader markets being manipulated.

Bitcoin is legit manipulated often. That’s no conspiracy theory. The 24-7 trading aspect where overnight moves can be forced, the fragmented exchanges with low liquidity, the high trade volume in jittery markets like Chinese make it susceptible to wild moves while most are sleeping. 

And don’t get me started on the other alt coins. 

So trade Bitcoin at your own peril, but be extra careful overnight, especially on weekends. 

A CHART THAT CAUGHT MY EYE

WDAY – Workday

I’m not sure there’s really a trade here. But this chart did catch my eye.

WDAY has been a monster stock, up +362% in the last 3 years and +87% since October alone. It’s been one of the leaders in pretty much the hottest sector in tech: Cloud / Software-as-a-Service.

I likely wouldn’t pull the trigger on a short like this, but the glaring negative divergences and potential break of its steep trend are enough to make me consider it.

If I were to short it, I’d set a tight stop (the previous high is the obvious place to cover any shorts) and not get too greedy if it works.

Or alternatively, it’s a name to consider taking profits in if it breaks that trend, since it might set up a few weeks of weakness.

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