The Dow Jones Industrial Average fell 4.58% last week, and was down 5.70% on a year-to-date basis ahead of Monday’s whipsaw session.
“It’s not often we see down sessions every day during a calendar week. But then, the technical condition has been weak for a while as we have noted,” TheStreet’s Action Alerts Plus team wrote. According to the AAP, the current sentiment and indicators are reaching extreme levels though, and that means a big powerful rally is likely to ensue within days.
“The McClellan Oscillator, which measures the up/down issues is flashing an extreme oversold reading,” the AAP stated, noting that both the Nasdaq oscillator and NYSE oscillators were sharply oversold and at levels which in the past have kicked off sharp rebounds.
“We suggest being patient here and waiting for some opportunities to open up.”
Not every market maven is in a bullish mode going forward.
The widely-followed Jeremey Grantham believes the U.S. is facing the end of a so-called “Super Bubble” that stretches across stocks, bonds, funds, real estate, and commodities. The bubble is expanding after the U.S. government spent trillions of dollars in pandemic-related stimulus packages. When it pops, the bubble will take trillions of dollars out of American wealth portfolios.
“For the first time in the U.S. we have simultaneous bubbles across all major asset classes,” said Grantham, co-founder of investment firm GMO. Grantham pegs potential losses of approximately $35 trillion in the U.S. if and when security valuations across the most-widely used asset classes return two-thirds of the way to historical norms.
“We’re in the vampire phase of the bull market, where you throw everything you have at it,” Grantham wrote. “You stab it with COVID, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation – which has always killed P/E ratios before, but quite uniquely, not this time yet – and still the creature flies.”
“Then just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies,” said Grantham. “The sooner the better for everyone.”
With the market in a state of peril right now, these are the stocks TheStreet’s market experts are evaluating this week.
JPMorgan Chase
Since the 2008 financial crisis, few bank stocks have performed more consistently than JPMorgan Chase (JPM), states Real Money's Brad Ginesin, who’s closely tracking the stock.
“Over the years, it's one of the first stocks I've looked to buy on weakness,” Ginesin said. “The shares commonly sell off on earnings days as a sell-the-news event, but rarely as they did recently on investor disappointment with quarterly results.”
The outlook for much higher expenses took the Street by surprise, prompting longtime bank bull Mike Mayo to downgrade the shares and lower his price target from $210 to $180. "This issue is certain to us: front-loaded spending for less-certain back-end benefits," the analyst opined.
Is it prudent to buy the dip in JPMorgan after the earnings selloff? “JPM may seem like a prime buying opportunity, and generally it is on severe weakness,” Ginesin said. “The shares are back to flat on the year while the banking index is up 4%, with the outlook for higher interest rates more secure.”
However, investor disappointment over rising cost pressure, especially from wage increases, needs to be respected. Consequently, waiting for lower levels to buy below $150 seems appropriate after such a negative surprise. The CFO spelled it out to analysts: "We are in for a couple of years of sub-target returns." These are words unexpected to be heard from JPMorgan management.
The stock market action is likely to continue along the choppy trading pattern that has marked the start of the year. In general, patiently waiting to buy quality stocks on real weakness makes sense.
“JPMorgan has the premier banking operation worldwide and ramping up expenses to invest in talent and technology will help secure its competitive position,” Ginesin noted. “Investor uncertainty over higher costs will offer a buying opportunity, especially with the tailwind of rising interest rates. The anticipated rise in short-term rates will improve lending profitability and net interest margins.”
Chipotle Mexican Grill and Domino's Pizza
Circumstances are conspiring against some of the most prominent names in the fast-casual restaurant industry
“Inflationary pressures stemming from rising costs of both labor and food are eating away at profit margins,” said Real Money's Ed Ponsi. “Supply chain issues are leaving key ingredients in limited supply. These challenges are exacerbated by a shortage of available workers, leaving customers feeling frustrated.”
According to Ponsi, inflation, the supply chain and the employee shortage were once considered short-term issues. “However, all three have been dragging on for months,” he said. “Now that earnings season is upon us, we could begin to see these issues impacting the bottom lines of some big names in the restaurant industry.”
Right now, Ponsi is studying several brand-name restaurant stocks, including Chipotle Mexican Grill (CMG) and Domino's Pizz (DPZ).
“Chipotle Mexican Grill has been a stellar performer over the past four years, posting gains of 49.39% in 2018, 93.87% in 2019, 65.65% in 2020 and 26.07% in 2021,” he said. “However, the restaurant juggernaut will be hard-pressed to duplicate that performance in 2022. Chipotle already has lost 16% year to date, and if its chart is any indication the stock is about to lose more ground.”
He added that “the stock recently formed a pattern of lower highs (LH) and lower lows (LL), indicating the start of a bearish trend.” In addition, “Chipotle's MACD (moving average convergence divergence) indicator is trending lower. Chipotle's next major support comes in at $1,320.”
Meanwhile, Domino's Pizza has formed a large double top pattern. “This ominous formation suggests a possible drop to below $400,” Ponsi added. “The stock's recent pullback occurred on above-average volume [which] is a negative sign.”
Netflix
Netflix (NFLX) stock fell by a whopping 22% on Friday, January 21.
The slump came after disappointing subscription growth figures, along with an equally tepid Q1 financial forecast.
Real Money's Stephen 'Sarge' Guilfoyle described the market action on NFLX as “swift and violent”.
“The company posted GAAP EPS of $1.33, which crushed Wall Street's outlook,” Guilfoyle said. “Revenue generation amounted to $7.71B, which was in line with estimates and good for year over year growth of 16.1%.”
So why the hate on Netflix?
“Obviously, those top and bottom-line numbers did nothing to provoke this level of violence,” Guilfoyle noted. “It has to do with decelerating growth, not a lack of growth, but a slowing down of the advance.”
Netflix projected that the streaming service giant would likely add just 2.5M new subscribers for the first three months of 2022, which is a long way from the four million or so that Wall Street was looking for.
The numbers forced Netflix to acknowledge that the competition has been intensifying. Such competition "may be affecting our marginal growth," Netflix said. The firm's operating margin dropped to 8% for the fourth quarter, down six full percentage points, despite the fact that the firm spent less on content creation than projected. On that note, Netflix has one forecast that operating margin will drop to 20% for the full year 2022 from 21% in 2021.
Since the Netflix numbers rolled out, 17 analysts rated at five stars by TipRanks who have opined on Netflix.
“There are plenty more, but I am only dealing with five stars,” Guilfoyle said. “Of the 17, we now have 10 "holds" or hold equivalents, six "buys" or buy equivalents, and one "sell." Of these 17 analysts, five do not offer target prices, while the average target price of the other 12 is $521.67. The highest target is $650 (Daniel Salmon at BMO Capital) and the low is $420 (William Power of Robert W. Baird).”
The fact is, Netflix is a trader now, not an investment. “Netflix is no longer part of FANG, and is no longer a true "growth" name,” Guilfoyle said. “It's growing, but it is not a "growth" stock and has been priced like one. That's over.”
