Morning Bid: The Market’s House of Cards

October 23, 2013

(The author is a Reuters editor. The views expressed are his own.)

These aren’t the words anyone really wants to hear, but some of the favored momentum greats of the current era, ones that Jim Cramer called the Four Horsemen of Who Cares What the Price Is, are starting to crack a little bit.

The most obvious example is Netflix, the purveyor of all things media (rent movies! rent shows! watch their programming! Kevin Spacey!) that’s seen its stock more than triple en route to the best performance by an S&P 500 component in 2013. Rumors abounded all through Tuesday that Carl Icahn had chipped away at his stake in the company, and the rumors were dead-on as the billionaire investor (TM) had sold a bit more than half of his 9 percent stake — part of the reason the stock, after opening up big on Tuesday, cratered within a span of a couple of hours and ended down nearly 9 percent on the day.

It could be that Icahn was just taking advantage at a point when it would have been hard not to do so, and seeing as how he netted a cool $800 million for watching his money make money for 14 months, it’s hard to blame him. But momentum stocks have a way of breaking, and breaking fast, and if Icahn is selling, it’s because he’s happy for his profits, but it just seems like a good time – the kind of thing that feeds on itself.

Furthermore, the charts would show you that Netflix endured what’s known as an “outside reversal” day – where if you look, the high of the day is higher than the previous day’s high, and the lowest price is lower than the previous day. Given that shares hit a closing record Monday, to drop so dramatically on Tuesday can often mean bad tidings. It suggests that a group of people saw a stock hit a certain level and found that it couldn’t sustain it, and then didn’t feel the need to defend it on the way down — the kind of activity that often begets additional sellers. (In the world of Fed stimulus for-EVAH, it may not be the same…your mileage may vary, of course).

It isn’t alone. Tesla Motors, the high-flying electric car maker, has seen its shares teeter a bit since the beginning of October. Remember, these names were the ones that actually held up in the weeks leading to the government shutdown. They perversely became the “safe” asset of choice when investors were selling utilities and consumer staples stocks because higher U.S. yields were undermining the case for those stocks, and then later when it seemed like everything was going to get taken down by the shutdown. These names were the “Who cares, they’ll be fine” group, and they were. Tesla is now down about 12 percent from its all-time high, which probably isn’t enough to get truly alarmed, especially as the volume of trading doesn’t suggest an aggressive amount of distribution – that is, lots of investors cashing in – but just the normal to-and-fro. (Netflix, with more than 25 million shares traded on Tuesday, saw its busiest day since July, the very definition of a “distribution” day, and a bearish signal.)

Some of the other big winners this year are less concerning so far. Priceline’s peak is $1,098.70 a share, and it ended Tuesday at $1,075.63 — a $23 drop equivalent to about a two percent decline that’s hard to get worked up about just yet, and the 3.5 percent drop in Salesforce.com is also really nothing special, again, because the volume isn’t there. Given that dedicated short strategies are down about 13 percent this year, it’s not hard to see why names like this don’t feel the kind of heat that they might have in the past when a stubborn short base sets its sight on a stock.

That’s not to say it’s all rosy for Netflix going forward. Shares are still about 80 percent overvalued, per Starmine, the shorts are likely to re-load now that Icahn has given up half of his stake with a cool 450 percent profit, and again, when stocks like this turn, they TURN, fast.

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