Show's Over
In the battle for the hearts, minds and wallets of the American consumer, the curtain has risen on a major dust-up. Until recently, the stock market has thrived, indiscriminately, on a steady diet of companies long on promise but short on profits. The era of FAANG has been a boon for risk takers. In a land rush, you just need to get to the high ground first and you'd win the race.
But the land rush is over and dealing with the aftermath of such frenetic times is never easy. It's about to get ugly.
There has been no more successful start-up in consumer media than Netflix aver the past 20 years. Ever since its founder Reed Hastings was ding-ed $40 for a late return at Blockbuster Video, his disruption of traditional media has been the template for the current golden age of content provision. The rapidly advancing capacity for the conversion of bits into pixels that resulted from the revolutionary internet/computer boom has provided a smooth pavement on which new entrant content providers could steal market share from the slow-footed traditional networks.
Cord-cutting consumers have shunned the dinosaurian network-centric models to the benefit of Netflix et al.
All they needed was high speed internet and they were off. Off cable.
This week I'm taking a more micro focus. We have to wait for the market's reaction to Powell's spoonful of discount rate pablum before taking new long positions. I'm watching 'the tape' for clues and I'm not happy with what I'm seeing lately. The momentum is failing. Volume and breadth have failed to confirm the new highs. Like this time last year, the force-fed market (remember, this is still a TINA world) has struggled to broaden out.
But, unlike last year, there is no downside catalyst in the current set-up. Estimate revision has bottoming out after the Q2 reality check that fully reflected the downshifted U.S. GDP of 2%. Tame inflation and low rates keeps PE multiples higher than normal. And most importantly, global monetary policy easing has replaced the threat of a cycle ending curve inversion, as measured by the 2s - 10s segment of the U.S. treasury curve. A soft landing scenario is unfolding. Sorry Mr Rosenberg, you have now just called 6 of the last 3 tops.
So what is any self-respecting bear to do? Look for the 'tale of the tape', of course. I'm focused on idiosyncratic risks.
Netflix stock recently cracked hard on its latest earnings report. Although the international segment is still growing, domestic net adds have plateaued. Analysts' negative revisions are multiplying. Add to that the cost of new content grossly exceeds cash generation, and investors have a right to be nervous. Game of Thrones at $100 mil an episode - really??
But this has been the hallmark of the FAANG era since the growth boom got underway in 2016. These bullet-proof companies are often given a pass for bad earnings due to the near monopolistic control they have over consumers. Dips in the stocks have been buying opportunities.The subsequent painful short squeezes helping push the stocks to new highs. The self-reinforced buying generated from the relentless passive investor boom doesn't hurt either, in this narrow mega-cap dominated market.
Let's go to the video sports fans.
NETFLIX - Weekly
Netflix stock price peaked in relative terms over a year ago, ending the phase of out-performance against the broader market (see S&P 500 relative return - second panel). Ominously, the momentum and money flows have also (panels 3 & 4) weakened significantly, as investors have moved on to new hunting grounds for growth such as cloud computing.
So it looks like a short sale candidate to me. This month saw a sharp decline in short interest on the stock, as a large number of positions got 'covered' after the eps 'miss'. Re-entering on the short side is now 'safer'.
NETFLIX - Short Interest
The feeble low volume bounce experienced by NFLX is shown below in the daily chart. Note the sharp increase in volume on the break-down day with a noticeable lessening in volume on the "bounce. That has caused a on-balance volume confirmation of the break.
As of this morning the bounce looks to have failed at resistance. I look for at least a test of the lows around the $240 mark.
NETFLIX - Daily
It's not just a weak Q2 report that has me negative on this stock though. I feel like the stock was dragged up by the massive effect of passive buying in the market that was caused by the Fed pivot to an easing bias. The round trip from December's lows is now complete and the upside from a 'priced in' Fed cut is de minimis.
Meantime, investors are flocking to the next perceived winner in the content game, Disney Corp. The switch to the Disney channel is on.
WALT DISNEY CO - Weekly
Add to all of this the threat from Amazon Prime, Apple, YouTube, Hulu and others and you can see an increasingly competitive landscape for Netflix, the formerly un-challenged king of streaming. The disrupter is being disrupted. And the stock knows it.
Short NFLX. Show's over.
Risk Model: 2/5 - Risk Off
A rising level of caution exhibited by AAII investor sentiment declines coupled with a weakening in the RSI to below 45 on the XIU means trouble is brewing. The FED cut tomorrow is likely a catalyst for increased volatility. Even if they a surprise by cutting 50 bps in an effort to be 'one and done', the market is poised to take a breather as it waits for the economy to catch up to its bullish posture. For now individual weakness in selected issues, like NFLX, is a likely scenario. A widespread sell-off lacks a catalyst, unlike last year when the market cracked from the Fed over-tightening fears.
For now a choppy tape is starting to take shape, as breadth is weak, especially from domestically focussed small cap issue that don't benefit as much from the passive indexing mania.