4 Iconic U.S. Stocks that Lost 49% While You Were Sleeping

Overnight, four iconic U.S. companies lost 49%. One of them, a reputable blue chip Dow component, wiped out four years worth of gains while investors were sleeping. What does this performance mean and can it be detected/avoided?

The biggest danger is one you are not aware of or can’t predict. For individual stock investors that’s gap down opens. Such overnight losses leave big chart gaps that often by-pass stop-loss orders.

October has been a particularly treacherous month as four iconic U.S. companies lost a combined 49% while shareholders were sleeping. Talk about a financial overnight coronary event.

In the night(s) from October 17 (Friday) to October 20, IBM (NYSE: IBM) lost 8.35% and wiped out four years of gains.

In the night from October 20 to 21, Coca Cola (NYSE: KO) lost 5.75%.

In the night from October 23 to 24, Amazon (Nasdaq: AMZN) lost 9.10%.

In the night from October 15 to 16, Netflix (Nasdaq: NFLX) lost 25.83%.

Is there a common trigger for all those coronary events?

Is it possible to detect and prevent owning stocks before an overnight collapse? 

The chart below shows IBM, KO, AMZN and NFLX side by side.

Trading volume spiked every time on the day of the coronary, but there was no consistent pattern the day before (which was the last day to get out in time).

A look at commonly used technical indicators – such as moving averages, MACD, RSI, percentR – also shows no consistent pattern.

Netflix and Amazon were unable to overcome their 20-day SMAs the days prior to the gap down, but Coca Cola ‘slept’ above the 20-day SMA the night before it fell out of bed.

Amazon triggered an MACD buy signal the day before it tumbled.

The only way to avoid individual meltdowns is to invest in baskets of stocks via ETFs or other index-based vehicles. The link below discusses which type of ETFs are best in this stage of a bull market.

The One Common Denominator

There is, however, one common denominator, indicated by the little telephone icon. All companies reported their earnings just before the big gap down (either after the close or before the bell).

Do Gap Downs Foreshadow a Major Market Top?

Excessive amounts of selling pressure are a reflection of investor psychology.

Gap ups on the way up are a vote of confidence; gap downs show that investors’ confidence is eroding.

Erosion of confidence is one of the tell tale signs of an aging bull market. This doesn’t mean the bull market is over, but it shows that investors are becoming more selective.

The number of outperforming stocks shrinks as more and more individual stocks fall into their very own bear market. In fact, currently 31% of all NYSE stocks are trading 20% or more below their highs.

In other words, a third of all stocks are already in their own individual bear market.

A historic analysis of major market tops puts this deterioration into perspective and shows how close (or far off) we are from a major market top. It also shows which sector is the best to invest in right now.

Here is a detailed look at the 3 stages of a dying bull market.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Leading Indicator: What the Yen Carry Trade Predicts for the S&P 500

Investors are always looking for leading indicators. Here’s one: The yen carry trade. This trade has been a recipe for success … until this week. Here’s what went wrong and what it says about stocks’ future.

Here’s a look at Wall Street’s moneymaking recipe box. Always delicious (except for this week), the yen carry trade feast.

The traditional yen carry trade is an interest rate play, where investors borrow yen and buy higher interest vehicles (which used to be U.S. Treasuries).

But, interest rates around the globe are close to zero, so there’s no margin.

The traditional yen carry has lost its spice. Here’s the new and improved recipe:

  1. Borrow yen
  2. Buy U.S. stocks
  3. Enjoy tasty profits (falling yen, rising stocks)
  4. Rinse and repeat …

The chart below shows the close correlation between the S&P 500 and the USD/JPY, which measures the value of the U.S. dollar in yen.

A falling yen and rising U.S. stocks turn both components of the carry trade (basically short the yen and long U.S. stocks) profitable.

But there are always two sides to a trade, and a rising yen (= falling USD/JPY pair) translates into double whammy losses.

That’s exactly what happened this week.

In other words, just as using sugar instead of salt screws botches a recipe, a rising yen (instead of a falling yen) turns Wall Street’s tasty profit formula into a bitter pill to swallow.

Due to the close S&P 500 / USD/JPY correlation, USD/JPY can be used as a leading indicator for the S&P 500 (NYSEArca: SPY).

What’s USD/JPY telling us about the S&P?

The Profit Radar Report featured the chart below in the March 12 update and made the following comment:

A rising yen (falling USD/JPY) would stifle this particular carry trade. The chart below shows that USD/JPY hasn’t been able to move above resistance at 103.70. The USD/JPY staying below 103.70 is one of the few clues that suggests stocks may actually move lower.”

Resistance at 103.70 is important, because it’s made up of three separate resistance levels meeting at the same spot:

  1. The ascending red trend line
  2. The May 2013 high
  3. 61.8% Fibonacci retracement of the points lost from January 2 to February 3

As it turns out, this resistance cluster was too much, the USD/JPY pair succumbed to the pressure, dragging the S&P 500 down as well.

By Friday the USD/JPY pair closed even below a minor support shelf, suggesting more down side to come.

Where is next support and could the unraveling of the carry trade turn into a bigger correction for U.S. stocks?

A detailed forecast for the S&P 500 is available via the Profit Radar Report.

The USD/JPY pair wasn’t the only factor that warned of impending down side.

Perhaps the most popular technical indicator known to Wall Street suggested the same thing, but surprisingly nobody picked up on it. More details here:

The Biggest S&P 500 Dilemma Explained in One Chart

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Earnings Euphoria: Precursor to Bearish Mean Reversion?

Corporate America has never before seen higher profits than now. Are healthy profits a reflection of a healthy economy or have earnings reached a point of unsustainability?

In good old times past it used to be that when complacency reigns on Wall Street, investors get wet. It’s different in a QE world; When complacency reigns, investors get wet eventually. Are investors complacent?

Bloomberg reports: “With 72% of earnings exceeding analysts’ estimates, it may be difficult for U.S. stocks not to reach a record in 2013. The S&P 500 is poised to recover fully from the financial crisis that began almost six years ago.”

According to 11,000 analysts’ estimates compiled by Bloomberg, profits of S&P 500 companies are expected to exceed $1 trillion this year, 31% more than when the gauge peaked. Bloomberg calls this the “biggest expansion in profits since the technology bubble of the 1990s.”

This is a bold statement. There was not only the earnings explosion of the late 1990s, there was also the financial leverage earnings explosion of the mid 2000s. In 2007, earnings of the financial sector (corresponding ETF: Financial Select Sector SPDR – XLF) accounted for over 40% of all U.S. profits.

It’s hard to believe that S&P 500 earnings today are 77.6% higher than at the 2000 peak and 10.3% higher compared to the prior 2007 all-time high.

A voice of reason often tends to get over looked in an unreasonable world, but the chart below reminds us of unpopular past realities. Mean reversion took many by surprise and earnings peaks turned into stock market peaks.

What do earnings tell us about stocks? Corporate earnings aren’t a short-term timing tool and shouldn’t be used as such, but record earnings sow the seeds for subsequent declines.

The S&P is currently trading just above a major long-term support/resistance level. As long is it remains above support, stocks may grind higher, but a trip below may quickly turn into a fast and furious decline.

The Profit Radar Report highlights the support and risk management levels needed to avoid a surprise move.