Case Study: Macy's
Once Upon a time, not long back - there was this belief that - What can go wrong at Macy's. The stock was trending nicely with solid support at 50 week moving average
In Uptrend - Bad News = Buying Opportunity
Oops How will market handle Macy's disappointment EPS $0.72, Exp $0.78, Cuts guidance
— Deepak Singh (@smarket) August 14, 2013
Every bad news was a buying opportunity. Over next year and a half - the stock was 50% higher.
BUT ALL THAT CHANGED IN AUGUST 2015
Macy posts bad numbers and stock tanks...and as usual...Bears linking it to state of US economy pic.twitter.com/47m5T7HOH0
— Deepak Singh (@smarket) August 13, 2015
At first, it looked like a normal market reaction but this time the market reaction was brutal and Macy's started breaking support one after another. This is ususally a big warning sign for trend watchers. As you can see in the chart below - Macy's in a span of 3 months broke 50 week moving average, 100 week moving average and horizontal support - all of them. It was now clearly AVOID stock
The most important thing is recognizing that the stock is now in downtrend and one should avoid it like plague
Macys - disappointing sales and guidance...stock in downtrend now pic.twitter.com/eFs75UBDq4
— Deepak Singh (@smarket) November 11, 2015
Well now almost 2 years have passed and where is Macy's stock - $22-$23
This is what happens when you chase low PE and Value stocks in a downtrend. Macy's downtrend continues pic.twitter.com/XDHJDZoEMw
— Deepak Singh (@smarket) June 7, 2017
The stock has lost additional 55% after it broke down below levels of $49. It's very important to recognize that when stock becomes no longer buy on dips. Value Buy in downtrend is Value Trap.
The objective of writing this post is to illustrate how fundamentals and technicals can be combined to analyze a stock.
Updated: 05 Nov 2017
Another Value Trap: Under Armour
Under Armour UA stock was in a high growth phase till early 2016 but then the growth started slowing down. The stock started coming off and then sold big time on little disappointing results. Now people who follow Price Action have a tendency to buy the dip but that changes when stock starts breaking down
This was Under Armour stock back in Oct 2016
What happens when growth is priced in the stock
Under Armour reported strong earnings 22% revenue growth -- and 28% growth in profits pic.twitter.com/FS5ulbx9MD
— Deepak Singh (@smarket) October 27, 2016
Now a year later -
There is a very clear lesson here:
Under Armour stock chart is a great example: Why one should never chase value when stock breaks down.
— Deepak Singh (@smarket) February 1, 2017
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers