Yesterday's Winners Are Today's Losers

Steve Strazza
January 7, 2022

From the desk of Steve Strazza @Sstrazza

The most speculative areas of the market peaked in Q1 of 2021 and have been under pressure ever since. It’s not just IPOs and SPACs. Areas like biotech, social media, and online retail have completely fallen out of favor too.

Many of the stocks that have been selling off were among the top performers off the COVID lows in 2020. Some of these former leaders are in 60% to 70% drawdowns today.

What a difference a year can make!

Now that we’re getting closer and closer to the first rate hike, the prevailing opinion seems to be that these stocks will remain under pressure. As things currently stand, there's not much on the charts to suggest they're ready to turn things around.

On the other hand, some of these industry groups are already more than 30% off of their highs -- and that’s at the index level. Eventually, further downside would be inconsistent with the idea that stocks are in a bull market.

For the health of the overall market, we want to see these stocks stop selling off so aggressively. Despite the volatility this week, there are some signs that this is happening.

Let’s dive in and talk about it.

Social Media $SOCL has been one of the worst industry groups over the trailing year. Here’s a look at the chart:

This was actually a mystery chart from late last year. (Sorry for the delay on the reveal post!) I was hoping these stocks would finally bottom and give us something more fun to write about.

Instead, they’ve continued to collapse as long-duration assets and the more speculative pockets of the stock market have fallen out of favor. SOCL is currently in a drawdown of about 35% from its peak last February.

Some of the top holdings are Tencent, Snapchat, and Spotify. Of course, there's also Google and Facebook, but these names haven’t driven this weakness.

When the market sold off on Wednesday, SOCL plunged 4%, falling to fresh 52-week lows. Momentum has remained in a bearish regime since August, and oversold readings have been a regular occurrence.

Despite the new lows this week, the daily RSI-14 could not get oversold. We’re seeing this all over right now. From industry groups and indexes to individual stocks, we’re noticing a lack of downside momentum. When we look at the 28 components of the Social Media ETF, only four became oversold.

While a lot of these beaten-down areas are simply working off deeply oversold conditions, downside momentum is waning. This tells us sellers are getting tired.

On the other hand, there was also a bullish divergence at new lows when we posted the original SOCL chart in our mystery post. In the time since, the ETF has fallen an additional 15% or so.

Just to be clear, most of these stocks look terrible. And it’s not just social media stocks but the entire high-multiple/growth space. We don’t want to buy these names.

At the same time, a tradable low here would make a lot of sense considering we’re in a bull market and these areas have already been selling off for almost 12 months.

To make this point, this chart shows the percentage of Nasdaq Composite stocks that are currently in a 20% and 50% drawdown:

Market internals are almost as bad today as they were at the COVID lows from 2020! The S&P is about 2% off its all-time highs, yet 40% of Nasdaq components are in a 50% drawdown or worse.

This is simply not the time to press shorts.

This is a bubble chart showing the current drawdowns in some of the most popular growth stocks:

As you can see, these stocks have been decimated.

Despite the selling pressure this week, only five stocks in the Nasdaq 100 got oversold. Only five of the 43 ARKK components got oversold. And only six of the stocks in the large cap technology SPDR XLK got oversold.

Peloton has been the poster child for the carnage in these stocks this year. It didn’t get oversold this week either. Here’s a look:

Is this a chart we want to buy? Absolutely not. But it’s also not the time to short it.

How about ARKK itself?

Not oversold either.

Many of these stocks and industry ETFs had their worst single-day performance since September of 2020 on Wednesday. The fact that there are so few oversold readings stands out.

Here’s one last example. This is equal-weight Software $XSW:

So, how do we want to approach these “growthy” areas? Let’s think about what else is going on right now.

Banks and energy stocks are making new highs as I type. The major averages were at new highs just a few days ago. This is a risk-on environment. 

We’re not looking to press shorts on former market darlings like Zoom, Peloton, or the ARK funds. We’re looking to buy risk assets.

That’s not to say these stocks can’t keep going down. Of course they can! The path of least resistance is lower, so that wouldn’t surprise us one bit.

But there are definitely easier trades in the current environment. We’d rather be putting some of these stocks on our radar and monitoring their health for an eventual bottom. After all, many of these names were leaders just a few years ago.

We hope you enjoyed this post.

As always, we love to hear from you, so shoot us a note and let us know what you think.

Allstarcharts Team

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