The market has continued to pull in after opening flat this morning, with the “Sell in May, go away” mantra prudent as ever. Momentum stocks have continued to get hammer as it seems investors are taking profits after large runs. While a retest of the breakout from the head and shoulder pattern–which is what we are seeing right now–is perfectly healthy technical action, the extreme weakness of some formerly leading stocks is the concerning aspect of the action these past three days.
Commodities are getting hit the hardest this week, with precious metals, oil stocks, and agricultural stocks all sharply lower. Silver has been a popular topic of conversation since the beginning of its parabolic move. The iShares Silver Trust ETF (ETF) nearly doubled from lows to highs in 2011, but over the last three days it has been taken to the woodshed.
Watch the Midday Snapshot video below with Evan Lazarus.
The catalyst for the 18% three day move was perhaps the fact that the CDE raised margin requirements for silver due to its increasing volatility. As the metal started to pull off, many trapped longs were likely forced to liquidate, much in the same way the short squeeze worked in the opposite direction. Gold has also gotten hit but on a much smaller scale, down 2.6% over the same three day period but accelerating to the downside today.
Oil has also continued to get slammed, with the United States Oil Fund LP ETF (USO) down another 1.8% today and 3.6% over the last two days. The drop in crude prices has also triggered a potent sell-off in the oil service stocks. The Oil Service HOLDRs ETF (OIH) is down 7.5% over the past three days. OIH is breaking major support in the $150 area and looks to have put in a head and shoulders top.
Agricultural stocks have also been hit hard and look completely broken right now. It will be interesting to see what happens with CF Industries Holdings, Inc. (CF) earnings after the close. The biggest drop today has been in Agrium, Inc. (AGU), which is down more than 5%. Industry leader PotashCorp./Saskatchewan (POT) is down 3%, while CF is down 3.5% ahead of earnings.
Along with commodity stocks, high-flying momentum stocks have continued to get hit. Chinese Internet stocks SINA Corporation (SINA), Sohu.com Inc. (SOHU) and Baidu.com, Inc. (BIDU) are all down around 3% as money continues to flow out of that space.
Chipotle Mexican Grill, Inc. (CMG) has followed through to the downside through an important level, and is down about 2.7% today.
The next shorting opportunity, especially if futures remain weak, could be Netflix, Inc. (NFLX). A lot of investors bet against this stock, with the net float short at about 20%. The new media pioneer carries a lofty valuation but has so far been able to fend off major competition. The action has been bearish in the stock over the last two days, and a break below $225.15 should trigger momentum to the downside.
*DISCLOSURE: Evan Lazarus is short AAPL.
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