Friday was yet another example of why you have to remain cautious. The pain continues. I predict a lot more will come as the market hovers into bear territory. Today we officially hit a 20.1% drop for the S&P 500 since the January intraday high.
50, 200, and 500-Day Moving Average
Technical traders rightfully panicked when the S&P 500 dropped under its 200-day moving average. They screamed when it fell under its 50-day moving average. Well… what are we supposed to make of this move?
The S&P 500 is now under its 500-day moving average. I don’t ever hear anyone talk about that metric. And I now have to pull up a chart to find out what happened the last time that we saw it break under this level. And it’s going to be quite a search.
I’ve looked at a few charting software, and the furthest back that I’m going here is 2019. And even during the 2020 crisis, the S&P 500 didn’t even fall under that moving average. What does it mean?
The Fed’s run is over.
After 13 years of big broad support from the central bank, the markets simply aren’t convinced anymore that the “Fed put” exists. Kansas City Fed President Esther George said yesterday that the central bank can’t be worried about the equity markets right now.
There is too much inflation in the system. The shock should continue.
Talking Kohl’s Cash
Well, the Kohl’s (KSS) trade that got me very excited is underwater to start the day. Kohl’s sold off more than 13% on Thursday as investors fretted about the potential for a sale in the company. It settled just above $40 per share.
There is concern that if Kohl’s sells, it will have to sell at well under the $64 offer it received from multiple properties just a few weeks ago.
A friend of mine who works in activist defense said they’d be lucky if they got $48 from any of these bidders. The most likely scenario: Something in the low $40s will be a solid bid.
I recommended a credit spread at $35 for June 2022 and protecting myself at the $30 level for June 2022. As arbitrage investors start dumping the stock because they were buying it above $50, I’m content to own it at under $35.
Why? Because the liquidation value of the company is just above $35. I know that the selloff right now could be stressful. But I think that the stock will bottom out around that liquidation value – that’s the company’s value at a tangible book value of 1.
And if I take possession of the stock, I’ll do so at extremely low valuations and at a much higher dividend. And… I’m expecting some bids to come in by June.
I’d offer around $40 per share if I were Hudson Bay or Sycamore Partners. The executives should have sold the company at a higher level, and that’s unlikely to happen now.
We’ve seen this happen countless times in market downturns. Executives think their company is worth far more than the market does. They dig their heels in. And they lose even more money. Someone shake them by the shoulders… Make them realize: They need to take the money and run.
I continue to eye an ugly situation in Tesla (TSLA). Shares are imploding right now. And investors need to get out of the way. Shares fell under $640, and the question is where capitulation kicks in.
I’ve been warning about the extreme valuation of this company for two years. Now that institutions are dumping, this can pull the QQQ even lower. Tesla’s downfall with Apple dropping at the same time could be the next major leg down in this market.
I still expect Apple (AAPL) to hit $120 by June if momentum remains negative. I think Tesla’s downside is extreme… and much lower. That said, it will be a very good intraday momentum stock for the rest of the year.
I’ll be back from Chicago next week. But I’m ringing the bell at the NYSE on Thursday with a client. That should be a great time.