Debauch of Self-Referential Verbiage! (FB,QQQ)
We’ve written literally dozens of letters in this space on the role of Facebook (NYSE:FB) in the market – and in the world at large. In fact, it was just months after the IPO was offered and the shares were trading in the $20ish range that we wrote As Goes Facebook, So Goes the World as part of our ‘Bourbon and Bayonets’ letter series.
In that particular letter, we first introduced you to our thinking on the company.
Thus spake fellow Normandy scribbler Matt McAbby back in May, 2013 –
And five years later, that about sums up what happened – including the oxygen-deprived mockery part.
But there’s more.
This is a random sampling of our later scrawlings on Facebook –
That’s where we were in April, 2014.
Consider these, too –
And the question is now whether our thinking is still as clear on the matter. Does Facebook, indeed, lead the market?
And the answer is, yes.
Have a look at a prophetic post we offered last summer in a letter called When Liberty’s the Target –
We’ve discussed the ‘winnowing’ process that occurs at market tops at various times over the last several years, explaining that in its final stages, a bull market will experience a drastic thinning of breadth, where only the biggest names, the market ‘stars’, as it were, garner all the attention and buying.
And that attention is sufficient to thrust the indexes straight upward in an asymptotic kaboom!, before, of course, the whole thing implodes and a general bear market ensues.
During those discussions, we also took the time to mention one stock in particular, Facebook Inc. (NYSE:FB), naming it the ‘poster child’ of the current bull market and the ultimate symbol of both the corporate and market reality in which we reside.
Facebook (which we’ve also dubbed ‘the world’s biggest time waster’) is an integral part of the statist security machinery that now profiles everyone with impunity and sells that information at a premium to both governments and retailers.
According to our measure of things, that winnowing process is now entering what might be termed an ‘intermediate’ stage, with stocks like Apple, Facebook and Google, et al. attracting as much attention for being the sexy blondes of the investment world as for growing their earnings.
By the time the jig us up, we predict Facebook will have moved several notches higher in the pantheon, and Zark Muckerberg will be gracing the cover of Time, People, Money, Woman’s Day and National Geographic.
Not exactly what we foresaw, but the above graphic shows the man’s a cover story, for sure. And isn’t it interesting that precisely over the matter of spying and data sales are we seeing the potential fall of a corporate titan.
But is this the end…?
We’re watching carefully, and we can’t say for sure, but there are many who are already preparing their Facebook eulogies.
As far as we’re concerned, the jury is still out. The trajectory is down for the near term, to be sure. But we won’t count this monster spy out of the game until the deep state has breathed its last.
And we’ve no sense that day is close.
Have a look at the chart –
This is Facebook stock since inception. As you can see, the price action on the shares has embodied two distinct trend channels, one from mid-2013 through mid-2017 (in red), and the second, when the trend channel was broken to the upside, and a new melt-up phase began, that has run roughly ten months (in blue).
The latest action, as seen on the chart below, shows the last two years’ truck on FB, and what’s clear is that we’re entering a new phase of trade for Facebook.
In the first place, we’ve crashed down to touch the lower end of the trend channel – a point that also coincides with the upper end of the longer term trend channel seen on the first chart.
A breakdown here would likely send the stock as low as the long-term moving average (in yellow) at $150.
And that’s a watershed level for the stock.
In its entire six year trading history, Facebook has only once retraced to its long term, 411 day moving average (circled in red). That occurred in August of 2015, and, under normal circumstances, one would expect to see a return trip to that level at least once in a 32 month span. But it hasn’t happened.
Yesterday’s action in FB saw a wild drop to the long term moving average and subsequent bounce higher that has the look of a ‘key reversal’ day.
Take a look –
There’s no guarantee here that the bottom is in; indeed, Mr. Zuckerberg still has a lot of explaining to do to the political echelon both here and in Europe.
But that yellow, long term line is where the basket is balanced.
If it breaks down, we’ll likely see a retreat to roughly 135, the bottom edge of the longer term trend channel.
If it holds, we’ll get a bounce that opens the stock for a final run at its former highs and beyond. In that case, the price action will look something like this, with number 3 representing the coming action –
We’re now going to turn directly to a Facebook trade.
The bottom line, friends, is that Facebook is still the market leader. And there’s simply no way the NASDAQ will climb without her.
Or that FB will fall without the NASDAQ in tow.
One’s gonna drag the other.
And we’re going to play that eventuality with a bet that Facebook plays catch-up with the broad market index.
It’s a simple long/short trade that employs the PowerShares QQQ Trust (NYSE:QQQ) to put it in play.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you purchase one lot of Facebook shares, now trading at $160.06, and sell a lot of the QUBES (QQQ), now going for $164.40. Total credit on the trade is $4.36 per board-lot matched.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew