The mirror image of the “wall of worry” is the “slope of hope.” Equally simple and effective, this theory portends that stocks slide lower when a stock is laden with optimistic sentiment, despite weak or negative technical patterns which eventually turns bullish investors into bearish sellers.
Click to Enlarge Trading experience and research has taught us well that the best time to be a seller is when everyone else is buying — especially in the analyst community.
This rule becomes even more important when the technical tides turn negative, as we have seen with a growing number of blue chips of late.
The average Nasdaq-100 stock has about 55% of analysts ranking them as buys and 40% ranking them as holds. This is important to know as it makes identifying those sliding down the slope of hope easier.
The accompanying table identifies a dozen stocks from the Nasdaq-100 that find themselves perched on the slope of hope. These stocks are likely to slide lower, faster, when the analyst community begins to see their risks and react with downgrades. And standing out in particular are these three troubled blue chips:
Blue Chips Sliding Down the Slope of Hope: Apple (AAPL)
Apple (AAPL) isn’t the most loved of the blue chips on the list, with 73% buy recommendations, but think about the sheer volume of investment dollars present in AAPL stock. From ETFs — it represents 13% of the PowerShares QQQ Trust (QQQ) and 16.5% of the Technology SPDR (XLK) — to mutual funds to individual holdings, everyone owns a piece of AAPL. The problem now is that fundamental questions are leading to technical complications as AAPL shares threaten to slip further into a corrections.
With the long-term trends rolling over, we’re expecting to see fund managers and analysts take a step back from their bullish outlooks as AAPL tries to find the innovative drive that defined the blue chip’s value.
In the meantime, we expect the slope of hope to slide AAPL shares toward the $85 mark, which would serve as long-term support.
Blue Chips Sliding Down the Slope of Hope: 21st Century Fox (FOX)
Media stocks were hot, but now, tectonic shifts in the landscape of the media companies are starting to worry investors as the longstanding dream of a la carte entertainment inches closer to reality. Add to this the pressure that traditional production has felt as smaller, more nimble non-traditional companies — read: Netflix (NFLX) — break into the business as revenues from traditional movies fall, and you’ve got a recipe for long-term fundamental pressures.
Apparently, the analysts that rate these companies are taking the wait-and-see approach, as many of the media companies, including 21st Century Fox (FOX, FOXA), still maintain 100% buy recommendations from Wall Street. After breaking the $32 level, we think the community will start to shift its outlook and issue downgrades on this and other media stocks.
With FOX shares trading at or around $30, we’re still seeing up to 20%-30% downside on shares as long-term support lies within the $20-$24 range. For now, holders should be sellers as FOX appears a prime candidate for the shorts to make some profits.
Blue Chips Sliding Down the Slope of Hope: Baidu (BIDU)
Chinese search giant Baidu (BIDU) is feeling the pressure of the slowing economy as the stock is now trading more than 30% from its 2014 highs. The decline has shifted BIDU into a long-term bearish trend as the stock is now trading below its 20-month trendline.
Analyst remain overly-optimistic towards BIDU as the current analyst recommendations reflect 83% buys. Looking even closer, about half of the buy recommendations are in the “Strong Buy” category, suggesting that there is an excess of optimistic sentiment to work out of BIDU before it eventually sees a capitulation worthy of investing.
We’ll see BIDU try to hold on to the $160 level from significant chart support, however the break below this level will act as a trigger to the bullish analyst community resulting in downgrades and an increase in selling pressure. Expect to see BIDU trading another 20% lower around the $140 mark before year-end.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.