The Federal Reserve tried to ride to the rescue on Tuesday. But a 50 basis point emergency rate cut didn’t calm investor fears. It seemed to make matters worse.
U.S. stocks fell nearly 3% on Wednesday and closed near the lows. The 10-year Treasury yield fell below 1% for the first time ever. The optimism from Monday seems erased, even if nearly half that session’s gains remain.
Wednesday’s big stock charts focus on some of the biggest losers in sectors that saw particular struggles on Tuesday. Some investors will see each of these names as potential opportunities on the dip. But these charts suggest investors should stay patient — advice that might apply to the market as a whole at the moment.
Canopy Growth (CGC)
Cannabis stocks like Canopy Growth (NYSE:CGC) had been struggling long before broader markets turned south. The first of Wednesday’s big stock charts suggests it could get worse:
- Technically, Tuesday’s sharp decline is a significant concern. Save for a brief rally in mid-January, resistance has held repeatedly around $22 going back to October, and now looks like a bearish multiple top. CGC stock has exited both a wedge established going back to May, and a broadening ascending wedge that began in November. Both moves suggest more downside. Right now, this chart suggests that Canopy Growth stock should re-test November lows below $15.
- To cannabis bulls, that kind of trading might seem too far a decline. But the sector and the stock have been selling off for about ten months now. Investors who have stepped into past dips have been burned. Strong earnings last month did seem to help the long-term case. The bounce after the report has been erased, and CGC again looks like a falling knife.
- Simply put, CGC needs a change in sentiment in a hurry. The stock isn’t necessarily cheap from a fundamental standpoint. Plunging Treasury yields signal a “flight to safety” and there are few riskier sectors out there right now. Even cannabis bulls would do well to stay patient.
Bank of America (BAC)
Recent trading for Bank of America (NYSE:BAC) has been even worse. But the fundamentals and the second of our big stock charts do suggest the selling may ease:
- BAC stock so far has tripped every bearish technical indicator. The 50-day moving average gave way, and shares then breached the 20DMA while exiting a wedge. The 200-day provided some support for a session before the declines continued. The last line of proverbial defense is support that held last year around $26.50. It might seem like BAC almost has to find a bottom there, but investors could have believed the same at multiple points over the past couple of weeks.
- But there is one fundamental indicator that might strengthen that support level. Bank of America’s book value sits at $26.78 per share. Investors might see a sub-1x price to book multiple as simply too cheap. That’s where the stock bottomed during the December 2018 sell-off; a sub-1x P/B multiple hasn’t held consistently since 2017.
- One issue on that front, however: BAC stock only held that support in December 2018 and August of last year when the market as a whole did. Unsurprisingly, given its sensitivity to the economy, Bank of America stock probably can’t find that support on its own. Investors betting that support for BAC will hold are betting that the same will be true for the rest of the market.
The sharp decline in Roku (NASDAQ:ROKU) creates a somewhat interesting test case for the market as a whole. For right now, the third of Wednesday’s big stock charts suggests some hope:
- ROKU has seen buying on past dips around current levels. Volume during the current decline hasn’t been particularly heavy, which doesn’t necessarily suggest shareholders are looking to flee en masse. A “death cross” does loom, as the 50-day moving average likely will cross below the 200-day, but without strong volume those indicators usually are less accurate. Right now, it does seem like support could hold as it did last year and last week.
- Meanwhile, there’s not much reason to see current fears as affecting Roku’s business all that much. If anything, U.S. consumers might be more likely to stay indoors. That might help streaming viewership and subscriptions, as well as usage of the Roku Channel. That short-term boost doesn’t necessarily mean ROKU stock should rise, but an investor certainly could argue that neither the near-term nor long-term outlooks for Roku have changed all that much.
- What’s at play, rather, is a sell-off in the market’s highest-valuation stocks. Shopify (NYSE:SHOP) has pulled back almost 20% from its highs. Datadog (NASDAQ:DDOG) is down 13%. But Roku’s performance is much worse, which suggests there could be a buying opportunity if investors return to paying dearly for growth. That seems a big ‘if’ at the moment, however.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.