For Peloton, the economic recovery has taken away much of what the pandemic gave. Last year’s gains in PTON stock haven’t been completely erased, but there’s no denying this year’s scalping has been more severe than shareholders would have hoped.
Some giveback was both necessary and expected after last year’s meteoric 400% ascent for PTON stock. But plunging nearly 50% is more than bulls bargained for.
The retreat may have started as a slight shaking of the trees due to profit-taking, but it’s morphed into something more ominous. The technicals, fundamentals and sentiment have all soured, creating a bearish trifecta.
Let’s take a deeper look into each. Then, I’ll share what I think comes next – and how to bank on it.
Troubling Tremors for PTON Stock
On the fundamental analysis front, the big news that struck last week was Peloton’s decision to recall all treadmill machines over safety concerns.
The impact was immediate on PTON stock, sending prices down 15% on the session to a new six-month low. Though treadmills don’t represent a large percentage of the company’s sales, the decision will still disrupt its short-term trajectory. The hit to its reputation will also adversely impact its image.
Sentiment for high-multiple growth stocks was already waning before this happened. For weeks we’ve seen capital flee areas of the market that thrived during the pandemic in favor of value and cyclical stocks. The technology sector, biotech and stay-at-home stocks have all been suffering. With that backdrop, PTON stock was already fighting an uphill battle.
It’s also unfortunate that the bad news hit when Peloton shares were testing a major long-term support zone near $97. Holding it was essential to any kind of constructive argument for the price chart. A recall was all the excuse bears needed to swarm. With the floor now broken, it’s not possible to build a bullish case using technical analysis.
Let’s expand on this further.
Pelaton’s Stock Chart Is Broken
Even if you like the long-term secular growth story of Peloton and the home fitness industry, and even if you think the recent halving of the stock price is creating a bargain, it’s still hard to make the argument that now is the time to buy. Is the recall news fully priced in? Have we sufficiently squeezed out the excess and shrunk the company’s high-flying multiple enough to make the stock attractive?
No one knows.
I find these questions impossible to answer. Thus, I think the smarter route is to wait until the price action tells us buyers are returning and the Street is once again warming to PTON stock.
Consider where things lie right now. Prices are trending lower beneath all major moving averages. We just smashed through a major support zone on huge volume. Every rally since we topped in January has been quickly rejected. Momentum increased on the last downswing showing sellers increased in strength. There are legions of bagholders just dying to get back to breakeven. This creates overhead supply and makes it all the harder for the trend to reverse.
Bear Calls
Time is likely what is most needed here – both time for the treadmill news to be fully digested and depart investors’ minds. And time for the price chart to form a sustainable bottom and a new uptrend to emerge.
For now, I suggest using the 50-day moving average as your guide. Rising above it would signal that the trend is finally healthy and a new bull has begun.
Until then, rallies are suspect and short trades have the upper hand. If the current rally can run to $97, look for it to fail as old support becomes new resistance. I like selling bear call spreads into strength.
The Trade: Sell the June $110/$115 bear call for 55 cents.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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