Growth stocks have had a rough start to 2022. They were already in downtrends but it’s still disappointing to see them get wrecked. Many started to stabilize around Christmas and had the chance to find a bottom. But, alas, it wasn’t meant to be.
The twin forces of factor rotation and rising interest rates are proving too much. The 10-year yield is galloping higher as the market seeks to get in front of the three expected rate hikes this year. As a result, money is flooding out of growth-related stocks and moving into value. To wit: the energy and financial sectors both surged this week.
Rising rates are kryptonite for growth stocks, especially those with high multiples and a long runway to profitability. If you’re a bear seeking ripe targets, then today’s candidates are for you. They’re all top picks to sell into strength.
Each carries a metric ton of overhead resistance, making it all the more difficult for them to pull out of their tailspin.
Growth Stocks to Sell into Strength: Block (SQ)
A subset of growth stocks climbed to the moon following the 2020 pandemic. Unfortunately, they also happen to be the ones that investors are hitting the hardest right now. Block Inc (formerly Square) is one of them. It rose nearly 10-fold from its March 2020 bottom. Now, with this week’s whack, SQ stock has officially fallen 50% from its high.
The unraveling has been rapid, and prices are submerged beneath all major moving averages. We’re extremely oversold here, but before you call for a strong rebound, consider SQ stock has been stretched for the last two months. And yet it keeps plumbing the depths. I’m in the camp that says bounces will be short-lived and are a gift to deploy new bear trades.
Watch for a pop toward $160, then pounce with long puts or put spreads.
Robinhood Markets (HOOD)
To say Robinhood Markets has been a disappointment since its IPO would be a massive understatement. Short of the two glorious up days that followed its debut, HOOD stock has fallen uninterrupted. If you take the drawdown from its peak, prices are down a horrific 83%. How can we be anything but bearish here with such a terrible track record?
Trend, momentum, and volume are all pointing to continuation lower. It doesn’t help that the world is awash in bag holders. Underwater longs are all prone to sell into strength, which makes every rally suspect.
Climbing to $18 would provide a cleaner entry point than chasing shorts here. Rallies provide lower-risk chances to deploy new bears. Shorting shares after such a tremendous drop doesn’t interest me. Instead, I prefer the limited risk route of buying puts or put spreads such as the March $15 or March $15/$11 put vertical.
Growth Stocks to Sell into Strength: Palantir (PLTR)
Palantir snapped support last week, closing at its lowest level in over a year. And the next floor isn’t until $11. That leaves a vast amount of room for further downside if bears press their bets here. What’s more, the risk is low if we place a stop over a recent high ($18.84).
Unlike the previous two picks, I don’t think we need to wait for a bounce in PLTR stock before pulling the trigger. The stock is cheap enough to make long puts work, but I like the even lower-cost route of put spreads.
The Trade: Buy the March $16/$11 bear put for $1.20.
The max loss is $1.20, and the max gain is $3.80.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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