The stock market couldn’t quite get any more upside follow-through from the rally that began late last week. Instead, an early morning advance was reversed…and the major averages closed in negative territory. That said, it was not a horrible day by any means. The decline came on lower volume…and breadth that was basically flat. Therefore, although it was disappointing that the stock market didn’t get some more upside follow-through, it was not the kind of day that told us that this most recent bounce is going to roll back over in a significant way immediately. In other words, the jury is still out.
Both the bulls and the bears had something they could feel good about from Chairman Powell’s testimony yesterday.. His comments that the Fed would stay nimble gave the bulls the feeling that the Fed could pivot earlier than most people are expecting right now. On the flip side, the fact that Mr. Powell said that it would be “very challenging” to achieve a soft landing gave fodder to the bears as well…….The second day of his testimony is today, but the second day of his semi-annual (two-day) testimony is rarely something that produces any market-moving news. This doesn’t mean we won’t get anything to chew on from Mr. Powell today, but it looks like the bigger news out of DC today will likely come from the Supreme Court. (However, those rulings will have a bigger impact on political issues than financial ones.)
It is becoming clearer by the day that the consumer is not going to stay as strong in the second half of the year as they were in the first half. The pent-up demand that had developed once again over the winter (with its semi-lockdowns) has faded. Searches on travel websites are starting to fall…and restaurant reservations on sites like Open Table are dropping as well. With the savings rate having collapsed over the last 15 months (from over 25% to under 5%)…and credit card debt climbing…it’s going to be a lot harder for the bulls to continue to say that the consumer remains rock solidly strong as we move through the summer and into the fall.
With this in mind, one stock we’ll be watching very closely as we move into the third quarter is AMZN. The stock is down 45% from its 2021 highs…and is now very close to its pre-pandemic highs from early 2020 (vs. the S&P 500 index…which is still almost 9% above its own pre-pandemic highs). We all know how AMZN traded in a sideways range for much of 2021, so the fact that it closer to its pre-pandemic level than a lot of other stocks is not a big surprise. Also, the fact that AMZN has a tradition of worrying more about their future growth than about their present earnings makes it no surprise that its P/E ration is still very high. However, since they care more about their long-term growth, we think its price-to-sales data is more important to reviewing AMZN’s valuation. At 2.3x sales, AMZN has become quite a bit cheaper…and much more in-line with its long-term readings. However, the stock is still not cheap. Therefore, if the consumer does indeed continue to weaken, AMZN’s stock could easily fall further. In other words, AMZN might have less downside potential than other big cap tech names, but that doesn’t mean still cannot fall further between now and the end of the year.
The reason we highlight this potential this morning is because AMZN seems to be forming a “head & shoulders” pattern on its chart. The right shoulder has been forming over just the past few days, so the stock could continue to rally for a few more days. However, if (repeat, IF) it rolls-over any time in the next week or two, it’s going to raise concerns in our minds. If the stock breaks below the $100-$101 level in any meaningful way in July, that will take it below the “neck-line” of this “H&S” pattern…and THAT would be quite bearish for the stock. Needless to say, it would also help confirm what we’ve been fearing all year…that the consumer is going to pull in their horns in a meaningful way.
Of course, maybe the most recent bounce in AMZN will turn into a strong one. So instead of forming a “right shoulder,” it might keep on rallying and give us a “higher-high” above its early June highs (of 125.50). That would be a very positive development. Therefore, we cannot get ahead of ourselves. However, if what we’ve been seeing for several weeks now from the consumer continues, the odds that AMZN will fall further will rise considerably. Therefore, we’ll be watching the $100 level in this key stock very closely over the next several weeks. A break below that level will raise the yellow flag that is now flying for the consumer…into a big red one.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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