“Death zone” stocks are about to crater the bull rally
Below is a headline I saw the other day on Market Watch…
For those who are unaware, Mike Wilson is the chief investment officer for Morgan Stanley. He would be considered an expert, to say the least.
And he has been outspokenly bearish on the state of the market, repeatedly beating his drum – just like I have – that the activity we’re seeing is entirely disconnected from reality.
So, when Wilson issued warnings about “death zones,” it definitely raised my alarms.
That’s why I rolled up my sleeves and dug into what he was saying beyond the surface level.
Now, it’s worth mentioning, when I use the term “rarified air,” that could be deemed a nicer way of saying “death zone.”
It’s not exactly a comfortable place to be.
When we looked at the stocks a couple of weeks ago that had moved up 40, 50, and 60 percent, these were the ones that I placed firmly in my death zone.
That’s because in the same way that those tickers drove the market higher (on faulty technical and fundamentals, mind you), they were going to be the ones leading the market back down after the reality set in for investors.
I mean, it feels like I’ve talked about the nonsensicalness (apparently that is a word) of the Carvana Co (CVNA) rally practically every day I’ve been on the air.
The company doesn’t make any money. Company’s got tons of debt. Cash flow is skewed outbound, to say the least. But still, the ticker went up.
These sorts of disconnects from reality pushed us to a point in the market where it takes everything acting exactly as it has to in order for us to continue rallying – or even just maintain.
And so, when options on the VIX and on the put-side of the market started to pick up last week en masse, it told me something.
It told me people are finally getting seated at their tables for their plate of reality.
So, this is really where the VIX turns into a bit of a self-fulfilling prophecy, as people start to try to figure out whether traders are scared or not.
The more ask a trader if they’re scared, the more fear starts to creep into their thoughts.
When everybody’s watching something like this and it starts to move, everyone reacts – especially when it’s as violent as taking out the 22 level, as the VIX just did.
As you can also see, in breaking that 22 level, it also broke its top Bollinger Band.
What I’m looking for is whether or not that 20-day moving average (MA20) is going to move above that 50-day moving average (MA50). If it does that, we could see the VIX just continue to run higher and higher.
Now, let me be clear, I don’t want to just come out here and say, “You need to give up on the idea of a bull market.” What I am saying, though, is you need to start adding protections to your portfolio.
Mike Wilson is going to be proven right here.
In fact, I’ve got a list with 73 different tickers that are trading within 1% of their MA50. All of them belong on a “death zone” list…
(I know, it’s longer than a CVS receipt – just click it to enlarge.)
One thing that you’ll notice is that these tickers are not your run-of-the-mill meme stocks.
People have come to expect such inexplicable spikes from names like GameStop Corp (GME), Bed Bath & Beyond Inc. (BBBY), AMC Entertainment Holdings Inc (AMC)…
That’s not what we’re dealing with here.
These are stocks that are likely already in your long-term portfolios – names like Mastercard Inc (MA), PepsiCo, Inc. (PEP), and Alphabet Inc Class A (GOOGL).
Even Berkshire Hathaway Inc (BRK.B) – Warren Buffett’s baby and the biggest investment holding company in the world – finds itself on the list.
My point is, people do not expect that type of action on these names. These are companies people expect to be insulated from meme-like rallies.
This means that, when they inevitably come down from their helium-induced highs, the impact on the broader market will be all the greater.
Panic selling will ensue as the VIX goes through the roof.
All of this brings me to the reason you need to be tuned into the Long and Short of it – the morning show – for the rest of the week.
If you’re not, you could leave yourself unnecessarily exposed to what’s to come.
Tomorrow morning, I’ll get into the correlation between market breadth – the number of companies trading above their MA50 – and the VIX, and why it matters. We’ll be using a few of those “death zone” tickers to help explain what I’m talking about, but really, that’s just hors d’oeuvres…
On Thursday, we’ll do a full breakdown of the “death zone” list, including how to trade them.
But all of that is only worth so much without Friday. That’s when I’ll give you the specific point in time I expect everything to hit the fan.
By the end of the week, you’ll have everything you need to make this market work overtime for you.
See you at 9;45 a.m. ET in the Money Morning Live main room tomorrow.
February 21 2023