The flip-side to the broad market correction that we have seen in the Dow Jones Industrial Average and the major blue-chip indices is the five-finger discount on previously over-priced stocks. Regardless of general technical trends, a majority of publicly-traded companies saw their equity valuations decline in the latter half of August. Some names of course have been hit harder than others, leading investors to ponder whether the market gods have given a rare opportunity to ride a hard-charging bull market at less than face-value.
Wall Street, of course, is hardly a charitable organization. The notion that there's free money on the table from the greediest place on earth is one that should be taken with a grain of salt. While pure contrarians see discounts, what they are really seeing (in many cases) is a bull trap, defined by Investopedia as a "false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline."
Let's go over a few of them:
- Microsoft Corp. (NASDAQ:MSFT) - This is a pretty easy one. Despite Microsoft's relatively strong fundamentals -- outside of some niggling, non-alarming issues -- and its robust rally from its recent spike-bottom, MSFT shares have dangerously formed a bearish consolidation pattern characterized by an inability to break upper resistance levels. In addition, Microsoft shares are consolidating in the middle of a peak-and-trough range that has remained roughly the same over the past 52-weeks. This is a clear indication of a major tug-of-war between the bulls and bears, and with the broad markets so volatile, who would bet against the short-traders?
- Twenty-First Century Fox Inc. (NASDAQ:FOXA) - After a dismal three-day trade to open August -- where FOXA shares lost 13% of market valuation -- and following a similar downfall during the Dow Jones collapse, investors may be tempted to jump onboard: after all, FOXA shares are stabilizing. Well, they shouldn't be. The price action for FOXA is exhibiting similar bearish consolidation patterns that are evident in Microsoft. In reality, any long-term investors are only delaying the inevitable.
- QUALCOMM, Inc. (NASDAQ:QCOM) - The rationale for dumpster-diving shares of Qualcomm is rather straightforward: how can a brand name that has lost nearly 27% year-to-date continue to lose more valuation? The answer is that it happens more frequently than contrarians care to admit. The major problem for QCOM is that the semiconductor and technology sectors are complete crap, and the China meltdown is the biggest worry. That situation won't improve any time soon, and QCOM stock's technical pattern confirms this -- bearish consolidation ahead of a highly-probable drop.
The bottom line is this: don't be fooled by the fire-sale advertisements. Some of these stocks will see even further declines!