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5 Social Networking Stocks to Sell Now - views
BALTIMORE (Stockpickr) -- Just like that, the “Wall Street darling” status once held by social networking stocks is gone. Long gone.
It was only a handful of months ago that social media companies -- and private equity names in general -- were getting plenty of positive press that coincided with a slew of high-profile IPOs. In fact, internet businesses were one of the few industry groups that actually plowed higher in mid-to-late 2011, as the rest of the market got shaken around by debt ceiling drama here at home and the ongoing European debt crisis across the pond.
But those times are over. Tentative profitability and even more tentative price appreciation has pushed investors out of social networking stocks en masse, and by and large it’s been for a good reason. But now that so many names are “cheap,” plenty of people are scouring for bargain-priced buying opportunities where they shouldn’t be.
That’s why we’re taking a technical look at five social networking stocks you should sell.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Now, to be clear, I’m not saying that bankruptcy is inevitable for these firms. I’m not even saying that they’ll continue to fall forever. But in the short term, investors should be avoiding these five names like the plague.
With that, here’s a look at five social networking setups that you should sell in August.
We’ll start off with Groupon (GRPN), a stock that’s sort of exemplified Wall Street’s disappointment with social media stocks. This Internet deal site went public in the biggest internet IPO since Google (GOOG) back in November, pricing at $20 per share and falling like a rock ever since thanks to a combination of fundamental and technical factors.
With especially ugly technicals shaping up right now, I’d suggest selling this stock.
Groupon formed a bearish descending triangle pattern for most of the summer, bouncing in between a horizontal support level and downtrending resistance. Essentially, as shares volleyed between those two price levels, they were getting squeezed closer and closer to a breakdown below support. That breakdown happened at the start of July, spurring a sell signal in shares.
And Groupon is showing no signs of finding bottom yet. Momentum, measured by 14-day RSI, has been in a solid downtrend since the start of 2012. Since RSI is a leading indicator of price, that means Groupon is in “sell mode” right now. I’d advise you do the same.
Chinese online media and gaming company Sohu.com (SOHU) may be a half a world apart from Groupon, but its price action isn’t far off at all. Like GRPN, Sohu triggered a bearish descending triangle pattern earlier this summer. That’s continuing to rule price action as we approach August.
The key difference with Sohu is that the triangle pattern in this stock was longer-term -- it had been forming since all the way back in October. And because longer-term patterns have longer-term implications, Sohu’s sell signal remains flashing right now. Former support at $46 is now a resistance level for Sohu (a fact that can be seen back in May and June), and that means that even if shares did bottom here, they’ve still got some major selling pressure to overcome before they can regain the levels shares traded at back in 2011.
In other words, it still makes sense to sell down here.
Don’t think that oversold RSI is a reason to buy here, either. Statistically speaking, oversold RSI is more likely to become more oversold in the short-term. And with that momentum gauge still trending lower, there’s no reason to expect anything more than a minor relief bounce this week.
The best way to think of online game developer Zynga (ZNGA) is that it’s a sort of high-beta Facebook (FB). In other words, any moves Facebook makes, Zynga makes too – just bigger. And since FB isn’t exactly a stable stock itself, that’s a scary thought. But Zynga’s most recent price action is even worse than the norm.
Zynga slashed its outlook for the year late last week, sparking an exodus in shares that sent the stock down 41% in the last few market sessions. If you think the worst is over, don’t. Statistically, it’s likely that Zynga is going to continue to move lower.
That’s because shares gapped down on the news. Yes, it’s really as simple as that. According to research by market technicians Julie Dahlquist and Richard Bauer, downward gaps are shortable in the short-term.
While what Zynga does longer-term remains to be seen (in the long-term, gap downs often make up for lost ground), investors who don’t want to keep getting hammered by this stock should look to sell.
If we’re talking Zynga, we can’t forget about Facebook (FB). Facebook has been drawing its fair share of unwanted attention from its own post-IPO drama, and the verdict is the same: sell this stock.
Just like Zynga, Facebook dropped dramatically late last week, sliding close to 20% after the firm announced an in-line earnings report. Facebook’s performance post-IPO has at least been consistent. Shares made their all-time high at the get-go, falling ever since with a series of higher lows.
While a reasonably strong support level had been set at $26 back in June, any buying pressure below that price got sapped on Friday when shares gapped down to test new lows in the low $22 range. For the exact same reasons as Zynga, Facebook’s gap down is a signal to stay away from shares.
Even worse, Facebook opted to take advantage of what they thought was good IPO sentiment by offering even more shares to the public. That means that FB has a much bigger float than other sell-worthy stocks like Zynga, a factor that could hike shorting (and thus increase selling pressure) in Facebook. I’d strongly recommend against going bargain-hunting in this stock.
For another take on Facebook, it shows up on a list of 3 of Wall Street's Future $100 Stocks.
Like most of the other names on this list, it’s been a tough year for shares of Sina (SINA). The Chinese social media network has slid more than 7% so far this year, underperforming the S&P 500 by more than 17% over that time period. And Sina looks pointed lower this summer.
Shares have been in a downtrending channel since back in March, making an orderly decline as more and more investors decide to unload their positions in this stock. One important thing to remember about downtrends (unlike uptrends) is that they can occur for two reasons: either people hate the stock (and want to sell) or people don’t care about the stock (and don’t want to buy). The declining volume over the course of the downtrend points to the latter.
The fact that shares broke down below an important former support level at around $50 indicates that any previous pockets of buying pressure have been taken out by what’s been going on in shares. Traders looking for a shorting opportunity in Sina should look to sell a bounce lower off of trendline resistance. Just keep a tight stop.
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.