Trading market shocks: Waste not, want not

04/12/19
  • WM dropped more than 5% in early trading yesterday
  • Stock was up more around 17% on the year in early April
  • Similar moves over past 25 years may signal future direction

Waste Management (WM)—guess what business they’re in?—did something yesterday that it hasn’t done in since February 2018, and has done only three times in the past decade: dropped more than 5% intraday.

Waste Management (WM), 2/14/19 – 4/10/19. Waste Management (WM) price chart. Plunge and reverse.

Source: Power E*TRADE


It was quite a move. The stock’s $5.38 decline was its biggest intraday dollar loss of the past five years, and it was more than six times the stock’s average daily move during that period. Down days in general—especially -5% ones—haven’t exactly been WM’s thing in recent months: The stock had a 17% year-to-date return on April 1 when it hit its most recent record high, was still up around 16% a day before yesterday’s flush-out, and had closed up 43 days this year while closing down only 26. Which may help explain why the market was caught off guard yesterday.

The apparent source of this market “shock”? An analyst downgrade from “buy” to “neutral” for WM and a few other waste management stocks because of an expected contraction in the recycling business.1

Did this news merit such a big reaction? Impossible to say, since there’s no way to know if the analyst’s take on the industry will hold water over time, or if WM will weather any emerging challenges better or worse than other stocks in its industry.

At least some traders thought yesterday’s initial WM sell-off was overdone—the proof is in the buying.

But it’s worth noting that about halfway through yesterday’s trading session, WM had rallied nearly 3% off its intraday low of $97.55 to push back above $100, and was on target to close out the day in the top third of its range. One way to translate this bit of price action is that at least some traders thought yesterday’s initial sell-off was overdone—the proof is in the buying.

The question now is whether traders still think yesterday’s shock move was too much (WM closed down more than 2%), or if it points to a longer-term cooling in WM and related stocks. Prior to yesterday’s news, there didn’t seem to be much chatter about the state of the waste management business, and WM had recently been cited as an attractive service-industry stock2—and the service industry has until now avoided the economic contraction experienced throughout much the manufacturing economy.3

But now, on to brass tacks. If WM’s past price moves are any indication—and they’re worth consulting, even if they’re not a foolproof indicator—bulls may have reason to expect at least some additional upside in WM, regardless of the longer-term picture. After the 21 other days since 1995 WM has closed in the upper third of its range after declining 5% or more intraday, the stock has shown a tendency to bounce back in the near-term.

Waste Management (WM) 5-day and 10-day returns, 1995–present. Service industry stocks, Waste Management (WM). Big gains after big sell-offs.

Source: Power E*TRADE


The chart above compares WM’s median returns five and 10 days after these big declines to the stock’s overall five-day and 10-day median returns. WM’s typical return five day after these big intraday declines was around 2.5%—more than 10 times the typical 0.17% return a five-day period. And 10 days after the big declines, WM had typically gained around 4.3%, compared to its 0.5% return for a typical 10-day period.4

Will this turn out to be another time WM stages a near-term rebound from a downside shock? There are no guarantees, but traders with cool heads often look to market shocks for potential trading ideas, because as the WM data suggests, exceptionally big moves often get reversed, at least partially.

Market Mover Update: Bank of New York Mellon and BlackRock were among the institutions that increased their stakes in Yelp (YELP) in the fourth quarter, according to recently reported SEC filings.5

Facebook (FB) spent its sixth consecutive day above the breakout level discussed in “Breakout watch: Stocks on the brink.”

Airlines had a big day yesterday, with Delta (DAL), American (AAL), United (UAL), and Southwest (LUV) all rallying more than 1% intraday.

Today’s numbers (all times ET): Import and Export Prices (8:30 a.m.), Consumer Sentiment (10 a.m.), Baker-Hughes Rig Count (1:00 p.m.)

Today’s earnings include: JPMorgan Chase (JPM), Wells Fargo (WFC), PNC (PNC), First Republic Bank (FRC).

 

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1 SeekingAlpha. Waste stock bull slashes ratings. 4/11/19.

2 Fool.com. 3 No-Brainer Stocks to Buy in...Business Services. 3/3/19.

3 The Economist. The gloom hanging over the world economy is confined to manufacturing. 4/4/19.

4 Supporting document available upon request.

5 Fairfield Current. Bank of New York Mellon Corp Boosts Stake in Yelp Inc (NYSE:YELP). 4/10/19.

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