Sometimes a market professional has to be a Sherlock Holmes – piecing market moves together to get a picture of what the ‘smart’ or big traders are doing in an equity position that you may have. Sleuthing is part of the job and Model Price Theory (MPT) makes the job a little easier. Let’s take for example Netflix (NFLX).
As always let’s start with our model price chart of Netflix.
Netflix Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.
Look at the weekly price bar I have annotated with an arrow in the above model price chart. This price movement at the time caught my eye because of the negative transit of EBV+8 and I noted it at the time in the ‘Comments Section’ of our Facebook App. This negative transit was the first sign that should have alerted traders or investors interested in NFLX that caution was warranted in a stock that has gone straight up since mid 2012.
A couple of weeks later, Carl Icahn released disclosure documents with the Securities and Exchange Commission detailing he sold 2,400,000 shares of NFLX on October 22nd, (you guessed it) the very week the annotated price bar highlights. Carl Icahn, who at the time owned about 10% of the company, initiated a major sale – with this sale and subsequent sales sold half of his position – caused a negative transit of EBV+8. Netflix, the stock price, subsequently recovered after the highlighted sale on October 22nd and negative transit of EBV+8 and made a parabolic move higher almost trading to $400 a share. Mr. Icahn used this surging stock price selling even more of his position, after the initial sale, as the stock rocketed upward.
From a model price perspective Mr. Icahn’s initial sale caused a negative transit of EBV+8. We obviously didn’t know this information at the time however he did leave his fingerprint in terms of the model price work. Who knows why Mr. Icahn sold his position in the company? Even with the fundamentals of the company seemingly still strong, there is a point where the valuation of the company makes little sense to all but the most optimistic or momentum style investors.
Negative transits of our EBV lines happen for a reason. Investors, traders should be on their toes when transits occur especially on stocks that they own or contemplate owning. The negative transit of EBV+8 on October 22nd in NFLX was a precursor illustrating future corporate news on the ownership of the company. Mr. Icahn, as I have illustrated in a previous blog, purchased his position in NFLX at the most advantageous time according to our model price work. Mr. Icahn in selling half of his ownership in NFLX did so at a very opportunistic time and valuation, making perfect sense according to our model price work.
Time will tell, maybe in a couple of years, when we look back at Mr. Icahn’s sale of NFLX shares could be just as opportunistic as his buys.