Two villains are set to grab financial headlines on Election Day but, in this case, at least, neither of them is running for public office. SeaWorld Entertainment Inc. (SEAS) and Valeant Pharmaceuticals International Inc. (VRX) report earnings in Tuesday’s pre-market, with their confessionals set to trigger another round of multi-year lows or hopeful bounces that add many points in coming months.
Sea World has tried to shake off a bad reputation for two years, earned when the Blackfish documentary exposed the theme park operator’s shoddy handling of captive Killer Whales. Valeant’s troubles started a year later when it assumed the role of poster child for drug price gouging, generating a massive blowback that’s undermined performance throughout the pharmaceutical space.
Both stocks continue to struggle near downtrend lows despite periodic short squeezes, with neither chart showing the slightest hint of institutional buying pressure. Valeant appears better positioned at the moment, selling off divisions to improve a battered balance sheet while SEAS just cut their dividend by 52%, despite an agreement to end captive breeding of killer whales.
SEAS Short-term Chart (2014-2016)
Sea World opened for public trading at $30.56 in April 2013 and entered an immediate uptrend that topped out one month later at $39.65. A trading range broke to the downside in August, initiating a downtrend that remains in force more than three years later. The first selling wave ended in the upper 20s, giving way to 10-month of sideways action, followed by an August 2014 breakdown in reaction to the whale scandal.
Three bounces into gap resistance got sold aggressively into April 2016, yielding a secondary breakdown through range support in the mid-teens. The decline ended at an all-time low under 12 in September, giving way to a recovery that ran out of steam three weeks ago at $14.62, well-below new resistance at $16.50. Well-received earnings could trigger a quick rally into that level while a sell-the-news reaction brings the downtrend lows back into play.
On Balance Volume (OBV) fell to an all-time low with price, confirming the most recent breakdown, while predicting it will take substantial buying interest to trigger a sizable recovery. That seems unlikely, even without the scandal, because the stock trades as a cyclical play in a vacation environment that’s growing at a snail’s pace due to the uneven economic recovery.
VRX Short-term Chart (2016)
Valeant emerged as a market leader after 2008, lifting into a series of all-time highs that reached $263.81 in August 2015. It then sold off in a historic decline, dropping in multiple waves to a 6-year low at $25.37 in April 2016. Selling pressure has eased but not ended since that time, yielding two sets of lower highs and lower lows into last week’s 7-year low at $17.75.
OBV plunged as the pricing scandal unfolded, carving stair steps that signal different tiers of shareholders abandoning ship. Day traders have replaced institutions during this period, with few funds other than Bill Ackman’s Pershing Square Management stepping up to buy the beaten down stock. The indicator fell to a multiyear low in October, even though the price is holding support at the June low, predicting the decline could eventually reach single digits.
High short interest has triggered repeated squeezes, and it may be no different from this week’s earnings report, which is likely to attract a fresh batch of novice sellers. In turn, those weak hands could set off a rapid ascent into the mid-20s and a test of the developing down channel. A bullish options play could work well with those dynamics, taking profits at resistance and reversing gears after the squeeze take its inevitable toll.
The Bottom Line
Two scandalous stocks take center stage this week, releasing earnings reports that are likely to trigger high volatility price action. This environment is best suited to short term traders with proven risk management skills while everyone else, including bottom fishers, remain safely on the sidelines.
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