Confidence Shakedown In Zillow Stock Will Send Bears Into Hibernation

The U.S. economy has never been hotter but Wall Street investors are on edge. As a result, great stocks are collapsing from their pandemic highs. One of those is Zillow (NASDAQ:ZG) stock, which is now 75% below its peak from last February. ZG stock’s 1000% moonshot out of the 2020 lockdowns was absolute lunacy.

Investors went nuts chasing online businesses benefiting from the pandemic. While there is truth that Zillow’s business stood to gain from the trend, the bulls went beyond reason.

Most stock corrections happen over bad expectations. In this case the correction was also partly because the company also committed a faux pas. Zillow’s management delivered bad news last year regarding a strategic shift. They exited the business of buying homes at a loss and that shook investor confidence.

The stock consequently fell sharply from near $100 per share and hasn’t stabilized since. Therein lies the technical opportunity.

ZG stock is falling back to the levels it was at before the pandemic. This puts the current price in a pivotal area, where buyers usually lurk. There’s no evidence that this will be an absolute flat line bottom, of course. Stabilization usually happens as a stock stops making lower-lows.

Signs of ZG Stock Seller Exhaustion

Source: Charts by TradingView

Yesterday the stock market ended in disaster and the carnage only continued afterhours. In spite of it all ZG stock closed positive, which could be a sign of seller exhaustion.

The bears are going back into hibernation. Those who are still holding shares here are less likely to panic out now. Also new buyers from these levels will have stronger conviction than ones who bought extreme highs.

In other words, when a stock falls 70%, it shakes out all the weak hands. Now the owners are less jittery, which usually translates into stronger support.

I can’t argue for an immediate rally, nor am I expecting ZG stock to revisit $200 per share. The 2021 highs were overblown, so the truth lies somewhere in the middle. I would consider Zillow Group a long-term investment with a potential shorter term swing. But by no means should investors go all in expecting a “V” recovery to the highs anytime soon.

Wall Street lost its mind after the pandemic. I doubt that those days are coming back and I’m grateful. I like it better when we do fundamentals homework, consult a few charts and set trades with conviction. Now price action is more reliant on headlines from the Fed, politicians or other world leaders than investor sentiment.

Fundamental Are Strong

The best argument for ZG stock is its P&L, and that metric speaks volumes. The business is growing at a rapid pace despite the hiccups; revenues now are five times higher than 2017 and gross profit has nearly doubled.

Moreover, thanks to the sharp stock drop, the valuation still makes sense. Even though Zillow loses money, its price-to-sales is under three. This means that buyers of the stock now have modest expectations. You can’t disappoint a low bar.

This is all to say that I am more optimistic than pessimistic on ZG stock from here. The elephant in the room is of course the effect of the Fed monetary policy. They are in the process of putting the crimps on the economy. This could cause the mortgage industry to slow down. As a result, the Zillow business could suffer a bit. This is another reason for fans of ZG to temper their enthusiasm a bit.

This morning the indices are again under pressure and technically broken. Onus is on the bulls on Wall Street to pick the reins back up.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

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