Pfizer Inc.'s (PFE) blockbuster vaccine news triggered a wholesale exodus from COVID-19's biggest beneficiaries on Monday, with double-digit percentage declines in well-known momentum plays, including Zoom Video Communications, Inc. (ZM), Peloton Interactive, Inc. (PTON), and DocuSign, Inc. (DOCU). Notably, all of these stocks were getting sold under the surface for weeks prior to the news, with insiders stepping aside after historic share gains.

Key Takeaways

  • The top COVID-19 plays have entered intermediate corrections.
  • The pandemic won't end quickly, despite effective vaccines.
  • The 200-day moving averages look like logical downside targets.
  • Now isn't the right time to catch a falling knife.
  • Political uncertainty could add to downside in coming weeks.

These issues are obviously overvalued, but trends don't turn on a dime, raising doubts about the persistence of selling pressure. And contrary to Monday's euphoria, the pandemic isn't going to end overnight after vaccines are approved and manufactured because large segments of the U.S. population will refuse to take them due to anti-vax fears and political discontent. This should keep folks on their Peloton bikes and out of fitness centers for the next year, at a minimum.

In addition, the pandemic has triggered a number of paradigm shifts that are likely to alter business and personal landscapes for decades to come. The virtual meeting space and transition to digital currency come to mind, with Zoom meetings taking place for a fraction of the cost of business travel, while PayPal Holdings, Inc.'s (PYPL) steep long-term growth curve will likely persist despite yesterday's 9% downdraft.

An overvalued stock has a current price that is not justified by its earnings outlook, known as profit projections, or its price-to-earnings (P/E) ratio. Consequently, analysts and other economic experts expect the price to drop eventually.

Time to Take Defensive Measures

Even so, traders and investors need to focus their attention on the task at hand, tightening up stops and taking other measures to avoid turning winners into losers. In addition, it isn't wise to catch falling knives right here, due to rising odds for multi-week corrections that test new support levels and major moving averages. That process has already begun, with big COVID plays breaking 50-day exponential moving average (EMA) support on Monday, shifting attention to their 200-day EMAs.

Unfortunately, getting to that long-term moving average will require more pain and double-digit down days. It's really a matter of risk tolerance at this point – i.e., are you willing to roll the dice in anticipation of stronger price action, or is it time to cut and run? Also consider that we've entered a period of uncertainty that includes the possibility of a president barricading himself in the White House. This factor alone could weigh heavily on buying sentiment in coming weeks.

Zoom Daily Chart (2019 – 2020)

Chart showing the share price performance of Zoom Video Communications, Inc. (ZM)
TradingView.com

Zoom stock got crushed on Monday, breaking 50-day EMA support near $460 and dropping more than 17% to a two-month low. It is trading flat after selling off 11 or so points in Tuesday's pre-market session, putting additional pressure on shareholders. This price action confirms a failed breakout above the Sept. 1 high at $478 while raising the odds that the unfilled portion of the gap posted in that session will eventually fill, exposing downside to $325.

Meanwhile, the 200-day EMA is now rising from $295, suggesting long-term support around the psychological $300 level, where the .786 Fibonacci selloff retracement is also situated. A decline into that level would have been unthinkable just two days ago, but investors now understand how quickly Zoom can shed 100 points. Even so, it's more likely that the selloff's trajectory eases soon, with a slower grind into support rather than a stomach-churning death spiral.

An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The EMA reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.

The Bottom Line

Top COVID stock plays have now entered intermediate corrections that could stretch into their 200-day EMAs, situated at much lower price levels.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.