Tradeweb Markets rose nearly 10% on July 27th after posting strong Q2 financial results. The stock surged from just above $74 to $81.23 that day. Yesterday, it closed at just under $84, bringing the total gain from its October 2022 low to over $30 a share. Now, following this 60%+ rally in less than a year, the overwhelming majority of Wall Street analysts has a Buy rating on TW stock.
It is easy to be bullish when everyone else is, too. Unfortunately, that’s not how market-beating returns are achieved. In order to really be successful in the financial markets, one has to find a way to be a step ahead of the others. Nine months ago, on November 4th, 2022, while the stock was still below $55, we wrote that “it can rise by over $20 from here.” The stock had just been cut in half from its late-2021 peak, but Elliott Wave analysis was already positioning us a for a major recovery.
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This is the chart our contrarian optimism was based on. Instead of simply joining the bears, who had been in control for nearly a year by then, we recognized that the decline from $102 to $51 was a five-wave impulse. The pattern’s sub-waves were labeled 1-2-3-4-5, where waves 2 and 4 ended shortly after touching the 61.8% and 38.2% Fibonacci resistance levels, respectively.
According to the Elliott Wave theory, a three-wave correction in the opposite direction follows every impulse. So we thought that Tradeweb stock can approach the $75-$80 area before the bears return. There was also an obvious bullish MACD divergence between waves 3 and 5, which also supported the mid-term positive outlook. Nine months later now, here is an updated daily chart of Tradeweb Markets Inc.
The bulls obviously exceeded our expectations. Instead of $20, they’ve added $30 a share since our analysis on November 4th. However, simple extrapolation of the recent past into the future won’t get us too far financially. And while there isn’t a single Wall Street analyst with a Sell rating on the stock, we think that’s precisely what investors should do now.
The recovery from $51 to $85 has taken the shape of a textbook three-wave correction, labeled a-b-c. This means that the 5-3 Elliott Wave cycle from the top at $102.33 is now complete. Once a correction is over, the preceding trend resumes. If this count is correct, we can expect a bearish reversal to soon trigger another selloff in wave C, whose targets lie below $51 a share.
The stock price is now bumping into the 61.8% Fibonacci resistance, which is another reason to expect the bears to show up. Besides, Tradeweb ‘s valuation spells trouble, as well. The company is expected to make just $2.16 in EPS this year. At the current price of ~$84, this translates in a P/E of 39. Paying such a high multiple strikes us as too optimistic and irresponsible.
Tradeweb Markets stock seems priced for perfection and perfection doesn’t last long in business. Multiply this by the bearish Elliott Wave setup on its daily price chart and we have plenty of reasons not to add TW to our portfolio. Once the stock has fallen below $50 and maybe even $40, the situation will be quite different. Until then, we remain on the sidelines.
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