The Oldest Trick in the Book

Lost in the shuffle of just about everything else, we saw the downtrodden stock of Chipotle Mexican Grill enjoy an upgrade by JPMorgan last Friday. Off the upgrade, CMG was galvanized with an initial surge of about 6% before fading a bit into the weekend but still finished green on the day. Today, the stock is up by about 0.4% as I write this. 

Now, here is the instructive and potentially actionable aspect about this for us: The upgrade was centered around valuation, ostensibly that Chipotle had reached a point where value was too compelling to pass us for the former momentum darling and, at one point a good while back, a bonafide former market leader. 

As so often happens in the lifecycle of Wall Street leaders and marquee momentum winners, they eventually mature both as brands and stocks and head to the equivalent of the "Over-55 Basketball League" at the local YMCA. 

You may also have heard of the phrase, "value trap," which is something to be on the lookout for when it comes not just to CMG but also the likes of LULU NKE SBUX, etc. during this particular economic period of entrenched inflation coupled with slowing economic growth (notably for the bottom 90% of people in the country).

In other words, should the JPMorgan upgrade fail to spawn a sustained rally in CMG, you can see for yourself on the Chipotle daily chart, below, that the bearish technical picture (below a declining 200-day moving average, lower higher and lower lows overall) suggests bottom-fishing is too early to pursue, and those who see value are, in effect, trapping themselves into much lower prices. 

Recall that during the second wave of inflation in the 1970s we finally saw the NIFTY FIFTY bubble pop under the pressure of profit margins getting squeezed due to said lingering inflation, and the aggregate PE ratio of the S&P 500 fell into the single digits. Hence, there were value traps all over the place into the 1973-1974 bear market. 

And there would be no better piece of evidence of using an example of Chipotle being a value trap than if a high profile bank like JPM's upgrade based on "cheap" valuation served no other purpose than the set up the next leg lower for the stock.