Can Wayfair Round The Corner Into A Short-Squeeze?

Key Points

• Wayfair has begun to attract analysts' interest and is on the cusp of a reversal. 
• Institutions have been buying, helping the market to bottom. 
• The company could surprise with Q2 results and spark a solid short-squeeze. 

Wayfair NYSE: W stock has been under pressure since hitting the peak of its bubble 2 years ago, but it may be ready to round the corner to the next phase of its life. The chart action is interesting and suggests a reversal is in play that could lead to a substantial short-squeeze. The short interest is down to about 20% compared to prior months but still relatively high and sufficient to fuel a short-covering rally, if not an outright squeeze.

The next significant, visible catalyst for the market is the Q2 earnings report, due out in early August. 

Wayfair Could Produce A Solid Quarter For Q2 2023

The analysts have been raising their estimates for Q2, so the bar is set high. Even so, Wayfair is expected to produce a 6% YOY decline in revenue, opening the door to 2 potential catalysts. The first is that revenue will outperform the high expectations and lead to another round of analyst upgrades. The 2nd is earnings.

The company is expected to cut its adjusted loss by more than half and could also outperform due to recent signs of strength. The company stands out as the leader in Sensor Tower’s app downloads data for June. Downloads of the company’s app jumped 50% YOY, with DAUs advancing 8% YOY.

That’s a significant figure because it returns the company to growth and sets it up for a solid 2nd half despite fears of a consumer spending slowdown. 

The analysts' sentiment is helping the market to find its bottom and may lead it higher once the results are out. The Marketbeat.com consensus sentiment is only a Hold, but this is up from Reduce YOY and firming. The most recent 7 include 1 price target reduction, but the remainder includes 5 price target increases and an upgrade to Market Perform from Under Perform.

The price target leaves something to be desired but shows signs of firming. The problem is that the consensus of $50.70 is about 28% below the current action and will put a cap on gains in the near term. The mitigating factor is the 3 most recent price target increases were issued in July before the Q2 report and are above the consensus.

If the Q2 report satisfies the analysts, they could raise their targets again and to a level that will lead the market higher. 

JPMorgan Chase is among the most bullish on Wall Street. They added the stock to their focus list, citing market share gains and structurally improved profitability. In their view, the company will outperform its peers because it is the best positioned and able to scale. 

The Wayfair Market Is At A Turning Point 

The institutions may not add a tailwind to this market, but the headwind they produced over the last 2 years has subsided dramatically. Net activity is overwhelmingly bearish, 15:1 in favor of selling, but even here, there is some good news. The bulk of the selling was in the 2nd half of 2022, and so far, 2023 has been different.

Total activity is well off the peak but bullish on balance in Q1 and Q2 and so far in Q3. This action is consistent with the bottom of the market and may help lift prices. The risk is that institutional selling spiked in Q2 2022, along with a spike in the price action. The price action is back to similar levels and may attract another round of selling.

As for the chart, the price action is interesting because it shows a rounded bottom that includes a Double Bottom and a Head & Shoulders pattern on the verge of complete reversal.

These are solid bottoming patterns and show substantial support at current levels. The critical resistance is near the top of the bottoming range, which is near $75.

Given the short interest, a move above there would indicate a complete reversal and may spark a strong rally. If not, this market will stay range bound with a chance of retesting the bottom of the range.