The Existential Crisis

Lululemon (LULU) printed as low as 107 on Friday. The stock once traded at $500.

That marks an 80% collapse from the high. The price-to-earnings ratio has dropped to six or seven.

The company will still book nearly $12 billion in revenue this year. Its margins are still healthy.

On the surface, this looks like a screaming bargain. That surface is exactly the trap.

Cheap stocks are where disciplined people lose the most. A fallen favorite pulls buyers in at every discount.

They average down. They get buried.

This weekend you will learn how to separate a real bottom from a falling knife. The low price is a distraction.

Watch the overhead supply instead. Watch whether the last bull has finally quit.

I have watched this pattern punish good investors for years.

Let me walk you through it on Lululemon.

A six P/E feels safe. It is not protection.

Lululemon delivered decent numbers this quarter. The bleeding continued anyway.

The options market implies the company survives. The real question is how much trapped supply sits above the current price.

Low valuation invents a story. The story says the worst is over.

The chart has not agreed once on the way down.

Strong revenue hides real rot. Lululemon carries a stack of issues that keep buyers cautious.

Those problems are not abstract. My co-host Gianni Di Poce sees them up close.

His wife teaches yoga and Pilates. She watches the consumer move toward a rival brand called Alo.

The backlash centers on polyester. Most Lululemon fabric is polyester.

Polyester is made from crude oil. Rising crude lifts their costs while Alo steals their core shopper.

I owned this stock. I bailed at 160 and 150.

I broke even on the trade. I gave myself one rule. If it took out 150, I was done.

I got out. I feel blessed that I did.

Back then it looked cheap too. It looked like a long-term bottom.

That read was wrong. You learn one hard truth in this business. Nothing bottoms until the last bull gives out.

The last bull has not given out on Lululemon yet. The proof sits in the volume profile.

Heavy overhead supply is stacked at 300.

Picture the buyers above. Someone grabbed a bargain at 328.

They are down badly now. Every rally toward 220 hands them an exit.

That selling caps the stock.

Lululemon could still drop toward 50 before it is finished. I would not mock that target.

The overhead supply makes it real.

Buying a stock because it looks cheap is how careful people get ruined. Wait for the last bull to quit.

Let the supply above clear first.

It tells you when a bottom is worth trusting. Do not catch the falling knife.

Stay disciplined.