As stock market averages continue to rise, people have started to wonder why do they need to pay someone to manage their money, if they could achieve a satisfactory return just by buying and ETF tracking the S&P 500, for example. As a result, money has been pouring out of hedge funds at a record pace, forcing money management firms to struggle for every dollar of profit they make. Waddell & Reed Financial Inc (NYSE:WDR) has been hit especially hard. The stock fell from its 2014 all-time high of $76.46 to as low as $15.02 by October, 2016. WDR spent the last year locked in a range, unable to make a proper rebound and is currently trading slightly below $19 a share.
On the other hand, if the broad market’s uptrend is the main driver behind Waddell and Reed’s downtrend, it makes sense to expect a recovery, once benchmark indices run out of power. After all, no trend lasts forever. We believe that as soon as the market reverses to the south, people would return to the money managers. Of course, the path of logic could often be misleading in the markets, so let’s see what the Elliott Wave Principle suggests is left of Waddell & Reed’s decline.
The lack of direction during the last year has formed a pattern, known as a triangle. It is exactly what brings clarity to what would otherwise be a shapeless crash. According to the theory, triangles precede the final wave of the larger sequence. This means a triangle could be found in the position of waves B or X in simple and double zig-zag, or wave 4 within a five-wave impulse. The selloff was already interrupted once by a recovery from $41.06 to $51.80 in early 2015, which fits in the position of wave 2.
If this count is correct, Waddell and Reed’s slump is not over yet. The downtrend is still in progress, since wave 5 down should be expected to drag the share price to a new low beneath the $15 mark. WDR might lose another 25% before things start to improve. Just like the Dow Jones Industrial Average could rise by another 3000 points, before it turns south. Patience is key.