For the past 12 months, equity markets have been on a tear. Bulls seem to feed on fear. We saw a rally off the Brexit vote, then a “Trump trade” after the U.S. presidential elections. So the stigma of animal spirits fits this market well. Red days have been scarce, so when they come they seem like chasms. Even then, every little dip catches a bid.
Facebook Inc (NASDAQ:FB) for example is now 30% higher than a year ago. Yet, even now it’s not bloated in valuation. Fundamentally, its price-earnings ratio is inline with that Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT). Moreover, FB carries better net profit margins.
I do worry about lofty expectations, though. Analyst ratings are mostly foretelling FB outperformance and that leaves the door open for disappointment.
Yet, I still bet that Facebook management is up to the task and will deliver. They are proven performers. FB now owns several platforms and has the attention of over a billion daily active users for hours at a time.
The price action in FB stock has been bullish. The April rally retraced only halfway before bulls rallied back and set a new high. If this week’s mega-cap correction stabilizes for FB around $145, then the bulls can build more upside campaigns.
FB Stock Correction
This week’s correction was across all mega-caps. We saw similar drops in Apple Inc. (NASDAQ:AAPL) and the collective known as “FANG” stocks It is important to note that there has been no fundamental changes in any of these stocks. So the price gyrations are the result of macro headlines from the U.S. Federal Reserve and other economic and geopolitical concerns.
By historical standards, the dip was minuscule, yet the media labeled it as a “correction.” We’ve been spoiled in expecting nothing but green days and all-time highs. So small dips feel like disasters.
FB stock is merely 3.5% off its all-time high. This is hardly an abyss. So while I want to go long FB, I am not enticed to risk $150 buying the shares with no room for error.
Since waiting for a deeper correction seems futile, my goal today is to generate income from FB options. The trade would profit without the need for higher prices. Case in point is this FB one from a month ago that yielded easy profits even if the price action wasn’t perfect.
Here I will repeat the process knowing I have profits in hand. I sell downside risk below proven support and if price stays above my position I keep my premium for maximum profits.