Why Investors Shouldn’t Step Into Square Inc Stock Just Yet

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SQ stock - Why Investors Shouldn’t Step Into Square Inc Stock Just Yet

Source: Chris Harrison via Flickr (Modified)

Back in early November, I penned a commentary claiming Square Inc (NYSE:SQ) was “the new hotness.” That is to say, this was a company that solved a modern-day, digital-age problem that credit card middlemen like Visa Inc (NYSE:V) and payment processors such as First Data Corp (NYSE:FDC) didn’t. SQ provided turn-key credit card acceptance solutions for (very) small businesses.

I still contend Square has a great future, particularly now that it’s getting into the micro-lending business that local and community banks have largely laughed at over the years. I’ve got to be honest, though. I wouldn’t be a buyer of SQ stock right now. As they say, timing is everything.

Story-Driven Rally

As a refresher for those who may not be familiar with the company, Square is the outfit behind the small, white, square-shaped devices that attach to a smartphone and turn it into a credit card reader. Small businesses like hairdressers and electricians love them, as they’re (1) mobile and (2) make taking credit card payments affordable.

The company isn’t profitable on a GAAP basis yet, but with projected top-line growth of 32% next year, there’s plenty to be excited about.

And investors certainly have been excited. The SQ stock price soared from less than $11.00 in October of last year to a high of $49.56 late last month — a 350% advance — thanks to the company’s relentless growth. If there was any doubt Square was here to stay, 2017 wiped that doubt away.

A company’s permanency, however, doesn’t inherently mean that company’s stock will only rise. Indeed, with percentage gains in the strong triple digits for the past year, the risk of a pullback is great. Big-time gains invite big-time profit taking.

Crumbling Under the Weight of Gains

And that’s where SQ stock is now. The Nov. 22 peak set the stage for a selloff, and a downgrade was all the excuse traders needed.

BTIG analyst Mark Palmer did the deed, lowering his stance on SQ stock to a “Sell,” explaining:

“We believe SQ’s valuation already reflects emphatic and unimpeded growth while failing to factor in competitive, credit-related and macro risks that did not go away when some investors suddenly viewed its shares as a play on a trendy cryptocurrency.”

Palmer being right or wrong is irrelevant. The only relevant matter is that this vulnerable stock began taking on water as the profit takers came out of the woodwork. They may not be done yet either, unfortunately.

The chart below tells the tale. While the stumble in late November was significant, it looked like the 50-day moving average line (blue) was going to serve as a floor, prodding a reversal. Now it doesn’t.

On Wednesday of last week, the second bearish wave pulled SQ stock below this pivotal line and dragged shares to within easy reach of a move below the early December low of $35.86.

 


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A move back below the $35.86 mark could open the selling floodgates, so to speak, with the weakness looking like it’s getting too serious, even to the most committed of this company’s bulls.

Also notice that while Square shares bounced late last week and early this week, the volume behind this effort was minimal. Conversely, the volume on the bearish days has been greater than the volume on bullish days.

Simply put, there appears to be more sellers than buyers.

Bottom Line for SQ Stock

We’re not past the point of no return yet, and even if the SQ stock price breaks below $35.86, there’s a reasonably good chance the 100-day moving average line (purple), currently at $31.99, could serve as a floor.

Given the shape of the November reversal though — and in the context of what looks to be a blow-off top — there’s too good of a chance there’s more selling in the cards to risk stepping into the stock at this time.

That’s a minority opinion, by the way, and not based on any fundamental argument. Then again, the rally since last October was never really about the fundamentals either. This is a stock that’s trading on perception and headlines.

As for how far a pullback might be allowed to go, a slide all the way back to the $24 area isn’t out of the question. That was a ceiling and a floor around the middle of the year, and it also happens to be where a key Fibonacci retracement line lies. Then again, there’s a Fibonocci retracement line near $34 as well, so traders would be wise to note that possibility as well.


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Whatever the case, reading the chart correctly is the game here, and the chart’s subtle clues point to lower lows before higher highs again.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/why-investors-shouldnt-step-into-square-stock-yet/.

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