When I last wrote about Facebook, Inc. (NASDAQ:FB), I stated that I don’t see enough reason to panic. Sure, the company has been in the spotlight politically, and not for the right reasons. However, the mainstream media’s Russia hysteria is overplayed. While the negativity could impact Facebook stock in the nearer term, I was against the concept of giving up on it altogether.
I’m still in the bullish camp for the long haul, despite that political headwinds only seem to be getting worse. So no, I’m not recommending panicking out of your position in Facebook stock and seeking greener pastures. However, I don’t think it’s wise to ignore troubling issues that are brewing. I’m convinced that company shares will face further volatility, so investors should buckle up.
First, an event unrelated to FB stock: I don’t like what I’m seeing in the major indices. The broader markets hardly put up a fight this week, leading to disappointing performances. Plus, it wouldn’t surprise anyone now if the markets continued their decline. According to The Washington Post, President Trump will impose 25% tariffs on foreign-made steel and 10% tariffs on aluminum.
Naturally, our affected international partners will retaliate, which doesn’t bode well for most companies in the nearer term. And as much as I like Facebook stock, I don’t consider social media firms as an effective defensive play.
Second, FB stock has done nothing this year, and by nothing, I mean literally nothing. Year-to-date, shares are down 0.3%. Unfortunately, while I’m rational about the political turmoil swirling around Facebook and its alleged facilitation of trolls and spies, the markets don’t have to agree with me.
When there’s a disagreement between the markets and your analysis, definitely go with the markets!
Facebook Stock Is a Solid Play in an Unsteady Market
Over the past few weeks, while benchmark exchange-traded funds like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) inched forward from the doldrums, I publicly expressed my hesitation. Technically speaking, I was unimpressed with the momentum. It wasn’t enough that the benchmarks increased; they had to convincingly move past the point where they initially faltered.
I’m seeing the same problem with Facebook stock. Not only is it moving sideways for the year, it failed to hold support at its 50-day moving average. This dynamic is very similar to what we saw in the SPY and the major indices. Thus, if the broader markets get weaker, Facebook shares may follow suit.
InvestorPlace Chief Technical Analyst Serge Berger feels the same way. Berger also believes that the bigger picture is positive for long investors and urges shareholders not to overreact.
However, he warned that Facebook stock faces weakness ahead for failing to secure important technical levels. In the near term, FB is more likely to fall, thereby providing opportunities for tactical short positions.
I wholeheartedly agree with Berger, and not just because he’s our top technical expert. But to add to his warnings, I believe that FB stock is charting a pattern known as the broadening top. I’ve referenced Stockcharts.com’s explanation so that you can verify for yourself and not just rely on my word.
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What caused concern for me was not just the physical similarities. According to John J. Murphy’s Technical Analysis of the Financial Markets, a broadening top is a bearish signal that occurs at major market tops. Murphy further explains that this pattern “represents a market that is out of control and unusually emotional.”
Investors are definitely emotional about Facebook, and FB stock can’t control its present choppiness.
It’s Noise, Not a Siren
Where I disagree with Murphy’s forecasting implications is the fundamentals. Facebook is the undisputed leader in social media, primarily because it owns the demographics that matter. Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP) don’t come close.
Facebook also dominates in subscriber growth. With Twitter and Snapchat being the younger platforms, their growth rate should theoretically skyrocket. Yet from the user growth stats I see, it looks like their popularity is maturing. Meanwhile, with over two billion monthly active users, Facebook has more than a quarter of the earth’s population.
Thus, the troubles impacting Facebook stock are noise. Yes, it will hurt, and as I mentioned in my last write-up, I’m not opposed to taking some profits off the table. But this is easily a company that can bounce back as it has done many times before.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
