Shares of Twitter Inc (NYSE:TWTR) are enjoying a nice boost Tuesday, up more than 5%. The move comes on news that TWTR stock will replace Monsanto Company (NYSE:MON) in the S&P 500.
Twitter’s move into the S&P 500 is extending the 52-week highs that TWTR stock set on Monday. So naturally, investors may be wondering whether now is the time to buy.
What Does the Move Mean?
Being adding to the S&P 500 — or any fund for that matter — is generally viewed as a good thing. Why? The reasoning is simple. Aside from hitting a point where a company is deemed good enough for the group, there is a fresh new wave of buyers. It’s not just momentum traders loading up on the name because of the news, either.
Exchange-traded fund, mutual fund and portfolio managers now have to buy the stock because of its position in the index. If they have exposure to the S&P 500 or a client that wants exposure to the index, they have to buy it. And by buying that fund, they buy the stocks that are in the fund.
Pretty simple, right?
It is, but it’s a bigger catalyst than some people realize, as a bulk of investment dollars go into funds as workers continue to sock back cash for retirement. It helps that the economy is doing well right now too. As the famous Warren Buffett advises, going into a Vanguard index fund is usually the best route for investors.
That being said, being added to the S&P 500 doesn’t mean TWTR stock is automatically set to fly higher either. But it’s certainly an accomplishment that CEO Jack Dorsey should be proud of. If Square Inc (NYSE:SQ) is next, Dorsey can give himself a big pat on the back.
Valuing TWTR Stock
While TWTR stock being added to the S&P 500 is good news, investors should remember that it’s already had a big rally. Shares are up 65% this year alone and 117% over the past 12 months. While we’ve been behind the name for a bulk of that move (backing TWTR stock in the teens and then again in early April near $25), getting in now is admittedly a bit late.
Don’t mistake that for a bearish take though. Twitter still has a lot going for it and I continue to like it and Facebook Inc. (NASDAQ:FB) more than Snap Inc (NYSE:SNAP), the latter of which has terrible fundamentals. SNAP shares have been on fire lately, but I would rather be long or flat FB and TWTR than long SNAP from an investment perspective.
Twitter has a lot of things going for it, the most recent of which involves a new video strategy. Those types of product adjustments and incremental improvements to the platform will make Twitter more attractive to users. It continues to serve as a breaking news outlet and a platform for well-known figures to get the word out directly to their followers.
There is value here, but we need the stock to take a rest.
Trading TWTR Stock
While we’ve liked TWTR stock, we were cautious coming into this week. That’s because Twitter was running toward possible resistance near $37. In the link, you can see what we’re were seeing and why we took a cautious view on this big, long-term winner. However, Twitter has been resilient, blasting through this level with little issue.
That move came on Monday, with Tuesday’s rally only emboldening bulls. Now though, I think new buyers need to be careful. Sporting a Relative Strength Index (RSI) reading of 83 suggests TWTR stock is overbought, (blue circle on chart).
Twitter is now way above its major moving averages, with the closest being the 50-day at $31.43. I would wait for a pullback, at least down to the most recent breakout level between $36 and $37. Should TWTR stock pullback and hold, bullish investors can go long. At current levels though, the risk/reward does not favor new buyers.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
