Despite the recent rallies in the market, the media rhetoric continues to be filled with a bearish tone. Everyone is expecting this party to end badly even though there is no evidence of impending doom. We hear it ten times a day: ‘we’ve come so far so fast.’ So using this logic, we should up our car insurance policy or stop driving if we haven’t wrecked in a while.
Sure we have a flattening yield curve but that is not reason to sell stocks of great companies who are still set up for success. Square (NYSE:SQ) is one that still deserve some attention even here near all-time highs.
SQ belongs to a group of financial stocks that I call the transactors. So it competes with behemoths like Visa (NYSE:V) and MasterCard (NYSE:MA) and it is holding its own. SQ is the relatively new kid on the block — a new kid who is kicking ass and taking names.
The Demand for SQ Services Is Getting Stronger
Year to date, Square stock is up 35% which is more than double that of the S&P 500 and three times more than the Financial Select Sector SPDR Fund (NYSEARCA:XLF). Clearly investors like what they see from the company. The advent of blockchain and even the bitcoin craze contributed to the popularity of these transactor companies.
But this is not just hype. The need for SQ services is real. The globe is migrating its banking to electronic format. Like everything else nowadays, we want our money fast and cheap and SQ helps get that done.
This is a trend that is not going to reverse, so the future is bright for as long as the financial world doesn’t collapse.
Even though, relatively speaking, the company is young, management has so far proven itself competent. So I consider buying Square stock a viable long-term investment. I am confident that if the stock market in general is higher, then so is SQ.
Fundamentally, critics argue that Square’s value is too rich and they’d be right. But in this case, SQ is still a growth company so I don’t worry so much about its margins. They are suppose to spend a lot to grow. Later, when they start to mature, I’d worry about increasing profitability. This is true for any growth stock I analyze.
Trading SQ Stock
For those who prefer to trade short term, SQ presents a challenge. This is a momentum stock so it moves fast in both directions. This makes it impossible to spot clear entry and exit points.
But in this case there are some important technical clues we can decipher from the charts. The range for SQ stock has recently tightened. In the past year, it’s touched both $100 and $50 per share and now it sits exactly in the middle. This builds up energy in the chart that needs to explode, which usually forebodes a big move to release the built up tension in the price.
Since we don’t know about the direction of the move we then find the important lines to watch here. My hunch is that it will be a rally since the bulls are still in charge of this market and SQ has no specific reason to fall on its own. So if I were to place a bet, I’d say SQ will be breaking it out soon.
Towards that, the next three levels to watch are $76.75, $79.25 and $82.90. Each is a mini-breakout level that would bring the next one into its target zone. So depending on my time frame I’d pick one of them to chase SQ stock. If it moves above it then I’d expect it to invite more momentum buyers into it.
Of the three, the $83 zone is the most significant. It was where SQ failed worst late February and November so clearly neither bulls nor bears will let it go without a fight. And on the way up, this creates congestion which is resistance to the rally. But if the bulls prevail then they overshoot $10 higher.
But since we are still in geopolitical headline mode then I’d have to set stop losses. SQ needs to hold $71.50 else it would trigger an opposite and bearish pattern that would invite momentum sellers.
Regardless of the short-term risks, there are opportunities in owning SQ stock for the long term more so than shorting it. If the concept of buying into high valuation is insurmountable then I should at least invest in either Visa or MasterCard because the sector is worth the risk.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.