This year has been very tumultuous on Wall Street. We have been in headline trading mode for almost two years. But investors have finally become inure to most of them. So for the last few weeks, the equity bulls have been in charge. This creates opportunities in momentum stocks that are ready to run.
The media and politicians keep rehashing old headlines so their influence on stock prices has become limited. Meaning, the stock market still reacts to tweets, but only for a few ticks.
This opens the door for sustained rallies in momentum stocks. For example, it is not so easy to foil a rally in say Netflix (NASDAQ:NFLX) with another reminder that the tariff phase deal is complicated.
With that in mind, let’s examine the potential in Netflix, Salesforce (NYSE:CRM) and International Business Machines (NYSE:IBM). These three stocks are fast movers that are lagging the S&P 500 by at least 10% points this year. But they are ready to breakout into a new trend and soon.
Momentum Stocks That Are Ready to Run: Netflix (NFLX)
There is a tug of war in NFLX stock and with the help of a Santa Claus rally, the bulls should win. Valuation is an issue because this momentum stock is expensive from the traditional sense. But so far, Wall Street has allowed this because of its overseas expansion potential. On the other hand, the haters are plentiful. Just last night, CNBC’s Jim Cramer dissed Netflix as he blessed Tesla (NASDAQ:TSLA). Therein lies a debate that only time can answer. Meanwhile it is best to trade the short-term charts so to eliminate the guesswork.
After a perfect bullish setup in July, Netflix stock failed miserably into a 30% correction in just two months. Luckily for the bulls, they were able to hold above prior support levels. This served as a base for a strong bounce. The bad news is that now it’s up to the buyers to prove that they can sustain the upward momentum and recover $340 per share. Otherwise, Netflix stock can drift lower to $200 per share. While this is not a forecast, it is a technical possibility from an a-b-c bearish pattern that started in July.
Recently, Netflix programming received good accolades. But the news has somewhat fizzled. Perhaps the success of the new Disney (NYSE:DIS) plus platform stole the show. This competitor to Netflix now sports over 20 million subscribers in a very short period of time. This doesn’t bode well for the future of Netflix because it will weigh heavily on its margins. For now, CEO Reed Hastings still sounds confident that his team is up to the challenge that is coming from Disney, Apple (NASDAQ:AAPL) and all the other media companies that are now coming online.
There is no doubt that Netflix’s service is popular and mostly due to its original programming. But there is also no doubt that competition is fierce and growing exponentially. At some point, NFLX will need to make a strategic adjustment but today’s opportunity is purely technical. Those long Netflix off of the bounce are safe to hold it for as long as price stays above $293 per share. There’s a gap to fill at $303 per share and that happens to be where the next fight for control will be between the bulls and the bears. If Netflix stock continues to rise, there will be tremendous resistance near $312 per share as it was the last major “accident” scene.
Until recently, I was a big fan of Salesforce and what it has been able to accomplish. This was a tiny company that battled the mighty Microsoft (NASDAQ:MSFT) a decade ago and won. Along the way they fully embraced the cloud. They also set the standard that high-tech businesses should have a subscription revenue model rather than single sales. But lately, I have been put off by the commentary from long-time CEO Marc Benioff. He sounds less focused on CRM’s business and more interested in what other tech companies should and shouldn’t do.
Nevertheless, CRM stock is still an impressive trading vehicle. Its long-term trajectory is still up, up and away. During its most recent earnings report, management disappointed investors with their forward guidance. But until they start actually making mistakes, dips in CRM stock are buying opportunities. So it’s a matter of finding the right level to match the investor time frame. There is not one trade fits all from the entry point perspective.
First, there is the risk if Salesforce stock falls below $154 per share, as it risks losing another $10 from there. Conversely, if the bulls are able to break through $160 per share, then they stand to reignite the rally to set new all-time highs. Those who are in the stock for the long-term need not worry about short-term levels to trade because in the long run and if the stock markets are higher, then CRM stock should also be higher.
Critics hate it for its valuation. But fundamentally CRM has never been cheap, as it sports a three-digit price-to-earnings ratio. In addition it sells at almost 9 times sales, so you could say that it’s twice as expensive as Amazon (NASDAQ:AMZN) from this perspective. As it sits near all-time highs, there’s always froth to shed, especially if the whole market also corrects.
International Business Machines (IBM)
I have no love for IBM’s management as the company continues to underwhelm Wall Street. Yet investors keep giving it a pass. I find it very strange that the CEO Ginni Rometty still has her job even after so many disappointments in a row. My feelings aside, I have traded IBM stock from the bullish side several times this year. And today’s note is to highlight the fact that there is another big opportunity brewing.
Technically, IBM’s weekly chart is very tight. This usually supersedes a big move, but where the direction remains hidden. For the last two months, the sellers of IBM stock have tried to break it on four occasions. But each time, the buyers were able to bounce and hold a higher-low trend. Unfortunately, they were also setting lower-highs. This resulted in a situation where the range went from $30 down to less than $5. So the next breach of the short-term levels will trigger a rally in that direction. IBM should either breakout to $150 per share, or fall to $120. Since the equity markets have been on a tear, IBM bulls have the advantage in this battle.
It is important for the price of IBM stock to rise above $136 per share. This would start the rally to eventually breakout from the lower-high trend that it has been setting for months. Word to the wise is that this stock has disappointed investors many times before, but in this case, the downside risk seems minimal compared to the upside potential. It is definitely worth tracking and chasing the breakout.