This year marked the rise of the Robinhood trader mentality. They seemingly took on Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) and won, as seen through the airlines trade. Buffet gave up on his positions there at the worst possible time.
However, a few weeks can’t erase the success he’s had for decades. Today we defend the method. not the man. Investors need to be greedy when others are fearful. Buying oversold stocks on correction still makes sense.
After an incredibly bullish August, Wall Street is going through a very rough September. There are only a few days left to salvage it, so the buyers need to pull off a miracle comeback. Investors who do homework are not usually the ones panicking on days like Wednesday. During bloody days, it’s best to compile a list of oversold stocks. The idea is to be ready to pounce at the right time.
Therein lies the tricky bit, because they don’t ring a bell to let us know that the coast is clear. Traders need to identify levels that make sense for them, or buy the dips when they hit technical support. The cases where both situations occur at the same time make for the best potential upside.
The indices are now off the highs. The S&P 500 and the Nasdaq have fallen over 10%. Two of today’s opportunities are in stocks that have fallen farther than the indices for various reasons.
Today’s tickers are:
- Nvidia (NASDAQ:NVDA)
- Technology Select Sector SPDR Fund (NYSEARCA:XLK)
- Invesco DB U.S. Dollar Index Bullish Fund (NYSEARCA:UUP)
There are important points to remember when buying a stock dip. First, the bottom is a process and not a hard line. We don’t need some magic number in order to make a smart investment. Second is that investors should take positions in batches. Taking one giant entry into falling knives, even if they are greatly oversold, leaves no margin for managing downside risk if selling persists.
Oversold Stocks to Buy: Nvidia (NVDA)
There is no doubt that Nvidia is well-positioned to profit for decades to come. If the stock markets are higher in the future, then NVDA stock will likely be leading them.
Technically, this company is dominant and making waves. Most recently they announced the purchase of ARM for $40 billion. They are bold and innovative, and will consequently will be trendsetters among their peers, especially when it comes to AI.
Competition is no concern, for several reasons. Even though rival Advanced Micro Devices (NASDAQ:AMD) is a mighty opponent, there is enough room for both to prosper. The demand in tech is growing exponentially and that trend has seemingly no end. Even lackluster Intel (NASDAQ:INTC) is doing well.
The market structure favors better days to come for Nvidia, so it belongs on the oversold stocks to buy list. There will be resistance, but eventually the bulls will prevail.
Fundamentally, NVDA isn’t cheap, but this is an inappropriate metric to evaluate growth companies. They have to spend a lot in order to sustain expansion. Amazon (NASDAQ:AMZN) embodied this concept, as it withstood a decade of criticism over its thin margins.
NVDA stock has a 93x price-to-earnings ratio and trades at 29 times sales. Even after falling 20% from its highs, this is far from being a bargain. But it is a reasonable entry point for this oversold stock. The downside this year is likely within $30 from current price, but the long-term upside is practically unlimited.
Technology Select Sector SPDR Fund (XLK)
Next we’ll consider a blanket trade on technology stocks. I chose XLK stock for a specific reason. It is concentrated heavily around two great companies that could top today’s list of oversold stocks all on their own. Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) make up 42% of the whole ETF. The next eight stocks are super stars in their own right, including Visa (NYSE:V), MasterCard (NYSE:MA) and Paypal (NASDAQ:PYPL).
The bottoms in each of these companies are near. They have all corrected hard off the August highs. Picking the absolute perfect entry point is a futile effort, so slowly adding to positions on the way down is better.
The most important part of investing success is avoiding obvious mistakes. Chasing a stock into a massive all-time-high spike is wrong. Remember that the goal isn’t finding perfection, but taking calculated risks for longer term profits.
The stock market reaction out of the March bottom spoke volumes. It wasn’t a coincidence that the Nasdaq rallied hardest and farthest. Tech will continue to lead the way because the pandemic has only increased our dependency.
Social distancing has made the Internet, especially the cloud, an absolute necessity. Those who have been holding out on these concepts no longer have a choice. The stock market of tomorrow will be led by those companies in the XLK.
Invesco DB US Dollar Index Bullish Fund (UUP)
For months, consensus has held that the U.S. Dollar was a joke. It couldn’t find a bottom and efforts buying the upticks in UUP stock resulted in continual disappointments. Finally though, September brought about a bottom in the greenback.
UUP is in the process of confirming the double bottom near $25 per share. It has already rallied 3% off the lows, which is a lot when it comes to currency. These tend to move in small increments, but there is potentially much more to come.
The trend on the way down was too consistent; those tend to see hard, persistent reversals. The rally seems like it’s almost done, but the first resistance zone on the chart isn’t until $26 per share. It’s there that buyers will take a breather, though they might continue another $1 up.
In currency terms that’s a lot of green to harvest. The options markets offer cheap and easy ways to profit. The UUP ETF yields the best results when traders buy in-the-money legs. If you’re using debit spreads, they can be tough to monetize. Bull put spreads work well for added profits, given you can use them.
Remember that there are no experts in 2020. Absolutely everything is new to everyone. These are times that will go down in history. The dot com and mortgage bubbles will no long seem unreal anomalies.
The mess that Covid-19 has create will eclipse the aura from 2000 and 2008 events. When circumstances are so new to us, we should have humble assumptions. We absolutely need a healthy measure of doubt in any thesis to avoid more nasty surprises.
After a correction this big it’s easy to find oversold stocks, but resist going all in. Cheap can get cheaper and what seems oversold now can definitely face more selling tomorrow.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.