The phrase “new all-time high” has worn out its welcome in my book. Don’t get me wrong, I enjoy a bull market as much as anyone. But this one has crossed the line of normal and into the freak show realm. Somehow the pandemic catapulted stocks higher under the worst conditions in history. The world chose to close everything down for months and not even that slowed the appetite for risk. Today I will focus on Facebook (NASDAQ:FB). Facebook stock is 20% off its highs and that’s an opportunity to entertain.
When we shuttered the world all income statements died. This forced governments to open up their checkbooks in order to save everyone. The U.S. is atop of the list of spenders. Just last night, President-elect Joe Biden pledged spending another $1.9 trillion for a COVID relief bill.
We chose to schedule a depression like we would a dentist appointment. And here we are in an abyss of a hole and there is no light visible above. It will take many decades to unwind this much Q.E.
Also this week, many Federal Reserve Chair Jerome Powell and his posse tooted the same horn. They won’t reverse the stimulus for many years to come. This all plays into Facebook stock and others. We will stay in party mode until something breaks. There is no evidence of this happening now so I consider this a potential run-of-the-mill stock correction.
Facebook Stock Price Is Never Safe From Headlines
The “book of faces,” as my son calls it, hasn’t had the best of headlines of late. Consequently Facebook stock was already against the ropes before the recent social media squabble. It is now even lower.
What’s important to note is that the business is still thriving. They still have almost three billion monthly active users and that is an insane amount of potential. Its advertising reach is phenomenal, so its advertiser clients are not defecting anytime soon. It will take a tremendous amount of deterioration in its global reach for that to happen. Until then, if the stock markets are higher in the future, so is Facebook.
Timing the stock entry is the tricky part because most people suffer from FOMO. This is a human emotion that is designed to keep us alive in the wild. If we see a herd of people running in one direction, our urge is to follow them. This works well for safety but is terrible for stock trading. That’s how people end up buying something late in a rally. Luckily, this is not the case because Facebook stock has been consistently falling for months. The mistake now would be to capitulate this late in that process.
While the indices are making new highs, FB hasn’t had one since last August. When a stock falls on hard times it often finds support when it reaches prior pivot points. Such is the case here as the stock is approaching the breakout from its earnings last July (see chart). Back then the stock spiked into a 30% rally which still remains as the high watermark to beat. On the way back down, the selling should abate. This is not always a hard line in the sand but rather a zone like a mattress. In this case, Facebook stock has a proven bounce from last September exactly at $244 per share.
Support Will Hold and It’s Near
My assumption is that it will find footing at it so I can start a long position here. I prefer to use the options and sell puts even lower for income. This gives me another cushion in case there is more pain to come.
Remember that stocks do not trade in a vacuum so the downside pressure could come from extrinsic factors. The whole market is too high for the current fundamentals. We’ve never had tough conditions like these yet here we are breaking records almost every day. It would be reasonable to have a correction especially that so much of the market’s strength is in frothy tickers.
This rally is not coming from strengths in the FANG gang. At least those and giga-caps have very strong fundamentals. That’s an important point to make because if markets do crash, that’s the only thing that would keep prices from capitulating. When a stock price is made up entirely of expectations of future sales, there is no support on bad days. The exit doors will be too small in say, EV stocks, and the way down will be painful.
I’m comfortable owning equality stock like Facebook through such risks, especially after it has shed so much froth. In the event of a catastrophe in equities, it will hold $230 and even better at $212 per share. For perspective, this worse-case scenario nearly brings us back to where the pandemic started.
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.