The indices have been relentless tag-teaming leadership. This week they are setting records again as the S&P 500 just breached $4,300. In contrast, the CBOE Volatility Index (VIX) is near its closing lows for the year. The bus is going a hundred miles an hour, and almost no one has their seatbelt on. This doesn’t usually end well, but for now it’s working. and within a market this bullish, there are great stocks to buy on the dips.
The three we chose today all suffer from similar ailments. They have seen better days, but they are also falling into support. It is important that we choose those that have strong fundamentals. This is what makes them worthy of our risk. The practice of catching falling knives willy-nilly is dangerous, and usually costs investors a few digits.
This is the age of machine trading. Experts tell us they are responsible for 80% of all the action. Therefore simply using fundamentals leaves investors at a disadvantage. The modern traders must include technical know-how within their thesis. The underlying assumption for all three stocks to buy today is simple. They have shed too much froth and deserve higher prices.
We added another technical layer to be the actuator today. In simple terms, we are using technical triggers to buy into strong fundamentals.
The overall price action is very confusing, as are the macroeconomic conditions.
Still, most large companies are doing great. A lot of this credit goes to more than $5 trillion in stimulus tailwinds. The Federal Reserve already told us they will be tapering sooner rather than later. Therefore I predict that the spending levels will drop going into next year. The only absolute truth that we have now is price, and this live in the charts.
Simple technical skills are sufficient to make our argument for these three stocks to buy. And they are:
Stocks to Buy: Las Vegas Sands (LVS)
Las Vegas Sands stock has fallen more than 20% since March highs. Granted, the 40% rally from January was insane. But giving back almost all of it is overdoing it. Therein lies part of today’s reason for a bullish outlook. Normal price action would see the selling abate about halfway back from a rally top.
What contributed to the recent woes is new rhetoric about Covid-19 variant infections. Virus fears are still fresh, and there are real worries about another potential shutdown. Still, the cost to reopen has buried government in deep debt. I am confident that we won’t repeat the shutdown anytime soon.
Panicking out of LVS now, after it shed all of this froth, is wrong. The January base lies just below near $50 per share. The bet is that this level will hold again. The opportunity here is to swing trade it back up to $60 per share. There will be resistance areas especially as it nears $55. Sellers are lurking there and it also matches up with the trend line technicals.
Over the long term, this company will go back to normal operations and fix its bruised profit and loss statement. Until then, the financial metrics will remain out of whack.
LVS stock does not deserve its current 13 price-to-sales ratio. Normally that would be reason to sell it. But as the reopening progresses, eventually this will normalize back into balance. In the meantime, the technical information in the charts are our best guides.
Penn National Gaming (PENN)
Our second pick today suffers from very similar ailment to our first. Penn National Gaming is also one of the reopening stocks. Technically it has a better setting than LVS. PENN stock has consolidated for a longer while — since the beginning of May. Moreover, this was the base that served as a starting point for the 80% rally that started last December. Pivotal zones like these often offer strong support.
The opportunity here is to swing PENN back to $100 per share. There will be sellers lurking about halfway, but eventually the bulls will prevail, especially if the markets continue to be this bullish.
The financial metrics for Penn National are slightly better than LVS. Their total revenues are still 29% below that of 2019 but in line with the other three of the last four years. Clearly there is less damage to repair coming out of the pandemic crisis.
Since we are relying a lot on the technicals, it’s only fair to mention the potential pitfalls they show. If for whatever reason PENN stock falls below $73 per share, it would ignite a bearish pattern with ominous implications. From a trader’s perspective, I would want to exit the swing trade in that case. There will be plenty of other times to buy it lower.
Stocks to Buy: Rocket (RKT)
Rocket stock is not living up to its name of late. Investors benefited from a few super spikes out of RKT stock in the past 12 months, but it has looked quieter recently. Luckily, even if the Reddit catapults stop coming, it can rally on its own merit. The company is solid and has a bright future ahead. Even this week’s negative headlines shall pass. They don’t affect how the company operates. In the end they will settle for a fine and move on.
Meanwhile the business will continue to operate as strong as it has been. Don’t take my word for it, just look at the profit and loss statement. Revenues have skyrocketed and net income was $2.8 billion in Q1. Statistically this stock is dirt cheap therefore catching this falling knife is an easy decision.
The last few times it fell below $20 per share, there were buyers eager to jump in. The idea here is to start or add to a long-term investment in RKT stock.
This also can double as a swing-trade opportunity back towards $22 per share. If that happens, and if the bulls are able to exceed $26, then real fun starts. From there they could tack on an additional $4.
Of the three today, this one looks best to me. It’s a great balance between a hot stock, good fundamentals and strong technicals. Combine all three and I’m comfortable taking a full-size position in RKT. However there is this nagging extrinsic risk coming from the indices’ altitudes. No stock trades in a vacuum, so if the market corrects it will drag all with it.
The key to long-term success is to have a balanced portfolio keep the portfolio in balance. Jumping into all three tickers would be a mistake. They are basically the same trade. Diversification and moderation are two key ingredients when markets are near all-time highs.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.