Wall Street was bracing last week for impact of another bad performance. The bulls pleasantly surprised everyone and pulled off a strong showing. The experts predicted the monthly options expiration would bring about selling. That didn’t happen and the bulls remain in charge of the price action. In such an environment, it only makes sense to find stocks to buy rather than panic.
Simple logic suggests that even though investor sentiment soured, the scoreboard is consistently bullish. When the indices are 2% away from an all-time high, it makes no sense to be bearish. This week should also be exciting with the Netflix (NASDAQ:NFLX) kicking off another exciting round of earnings.
The global economy is still floating on a sea of stimulus packages. Yes, the Federal Reserve has unofficially announced the tapering process. However, this means that the QE will continue past the middle of next year. This is not a bearish action against the market. They will be pushing a little bit less hard for months to come. The tailwinds for stocks are abating, but they are not ending. More importantly, the Fed is nowhere near beginning the tightening.
We seek stocks to buy that are always of great quality. They have incredible P&L’s that can handle a rise in yields. It’s not going to matter much to Apple (NASDAQ:AAPL) if the Fed buys $20 billion fewer bonds in December. Nevertheless, I acknowledge that near all-time highs investors must remain cautious.
The cliche of being “cautiously optimistic” fits perfectly in this environment. The strategy that works best it’s to find stocks to buy that have fallen into support. It would be ideal if the dip came from reasons unrelated to their own operations.
Investors should not blindly sell a stock just because someone said so. It is best that we do our own homework, and in this age and time, it’s easy.
The three stocks to buy we present today are:
Stocks to Buy: Alphabet (GOOGL)
I’ve been a Google user for decades, and a fan of the GOOGL stock. When investors panic out of it, it has offered opportunities to buy the dips. The stock continues to fire on all cylinders breaking records still. There is a good chance that it will restart another breakout from August highs this year.
The September correction was orderly and they are basing from it now. If the indices continue this strong, GOOGL stock will have the opportunity for another burst. Above $2,900, the buyers will have the opportunity to overwhelm the sellers. As a result, they would then breach the highs and go into open air. When in all-time highs, the sellers lose their marks and the bulls can overshoot toward $3,100 per share.
I recognize stocks are at extreme altitudes and that we could correct. But until that happens, the buyers remain in charge. Shorting stocks makes very little sense, which leaves the door open for these three trades today. I am optimistic but I would also caution that these are mid-term trades not long term, full commitments.
Near all-time highs, I prefer trading around the price action from the bullish side. I cannot justify taking a full position for a long-term investment. Chasing this late in a bullish cycle with an entire lot is asking for trouble.
There is very little I haven’t said already about Amazon in years of covering it. This is the perfect example of a growth company that never quit being a startup. They are constantly hunting new revenue streams at an aggressive pace. In the process, they brought us “the cloud,” which has transformed the world. The stock has support below $3,300 per share, and could be aiming to hit $3,800 soon. It will have a catalyst opportunity at $3,550 this month.
During the pandemic, Amazon became the default supply source. But in the U.S., they also became the employer of default during the shutdown. They were hiring people on the spot, which helped families bridge the tough times. It catches too much flack about its employment practices for the good that it does. They continue to raise their minimum wage aggressively. Moreover, they invest in their employees’ education.
Friday, AMZN stock rallied 3%, perhaps to position into the earnings season. My stance remains that if the stock market is higher in the future, Amazon is leading it. The experts who fought it for a decade have since capitulated. Very few still squawk about its profitability levels. Even fewer short it as a long-term thesis.
The naysayers were wrong, and they finally realized it. Therefore, the dips are opportunities to swing trade it up. The method and frequency of trade depends on the individual styles. Neither is 100% wrong or right.
The short-term reactions to earnings are binary. I have no doubt that their report will be astonishingly strong. I’m equally as confident that these won’t guarantee a pop that morning. Negative reactions come from bad expectations. I’ve seen it fall too many times from a “disappointing” +30% increase in sales. I am a buyer of all those silly dips.
Amazon’s financial metrics are the envy of most companies. If it is a sell then it’s time to leave investing altogether.
Stocks to Buy: Facebook (FB)
Our last pick of the day is the always controversial Facebook. It has recently rekindled headline fears and FB stock has fallen back into its recent support zones. After setting a new high, giving back some is not a reason to start shorting it. The bulls broke out in March and it’s OK to retest that zone for footing.
Moreover, last week’s market rally may mean that FB has catching up to do. This would be especially true if the other tickers above deliver on our thesis.
The FANG gang leader is Facebook, at least alphabetically speaking. These are top-notch stocks that tend to rally and fall together. There has been so much worry circulating among the Wall Street experts that the upside earnings surprise is likely.
Sentiment may just have shaken out enough weak hands out. These companies have yet to deliver a bad report in years. I doubt they will start this season. And if I’m right about the experts looking in the wrong direction, then the downside scenario won’t come. When everyone is looking for potholes, we are less likely to fall into one.
As I said earlier, the short-term reaction on earnings is binary the day after the release. Furthermore, it has very little to do with the actual quality of the report. Expectations have the bigger impact and in this case they have a lower bar to overcome. It is likely that it won’t take much to cause a relief pop in FB stock. And it could even be in sympathy to NFLX earnings this week.
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.