After a small stint in September of harsh investor sentiment on Wall Street, the indices made new highs. I had maintained a positive opinion and shared stocks to buy throughout the malaise. Today’s message is more of the same, but with three new tickers that just fell on hard times.
I still focus on quality tickers whose stocks are falling under false pretense. Most often this happens over a wrong reaction to the earnings reports. Two of the three tickers today have that scenario going on this week. The third is slightly different but same, but is even more important to the markets.
One thing is for sure, the bulls are in charge of the price action in the equity markets. They bought every dip even last year with ferocity. Even when the CBOE volatility index (VIX) spiked, investors were still bidding up risky stocks. That shows that the true measure of fear was misleading us. Scared markets don’t reach for frothy stocks.
The overall investors on Wall Street are not willing to net sell anything. They get out of one group to invest in another, so they constantly seek stocks to buy. They call this rotation and you can see it happening even yesterday. The small caps were falling, because the big caps were breaking records, like Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). The money had to come from somewhere, so they sold something that wasn’t having a headline.
This week it’s all about the mega-cap earnings reports. We still have doubters as to the value of these companies. I prefer to find great stocks to buy on dips than chase runaway rallies. To do this, the investors must be willing to do a lot of homework and set alerts. The three that came up on my screen last night were:
Stocks to Buy: Texas Instruments (TXN)
Texas Instruments stock should be as boring as they get. This is a solid company delivering strong performances for decades. This week it is falling precipitously on its earnings report headline. The scorecard was not great, so I understand why investors found it disappointing.
However, the level of disappointment was surprising. TXN fell hard and by the mid-morning on Wednesday, it had reached a support zone. Emphasis is on the “zone” part, because it wasn’t a hard line in the sand. That was the time to get long the stock for a trade. In this case, this trade could actually morph into an investment. Sure enough, the buyers showed up and the stock closed off its lows.
However, I would not commit with big-size orders just yet. I anticipate there will be resistance on the rebound, so they might revisit this week’s lows again. There will be sellers starting at $190, and more of them $2 higher. Therefore, my preference would have been to sell puts into what others were fearing. Doing so allows the investors to be long now, yet leave another 10% room for error. Either way, I would start with partial positions.
The TXN financial metrics don’t argue either bullish or bearish points too well. Its value is reasonable among its peers, so it’s not a reason to panic or love it. Management simply lacked enthusiasm, and delivered cautious forward outlooks. I don’t fault the sellers, and I don’t blame the willing buyers here either. In this bullish market, it should recover and follow it higher.
My second pick today is not one of my favorite companies. However, I trade it from the bullish side more often than not. Management reported earnings and the stock fell 10% on the headline. I consider part of the stocks-to-buy bunch because investors may be focusing on the wrong metric.
Twitter showed tepid user metrics, but they still delivered growth in their financial statements. The bottom line for any business is to drive its financial situation forward. They did that in size, but the mass knee-jerk reaction was to interpret the headline as disappointing. Smart investors should see an opportunity here to catch this falling knife.
The technicals on the chart also support that idea, since TWTR is falling into a prior bounce level. The area around $54 per share has been in contention since last year. Therefore, it is likely to find buyers lurking there willing to pick up the pieces. When a stock falls this fast, the prices for its put options explode in value. Instead of buying shares, it could make sense to sell puts into that fear. The buyers of puts on bad days are willing to pay extra for them.
Nevertheless in the long term, this stock has brought profits to its holders. So, buying its equity today makes sense – but in moderation. I keep reverting to this concept because it is important. When markets are breaking records, it is never an obvious place to load up long on everything else. Stocks do not rally in a vacuum, they need the indices to help them along.
Up here, we are vulnerable for market-wide dips on the smallest of headlines.
Stocks to Buy: iShares Russell 2000 ETF (IWM)
My third pick of the day is not even a stock. In fact, it is the collection of 2000 of them in the Russell 2000 ETF. The IWM stock is showing a bullish posture. However for almost a year, the bulls have not taken the leap of faith. The resistance above $233 per share is still there, it starts at $230. They have come close on several occasions, most recently two days ago.
Yesterday, it fell almost 2% as the Nasdaq stole the show. The money that piled into GOOGL, MSFT and Tesla (NASDAQ:TSLA) had to come from somewhere. Within that rotation lies the opportunity, because the bulls will eventually plow through the IWM roof. When that happens, the rally from $234 could extend 7% to 12%. First, the buyers must remain in control of the markets.
So far, that has been the case. They finally shrugged off the September swoon, and they are setting new highs. IWM however is still thinking about it and not actually doing it. When they finally do, they will launch the next leg higher for the entire market.
I don’t believe that the broader indices can rally without the IWM following along. As soon as it makes a break out, the bears will then be a serious trouble.
In anticipation of this happening, buying IWM stock makes sense for the right portfolio. Once the earnings season headlines abate, there could be fireworks in the IWM.
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.