Rocket (NYSE:RKT) stock has been on a downward spiral for months. Since its March peak, it has lost as much as 65% of its value. Finally a week ago, the bulls got a break in the selling. Monday’s near 2% boost was a nice start for this week. But while this demonstrates solid short-term progress, there is a lot of work for the bulls to do from here. I remain bullish on RKT stock in the long-term, but I also recognize that Wall Street is late in seeing its potential.
With all of that in mind, here’s my advice on how to approach Rocket stock moving forward.
Technically, this rally brings RKT into a prior failure level. These usually become forward resistance until the buyers muster up enough energy to punch through. Longer term, the business prognosis is much better than what the price action has delivered.
Don’t just take my word for it, the data to support the statement is in its financial results.
RKT Stock’s Solid Financial Metrics
The income statement for Rocket Mortgage shows strong revenue growth. The run rate is close to $15 billion per year, Almost five times more than 3 years ago. It is also profitable but the metrics can be confusing. While RKT stock looks cheap from the price-to-earnings perspective, it still draws a big negative cash from operations. The market in which it operates is hotter than ever. This is in large part thanks to very loose monetary policies from the Federal Reserve.
Even though the Fed unofficially announced a taper process, they are still accommodative for economic growth. However, things may be too good and investors should be somewhat leery. I’m not suggesting to short real estate markets or stocks. But starting new longs from here should be partial, not full-sized trades.
After a strong rally IPO last year, RKT stock gave it all back up. It consolidated, then a few months passed and it exploded into a massive 125% rally. That turned out to be the end of all that’s good for it. The stock is now about a third of what it was then and struggling to find footing. I expect that Wall Street will come around to liking it in the long term. Meanwhile, there will be sellers lurking near $18 per share. When revisiting prior necklines, stocks usually face resistance.
There will also be risk from extrinsic factors. This stock cannot find footing in the most bullish equity market. Then if the indices decide to correct, Rocket will correct much harder. Luckily, we just had a mini tizzy that may have shook out enough weak hands on Wall Street.
Conditions Are Still Favorable for Rocket
The macroeconomic conditions are still healthy, and there is plenty of cash in the U.S. economy. Therefore, I am optimistic that the S&P 500 will make new highs before we correct 20%. There is growing rhetoric that disagrees with me and investors who followed that path of thought were bracing for impact. By the looks of it this week, they were wrong and swimming upstream.
I like the adage that comes from these folks that we shouldn’t fight the tape. The bulls are still in control of the price action. This might give RKT stock enough time to recover and build on this mini rally that started last week. Under normal circumstances I would assign this trade high conviction. But the bears are in charge of RKT, and markets are near all-time highs.
Therefore, I suggested intentionally tempering your enthusiasm a bit. Using the options markets allows you to create an additional buffer. For example, selling December puts below the all-time low creates bullish positions with room for error.
Let’s not forget that we still have the Reddit posse out there. The easiest way for RKT stock to beat the resistance levels is through a super spike akin to what we saw with GameStop (NYSE:GME) earlier this year. I would not condone taking a bullish position just hoping for that, but my overall outlook is bullish regardless.
In other words, the bulls would benefit tremendously from a headline to cut through the muck. Otherwise, it will take a long time to rebuild the base and set higher prices. Investor sentiment is still fickle this month, so staying cautious while optimistic is smart.
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.