Last week, equity prices faced intense price action. The bulls are still charge if we judge things strictly by the charts. However there is an increasingly uneasy feeling, which is making for weak points. For example, the small-capitalization sector is in a correction phase while the S&P 500 and the Dow Jones Industrial are still breaking records. This cannot continue for long, and we should see a showdown maybe as early as this week. Meanwhile, this bifurcation has created solid opportunities for stocks to buy on dips.
However the entries must come with many serious caveats. Most importantly, if the markets are near a top, then catching these knives is still risky. Therefore, regardless of my conviction in each of these stocks to buy, I have to respect the extrinsic risks.
At the heart of the problem are the fears of rate hike. The economic reports have been too good, which is good news for the economy. But this puts more pressure on the Federal Reserve to be aggressive with its monetary policy. Last week we had that combo of news from the Fed minutes, then the jobs reports on Friday. Otherwise, the company P&Ls (profit and loss statements) are still very strong.
Investors are looking for potential slowdowns in spending when we have no hint of it. In fact, the U.S. consumer is spending at record levels. The Fed actions are to offset a healthy economy, so we should not be net bearish.
These stocks to buy may have been the canaries in the proverbial coal mine. But there isn’t much room for them to fall from here without major incremental problems. More on that later when discussing each.
I also have to respect the short-term overall technical risks that plague many giga-caps. There are too many good stocks that have bearish charts. Amazon (NASDAQ:AMZN) would be a great example of that. It is battling a looming bearish head-and-shoulder pattern. If it can’t recover the levels from two weeks ago, AMZN stock could fall into $3,040 per share. Even if this is not my forecast, I must respect the fact that it exists. On to the three stocks to buy discussion, my picks are:
Stocks to Buy: Bitcoin (BTC-USD)
My first pick is not even a company, it’s the leader of a whole cohort. Crypto has more critics than fans at this point. The topic is still too foreign for the masses — but therein lies the long-term opportunity. In due time, more people will come to understand it.
Until then, the biggest upside potential will come from growing demand.
This week, cryptos are under assault from sellers. Their chief representative remains Bitcoin and it, too, is fighting for support. The fundamentals are not in question, but the sentiment is. Consensus is now that it has triggered a bearish head-and-shoulders pattern with ominous forecasts. In reality that is a possibility but it’s not a game changer.
First of all there are still support levels that could stave off the targets. Moreover, this is nothing to fear because that’s how a chart rebuilds a base for more upside. I remind you of how it “crashed” from $18,000 in November of 2020. Now you can hardly see that dip on the chart. The H&S pattern would bring it back to the mid $20,000 range.
Therefore, I look at this impending “crash” as an opportunity to get long. Currently I am long Solana (CCC:SOL-USD). If BTC falls through the current trap door, I would add to my position and deploy new ones in BTC. I am confident that crypto will be relevant for decades. Maybe not all the coins will make it, but there are a few slam dunks, and those include Bitcoin. Investors should ignore the rhetoric and set alerts for entry points along the way. I am interested in the support lines near $29,000, to name one.
Humana (HUM)
Humana created its own drama for shareholders last week. It cut medicare enrollment forecasts for the next quarter. Investors hated that and sold the stock down 23%. I bet management wishes they had chosen better verbiage, because the price action does not match the severity of the headline.
The financials still show consistent growth over the years. It’s nothing extravagant, but it doesn’t need to be. The HUM stock was not expensive to start, and now its forward price-earnings ratio is under 20. The company generates $6 billion in cash from operations, so I am confident they can navigate whatever seas they saw coming.
Dips as large as this one usually need a few days to work through the system. HUM stock sliced through its primary support near $410 like it wasn’t there. That is a pretty bearish sign about the short-term future of the stock. Patience will be a key ingredient for trading success.
HUM is now near levels that constituted a solid roof in September of 2018. Coming back at them from above usually means forward support. I doubt that it will be a hard line in the sand, I think it will be more of a zone. This was also where they battled in November 2019 through the pandemic crash.
The zone near $350 per share should have a horde of buyers lurking. When a quality stock falls into support, I find comfort in selling puts to own shares. This gets me long the stock while leaving tons of room for error. And I would not need a rally to create income.
Stocks to Buy: Netflix (NFLX)
The business success of Netflix is undeniable. It turned the way the world consumes media on its head. Now everyone is either on or looking to get onto a streaming service. Media moguls have had to adjust their companies to be in line with the trend.
NFLX stock is proof that Wall Street approves of this. It is up more than 300% in five years, but of late it has fallen on hard times. In two months since mid November it lost more than 20% of its value. This is a recession by Wall Street standards. The trap door on the chart was at $599 per share, then again at $580.
While the technical targets are still below its current price, NFLX stock is worth considering. They don’t ring bells at bottoms, so investors have to make assumptions. Mine is that there is support lurking near $525 per share and more $10 lower. I can use options strategies to deploy credit put risk now and leave room for error.
Beware of the short-term earnings reactions, as they haven’t been friendly. Investor expectations since the pandemic have lost touch with reality. Regardless of the strength these companies deliver, traders want more. Going all in into coin flip outcomes is not smart. Legging into a position makes more sense. A conservative approach would be to wait for either $490, or signs of consistent higher-lows.
On the date of publication, Nicolas Chahine was long Solana. Hedid not have (either directly or indirectly) any positions in any of the other 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.
