The conflict in Ukraine is getting complex and Wall Street is on edge because of it. The concern is that the struggle could expand and spill into a global war. My assumption is that it won’t balloon into the worst-case scenario for stocks. I am not a political expert, so I will discuss how stocks may do in spite of these headlines. Today I suggest three stocks to buy that fit my optimistic peaceful assumption.
The binary nature of the current situation means I should be humble with my trades. In fact Monday we learned that Russia now has troops across the border on a peace keeping mission. Going all in stocks now is ridiculous because we all know politicians are not always reasonable. The proverbial poop could hit the fan, and all stocks will suffer. The indices fell -2% when the futures opened, in addition to -1.5% from the Monday session.
Headlines aside, companies have never done better. The earnings reports are coming out extremely strong. You wouldn’t guess it by how harshly investors have punished many of them. Nevertheless, consumer spending and excess reserves are near highs. In fact, it is partly the reason that the Federal Reserve is killing the quantitative easing and starting a quantitative tightening. The U.S. economy is too strong and spending is now out of control.
We have full inflation, but we knew that last year. The Fed told us a zillion times that it was transitory, now it is not? I don’t remember hearing a “sorry we were wrong” statement from them about the “transitory” stuff. If they tighten too fast and break the economy then we should give them a gold medal in stupidity.
The three stocks we are suggesting today also are not reasonable. I chose ETFs that move three times faster than the instruments they track. When in crazy-land I sometimes like to do crazy things, within reason. Someone who has the exact opposite opinion as me can mirror the setups with the inverse version of my tickers.
The three stocks to buy are:
- ProShares UltraPro QQQ (NASDAQ:TQQQ)
- Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA)
- Direxion Daily S&P Biotech Bull 3X Shares (NYSEARCA:LABU)
Stocks to Buy: ProShares UltraPro QQQ (TQQQ)
I am not typically a fan of taking ETFs that have multipliers. But these are special circumstances so I will step out of my comfort box on purpose.
My overall market thesis is still bullish because of the simple fact that companies are doing very well. Most mega-caps — if not all — are not likely to crash without severe external factors. There is no deterioration in business from the FANG gang, Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT). Left alone, these big-cap stocks will continue to rally.
Therefore, whenever this headline uncertainty blows over, they will rally once more. Capturing the upside movement in them means that they will also move the indices that house them. They are that big and have heavy mathematical influence over the Nasdaq. The TQQQ stock is a 3x multiplier on the index. So if my assumption is that “this too shall pass” is correct, the Invesco QQQ Trust (NASDAQ:QQQ) will likely set new highs this year. TQQQ stock will follow it three times as fast.
I know this is not the popular opinion, but if there’s no risk, there’s no reward. I consider this a speculative trade because of the nature of the current environment. Moreover, this is going against the grain of all experts who expect calamity from the rate hikes. Therefore, it is important to do your own homework and trade your own thesis. Later I will suggest how you can take the opposite of mine if you disagree.
The TQQQ chart is simple. It has immediate support from the Jan. 24 low. Moreover, it has much stronger support from the May 2021 bottom and beyond. Entering this position in two tranches would make sense (leaving room for error). More importantly it is a tactical trade, so it requires stop loss levels. The upside potential could be as big as 40% in the next two months. Yet, moderation is still key to success in this unreasonable ticker.
Direxion Daily Small Cap Bull 3X Shares (TNA)
Last year you may have heard about the “rotation” effect. Most often they meant money transferring from the Nasdaq into small-cap stocks. I believe that at this point they are both down into extreme levels, so rebounds could be substantial in both. So rallies in the QQQ may also materialize in the small caps.
To capture the small cap recovery rally with a multiplier, I can use the TNA. If the iShares Russell 2000 ETF (NYSEARCA:IWM) rallies +1%, this one goes +3%. This also is a tactical trade requiring strong risk appetites. Incidentally, this is where a lot of the ARK Invest high profile stocks live. The group lost footing over a month ago from $76 per share. Going through that level will be difficult on the way back, therefore I expect resistance there.
Meanwhile, the bulls have established the bottom at the end of January as well. Unlike the major indices they have had three consecutive winning weeks out of four. I can assume that there’s positive momentum, which supports my theory. If the bulls can maintain this, they have the chance at taking out the resistance at $68.30. The effort could give them enough momentum to blast through the resistances above.
If the recent lows fail, then I expect a 15% drop below the recent lows. Meaning be fast and don’t hesitate to book profits and losses quickly. The TNA stock also moves extremely fast and leaves very little room for mistakes.
Stocks to Buy: Direxion Daily S&P Biotech Bull 3X Shares (LABU)
My third pick today carries the same spirit as the prior two, only to another extreme. LABU stock is now revisiting the absolute pandemic 2020 lows. I see no logical reason for this other than assuming that the pendulum has swung too far.
Taking long positions here is the opposite of chasing blindly into extreme spikes. Meaning that expecting upside is a reasonable scenario. If the indices hold up for the next two weeks, LABU may have a rebound hard toward $30 per share. Along the way there would be many potential hiccups, but this is a violent stock.
It is important to note that LABU is now below the 2016 and 2018 crisis points. But on a very long-term chart it looks like it tends to rebound very sharply from extreme scenarios. This would be the fourth one in six years. I can assume it will repeat until otherwise proven wrong.
This is a good time to remind everyone that these are speculative and tactical trades. It is easy to fall prey to the enticement of ETFs with multipliers like these. Investors should use extra caution especially if when dealing with them first time.
Earlier I noted that someone who disagrees with my basic assumption can take the opposite sides of my trades. For example, instead of the TQQQ, traders can short the Nasdaq via the ProShares UltraPro Short QQQ (NASDAQ:SQQQ). Similarly they can use the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA) to short the small caps instead of buying into the TNA.
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.