While managing my trading group, I converse with hundreds of active investors on a weekly basis. This week, they have all focused on the much-awaited U.S. Federal Reserve (Fed) minutes. In reality, the minutes were not that important because they are three weeks old. The accounts that they log have passed and the Fed announced its harsh quantitative tightening policy. The indices woes are not really the result of a change of policy. So, there are still quality stocks to buy in the face of the same headwinds.
Since the Federal Open Market Committee (FOMC) meeting last month, we have had dozens of Fed heads deliver speeches. Some did it more than once, so there has been no confusion about their hawkish intentions. Yet, traders erroneously perceived that there was new policy. The indices price drop is not necessarily the start of the end. There is enough clarity from the charts that we can ignore this not-really-news for now.
This Is Normal Price Action
Part of the struggle this week is that the rally out of the Fed meeting was too aggressive. From that low to last week’s highs, the S&P 500 gained 11% without any rest. These red days are merely giving back a small part of it. In fact, the selling could extend another 4% to SPY stock and it would remain normal. I use the term “normal” within the context of an abnormal rally that brought us to this predicament. In other words, this is how stocks behave during periods of high volatility.
This year, we are struggling with serious extrinsic factors. Between central banks who threaten the economy and the war which threatens global stability, investors are nervous. Finding stocks to buy on dips becomes a nightmarish chore. Reducing the decision to smaller segments makes it easier. My goal is to make simple arguments for three stocks to buy on their extreme dips.
They have little in common from a fundamental standpoint, but they have nearly identical chart patterns. These are businesses with impeccable fundamentals and competent management teams. This is an important nuance because it eliminates unusual question marks. Because investors have been so unpredictable, I consider all three setups to be tactical.
The first rule that comes with that is to not take a full-size position all at once. Dispersing the entry points lessens the risk. They don’t ring bells at bottoms, so I should leave room for doubt. I am confident in my thesis, but I am suspicious of the “fear of missing out” effect. It is easy to forget that stocks do not trade in a vacuum. Individual rallies cannot happen in falling markets. The S&P 500 is still near all-time highs, so there is plenty of downside to happen. Falling markets will drag down all stocks with it, including our pick of stocks to buy this week.
Here are my three picks for stocks to buy for tactical rebound rallies:
Stocks to Buy: Citigroup (C)
I am not one to chase rallies in bank stocks, especially when we are entering a quantitative tightening program. Without pointing out any specific reason, the incentives that the Fed were giving the banks will disappear. They are now more likely to put headwinds in the way of the ability for banks to lend.
The price action in Citigroup (NYSE:C) stock reflects a lot of pain. Therefore, it is likely that much of the bad news has already played out. C stock has already lost almost 40% of its value since last summer. While this sounds awful, it merely brings it back to the 2020 rally base. My goal today is to tactically try and swing trade it up a bit. This is not to initiate a blind buy into Citigroup stock. There is the possibility of it falling below $48 per share.
The November 2020 gains were irrational and they created a weak chart structure. There are now a bunch of giant gaps that never filled. Normally, these are magnets for a stock’s falling prices. However, in this case, I don’t see the need to fill all of them. The pandemic year was a freak of nature, so the usual Wall Street rules don’t necessarily apply.
There is a snap back rally building in C stock that could recover $58 per share. I consider this a tactical setup, but not one that foretells the recovery of new highs. Citigroup has been around forever and nothing about its financial statements raises concern or causes jubilation. Their revenues are stagnant at best, albeit they are somehow growing the bottom line. Management deserves kudos for becoming more efficient with the same dollar coming in a different door.
Sea Limited (SE)
Sea Limited (NYSE:SE) stock fell 77% from its 2021 highs. One would think that the business is going downhill fast. Quite the contrary, this is a hyper-growth company that has delivered astonishingly strong reports. Case in point, their revenues grew from $300 million in 2015 to $10 billion for full year 2021. This is quite impressive by any standard and management deserves better credit.
However, Wall Street currently has little tolerance for companies that have a substantial negative net income. In this case, I find some solace in the fact that they deliver $200 million of positive cash from operations. Therefore, my assumption is that they are spending on purpose in order to grow aggressively. This reminds me of a small company you may have heard of called Amazon (NASDAQ:AMZN). Critics complained about its thin margins for years before they figured out that they built an empire.
The SE fundamental business is strong because of its broad spectrum. Sea is three companies in one. Imagine wrapping up Amazon, Block (NYSE:SQ), and Microsoft (NASDAQ:MSFT) in one company. They have revenues from three major popular sectors. According to the company website, they are present in e-commerce, financial technology, and gaming.
Technically, when a quality stock falls this far for this long, it offers unusual opportunities. The snap-back rallies from such situations are often massive. Therefore, it is worth the risk to take a partial SE position and wait for it to happen. There isn’t a specific trigger for it, not until it goes above $140 per share convincingly. But there is evidence that the negative reaction from their earnings may have flushed the bears out. The bulls may have since taken the reins. The stock is making higher-lows and higher-highs, hinting to the progress of a bottom.
Stocks to Buy: Home Depot (HD)
My third pick today is Home Depot (NYSE:HD), but it is the riskiest of the bunch. The company has done very well with the tailwind from loose monetary policy. However, I have grave concerns from three fronts this year. The first is the rise in mortgage rates that is happening quickly. The second is the massive increase in the cost of resources. I am not sure how long it takes before the explosive costs impact Home Depot’s income statement. And the third is the most immediate concern for me, which is the chart.
Yesterday, HD stock threatened losing an important support level. If the bulls cannot recover and hold $300 per share, it could trigger a big bearish pattern. The downside target could be as much as 30% below current price with a few support levels in between. The speed with which the stock rose over a year ago has created a potential vacuum. This, in combination with the head-and-shoulder bearish pattern, could result in extreme pain.
Therefore, investors who want to bet on this downside not happening must have immediate stuff out levels. Brave traders could consider this an opportunity to buy Home Depot as a contrarian bet on the scenario. Out of the three today, I would place SE first, Citigroup second and HD last.
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.