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FAANG stocks turn red: What to buy when the market goes nuts

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From Jeff Clark, Editor, Delta Report

According to the efficient market hypothesis, there’s nothing insane going on in the stock market. Stock prices reflect all of the currently available information and investors’ analysis of that information.

Hogwash.

In the long term, I’ll agree that markets are efficient. Investors are rational. And stock prices generally end up where they are logically supposed to.

In the short term, though, the market is nuts.

In the short term, stock prices react to emotion, not logic. Fear and greed are more powerful in the short term than a thoughtful analysis of balance sheets and income statements. That’s why crazy things sometimes happen in the stock market.

Back in 2000, for example, any rational person could see the dot-com bubble inflating. Stocks with no earnings, no revenue, and no hope of either were pressing higher nearly every day. Meanwhile, traditional businesses – with long track records of earnings growth, stable dividends, and long-term business prospects – couldn’t catch a bid.

In 2000, I did not own a single dot-com stock. Instead, my largest holding was Cooper Tire & Rubber (CTB). At the time, CTB was an 87-year-old company. When I started buying the stock in early 2000 at $9 per share, CTB traded at six times earnings and paid a better than 5% dividend.

CTB promptly dropped to $6 per share.

The stock lost 33% of its value in early 2000, at a time when the average dot-com stock was racing to the moon.

As you might imagine, the clients at my brokerage firm were frustrated. Their friends and neighbors were bragging about the piles of money they were making in this.com and that.com. Meanwhile, my clients were stuck in a dusty, old, tire and rubber stock that just seemed to fall every… single… day.

All I could do to console my customers was to tell them that sometimes the markets do screwy things. Sometimes, logic takes a vacation. Stocks that shouldn’t go up, do. Stocks that should rally, don’t.

And it is during those times that investors who have the ability to curtail their emotions also have the ability to make outsized gains. But, you can only make those gains by going against the emotions of fear and greed… and betting on logic instead.

I lost several clients in early 2000. I refused to buy the dot-com stocks. I stuck with buying old, time-tested companies trading at steep discounts to their historic valuations.

By early 2002, most of the dot-com stocks had crashed and burned. The customers who stuck with me were cashing out their Cooper Tire & Rubber trade for a 150% gain.

Here’s my point…

While the focus in my Delta Report trading service is on shorter-term trading – where we attempt to get into a position one day and get out of it a few days later – there are times in the market where it can be far more profitable to take a slightly longer-term view.

Investors’ short-term emotions have decoupled from longer-term logic. So, asset prices have, for lack of a more sophisticated term, gotten out of whack.

It is during these times that it can be HUGELY profitable to take a BIG SWING.

Find a stock that is grossly undervalued by almost every fundamental metric. Find a stock that just can’t seem to get off the mat. Find a stock that nobody likes… a stock that if you mention it at a cocktail party, you end up drinking alone.

Then, buy that stock and hold it for a few months.

You won’t be disappointed.

Best regards and good trading,

Jeff Clark

P.S. Like I mentioned above, the focus in my Delta Report trading service is on shorter-term trading. It’s all about how to maximize your profits while still reducing risk.

The Wall Street players lose a lot of money because they’re always looking for that big swing moment. Though those moments do exist, they aren’t common. My risk-reducing methods have proven that you can make a lot of money while not betting the farm on every trade.

You can read more about my proven trading philosophy right here.


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Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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