The stimulus-driven equity markets may be exhausted after big tech released its March quarter earnings this week. The market had rallied over 30% from its lows in late March to the end of April. Now investors are pulling profits off the table with uncertainty still exceptionally high.
Big Tech Turnout
Tech earnings were mixed. Google (GOOGL - Free Report) and Facebook (FB - Free Report) both surged off the engagement tailwind that each demonstrated in their reports, boosted by the global stay at home initiative. Apple (AAPL - Free Report) shares are seeing modest gains this morning after beating both top and bottom-line estimates, with services driving a progressively more substantial portion of its income.
Microsoft’s (MSFT - Free Report) essential enterprise cloud services have allowed the company’s operations to get by virtually unscathed by the pandemic. The firm illustrated robust double-digit top and bottom line expansions year-over-year in its March quarter results. MSFT remains up over 10% for the year, and I suspect these shares will reach a new all-time high in the next 6-months.
Amazon (AMZN - Free Report) shares had been trading at all-time highs going into earnings last night, and the miss on EPS estimates was enough for investors to start pulling profits. AMZN is still up 22% in 2020 thus far. This pandemic is the perfect storm for Amazon, conditioning the world to rely on its first-class e-commerce platform for their shopping needs, and further illuminating the necessity of its cloud computing services. AMZN is still too expensive for me to consider purchasing, but the long-term investment outlook is compelling.
Profit pulling from these big tech names is not the only reason that the markets have broken down the last couple of trading days. We are living in a digital world where technology drives more than just consumption patterns. Computers are now literally running the equity markets.
More To The Story
Computerized algorithmic (algos) trading & investing makes up the majority of daily volume on the equity exchanges today (some speculate as much as 80% of daily volume). ETFs, Institutions, hedge funds, and proprietary traders are utilizing state-of-the-art quantitative trading models to gain an edge on the market with the speed and precision that they add. The market crash in late February and March was the fastest on record because of the speed in which these algos react.
If we can understand how algos make their trades, we can utilize this information for our own benefit. Algos are diverse by nature, as they each have their own competitive edge. Technical levels are something that I noticed the computer-driven markets have continued to respect.
Below, I have drawn up two Fibonacci retracements onto an S&P 500 index chart, utilizing TradingView’s tools.
The most important retracement is the one drawn from February’s highs to March’s lows, with its levels being represented by the thickest lines. The over retracement was from the December 2018 lows to the February highs, and those levels are represented by the thinner lines.
The 61.8% retracement level is what we just deflected off at an S&P 500 value of roughly 2,940. The 61.8% retracement is the most significant level because it is the “golden ratio” in which the Fibonacci retracement is derived. It represents an inflection point in risk/reward, which algos and traditional trades utilize.
This is likely very confusing for those of you who have never drawn fibs in the past, but I wanted to illustrate what levels the markets are taking seriously and what levels you should be considering when deciding on making a trade. To further understand Fibonacci retracement click this link.
What I Am Looking For
If we continue or pullback, I am looking to start buying equities when the S&P 500 falls to 2,650. I do not believe we will retest our March lows because of the unprecedented ‘unlimited QE’ that the Fed has backstopped the asset market with.
2,650 is a level that has been used as both resistance and support during the rally off the lows. I suspect that it will be a strong support level for the equity market if we continue falling. Below are the stocks I will be looking to buy when we get there
Alibaba (BABA - Free Report) , Facebook (FB - Free Report) , Home Depot (HD - Free Report) , Costco (COST - Free Report) , Microsoft (MSFT - Free Report) , Splunk (SPLK - Free Report) , Twilio (TWLO - Free Report) , Sea Limited (SE - Free Report) , Nvidia (NVDA - Free Report) , and Adobe ABDE.
Patience is the key to success in these highly uncertain times. There is still a lot of opportunity in the equity markets you just need to know what to look for.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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