Rational investing is beginning to seep back into the stock market as traders and investors start to pull profits off the ripping rally we’ve seen the past few months. We are now stuck in a trading rut at the S&P 500’s 3,000-point level as the markets decide which direction to head next.
Should we start buying up stocks on this pullback, or is further downside risk still too high?
In last night’s futures trading, the S&P 500 came down to an old support level right around 2,935, which represents a 61.8% Fibonacci retracement (aka the golden ratio) from the February highs to the March lows. This level also represents the current 50-day moving average of the S&P 500 making the support even stronger.
We have been interacting with this critical level throughout the “V-shaped” market recovery and is now a key support level to watch. I have indicated in the chart below, where we bounced off the 61.8% retracement (2,935) this morning. If we are to break through both the S&P 3,000 and the golden ratio support, the next level I am looking at is 2,790.
What To Buy
My eye is always on high growth tech companies and now more than ever. Jerome Powell and the rest of the dovish Federal Reserve announced that they don't anticipate increasing their benchmarked Fed Funds rate through 2022. Right now, the Fed Funds rate is sitting at the lowest possible level between 0 and 25 basis points.
The extended low-interest rate environment makes these growth-oriented businesses more valuable from an analyst's perspective. Earnings & cash flow estimates that balloon with time can now be discounted back at a low rate, making future earnings worth more.
I am looking at high-quality growth-oriented tech stocks that have been provided with a tailwind from this global pandemic.
The cloud segment has seen a big boost from the COVID-crisis, and I anticipate that its long-term potential has only increased as the "new normal" embraces the work-from-home trend.
E-commerce is also a segment that has been propelled forward by the pandemic with the rapidly escalating retail apocalypse bringing more business to online retailers.
Alibaba (BABA) is the dominant player in both cloud-computing and e-commerce in Asia, and the proliferating tech expansion in the region makes this stock that much more exciting. Alibaba is a buy right now, but if you are waiting for a broader market pullback, any price around $200 a share is a steal.
I love Splunk (SPLK - Free Report) because its control of the niche real-time data management segment, but the stock price is a little stretched at the moment trading at around $180 a share, right off its all-time highs. I may wait for a further market correction before putting on any sizable position in this stock.
Sea Limited (SE - Free Report) is a relentless powerhouse of growth in Southeast Asia, controlling the digital and e-commerce in one of the fastest digitalizing regions in the world. SE has blown up in the past 3 months alone, illustrating capital returns of 150%.
I bought some 3 months ago, and I'm kicking myself for not buying more. I'm not going to be chasing this rally, but I am hoping we can see a substantial enough pullback where I feel comfortable buying more. If SE makes it back towards $50 a share, I will buy as many shares as I can afford.
When To Buy
I am of the thinking that we still have more room to fall. The recent pullback was necessary. The stock market needed to catch its breath and blow off some of the froth that overzealous and under-informed new retail investors had been building up with their highly speculative stock purchases.
The extent to which this "V-shape" recovery will continue to progress depends on a number of uncertainties, and, as of now, the market is pricing in the best-case scenario. I am very skeptical about the S&P 500's ability to stay above the 3,000 level for much longer.
I am holding about 25% cash. I was able to purchase a lot near March's bottom, but I have been holding off on purchases because of the startling market recovery these past few months, which is not aligning with broader economic conditions. I will be a buyer again when the S&P slips below the 2,800 and come down to the 50% retracement level, which I discussed above.
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