ABBV - The Magnificent 7 Aren't So Magnificent Right Now Buy

2023-12-07 02:28:36 ET

Summary

• Tech titans like Microsoft, Meta Platforms, Alphabet, and Amazon have experienced slight declines in their stock prices.
• I suggest waiting for a larger drop before buying these stocks isn't feasible, but highlight the potential for future growth in revenue and AI-powered services.
• The market is currently consolidating, with smaller stocks making new highs, and interest rates falling, leading to increased investment isolated to small-cap stocks for now. This will change.

To see these tech titans falter at all is jarring, yet let’s look at them realistically

The first instinct is to try and find a fundamental reason why these beloved stocks are falling, Microsoft ( MSFT ) -4.1% from the recent 52WH, as well as Meta Platforms ( META ) -7.5%, Alphabet ( GOOGL ) -8%, Amazon ( AMZN ) -3.2%. When you write it down it seems silly to even point these names out as “down”, I get that. If you want to get these names cheaper, wait a few months when I believe we will see lower stock prices at least for a short while, that is a different discussion. If you want more details on where I think the stock market is going check out my Sunday night article Market Should Retreat 10% To 15% By Mid-March, Probably Sooner . Right now If I see a stock that I want to hold for the long term I would only buy very small increments. So this article is really about short-term very tactical trading. Let me be clear If you want to start a position in these names, just by a few shares. Okay, so why would an intrepid trader bother with these names down so little? Good question, and it raises another question.

Shouldn’t we wait until these names go down a decent amount, let’s say 10% - 15%

Sure that is if these names will go down significantly more. META and GOOGL are already nearly there, MSFT and AMZN haven’t gone anywhere. To that observation, I say, exactly! MSFT is just at the start of a huge growth in revenue for their CoPilot GPT Chat assistant's product. They are an important new productivity booster for every component of Office360. As for AMZN, they are also coming on strong for their AI-powered services. Also, they are certain to recapture their AWS revenue growth as enterprises migrate from the corporate data center to the cloud. Also by all accounts including my shopping experience AMZN is killing in e-commerce. Both of these names MSFT and AMZN recently hit their 52-week highs, very often when a stock breaks out to new highs there is a consolidation period where the stock contends with the recent high before it breaks above that level and heads higher. I think that is what is happening here. So if you agree that all these names are merely resting before they go on to new highs then you should read on. The key here is that in trading you need to get the price right. Just knowing (in your heart at least) that MSFT is going to march higher is scant consolation if MSFT needs to fall another 7% before it goes back to climbing higher. The other thing to reckon with is to assess whether the market is going to finish 2023 strong. The notion that these 4 names are going to rally and that the market will end toward old highs is very much entwined since these multi-trillion dollar stocks carry so much weight in both the S&P 500 and the Nasdaq. Why are they going down in the first place?

These tech titans have been the stars of the show all November

The S&P 500 gained almost 9% last month which was the best month for stocks since July 2022. So this week the market is consolidating, on top of that what is happening now is a healthy sign, many smaller stocks a making new highs or at least regaining toward old ones. The Russell has been shining of late, powered by lower rates, as the rates fall the prospects of all kinds of stocks that aren’t yet profitable begin to shine again. A great example is the biotech sector where in just 7 days AbbVie ( ABBV ) made offers to acquire two biotechs ImmunoGen ( IMGN ) and Cerevel ( CERE ). There will be more coming, there are many reasons why acquisition in this space is climbing but a big one is that as interest rates fall the value of these stocks is rising. This is because the value of a stock is primarily based on the future stream of profits and revenue. When interest rates are high that future stream is worth less. Why? Because if an investor can receive 5% safely then a biotech that is developing a treatment that is not a slam dunk had better promise a very large pot of gold at the end of the rainbow. As the rates come down that pot of gold can be incrementally smaller to attract buyers. So smaller market-capitalized stocks are attracting investment dollars, and the hedge funds that were so badly positioned months ago may now be all set in Magnificent 7 names for what remains of this rally. At least until the M-7 starts gaining again, then they will rush in for the inevitable breakout. I think what we are seeing is not selling per se, but more of a buyer's strike. For example, MSFT share volume today was 21,182,072, and the 10-day moving average was 25,227,994 which is 16% lower. Let’s look at AMZN’s volume today 39,678,960 and the 10-day moving average is 47,727,190 which comes to 17% lower. This is what I mean by a buyer's strike, if traders are selling a name in earnest the volume would be higher or at least match the average volume.

You aren't going to get a gilded invitation to buy these fantastic names

So in summary, as interest rates go lower small caps are catching a bid. By the way, small caps don’t have to drop for the Tech Titans to do well or the reverse. It is just that a small stock rally is such a new phenomenon after years of ignoring certain sectors, that perhaps the incremental dollar is going there. A healthy stock market has all sizes of stocks doing well. Let’s not forget that there is a ton of cash that has been withdrawn from stocks and gone into money markets. As treasuries continue to fall the reward for hiding there becomes smaller and smaller. I think that cash will find its way not only in the nascent small-cap rally but in the biggest names as well. Money managers and hedge funds want to show that they are putting their client’s cash to work. Keeping cash in an interest-bearing account works only for so long. Also, the individual investor will have a chunk in their money market, but now it isn’t earning 5% anymore. My thesis is, that these names are not going to send you a gilded invitation to buy them, they should be bought soon. Let’s look at the charts and see what they tell us. Let’s start with AMZN and a 3-month chart.

This is a very simple chart. What we see here is a huge blast-off from the end of October, and then hitting a new high. The triangle is what is known as a “rising pennant” otherwise known as a “bull flag”. Why is it bullish? Because the lows of each day are moving higher. As it reaches the apex it will get resolved one way or another, usually in this formation, the flag is resolved to the upside. Let’s have a look at META since I haven’t spoken about it at all let’s see what the chart says. If you need me to recite the positives of META to get you to see it my way then just don’t buy any of these names. Let’s just say that they are printing money right now with no sign that it is going to falter and leave it at that. Here is the 3-Month

This META chart is a bit less “Cut-and-Dry” I zoomed into the 1-Month chart because this bounce off of support is still very new. The support level does go back for 3 months even before the climactic sell-off of all things tech at the end of October. I believe that this triangle will resolve to the upside and once it does buyers will flood back in. Next is GOOGL at the 3-month

This one is indeterminate, I guess I should have looked at the chart before I included it in the article, but that isn’t my way. I am giving you my thoughts about the market as I am thinking of it. I had GOOGL in this group because I think it is shining on the fundamentals. Frankly, the price action lately was encouraging. Today even as all the other big-cap tech names were faltering GOOGL was positive most of the day. The chart does not confirm the bounce to a strong enough degree for me to create a trading position. I was in this name in the high 130s but bailed very quickly. I have trading rules for options and I follow them with discipline. In this case, it saved me from losing the entire trade. Now I am looking for a new entry point, I guess I will wait a bit longer. So that leaves us with MSFT

The purple diagonal lines mark out another flag or triangle. In this case, it is an equal-sided flag.

I want to stay with this name because the rally was stunted for an impertinent reason. I believe MSFT will not only regain the old highs but continue breaking out.

My trades…

It shouldn’t surprise you that I am long in Call Options in all of these names except GOOGL, and I am eyeing it very closely to see if it has finally been based and ready to go higher. What about names I haven’t mentioned? Nvidia ( NVDA ) I think is headed back down to 430 and perhaps lower. It has been repeating this pattern for months, and now that has had the debut of its AI chips, I think NVDA traders will have every excuse to pressure it lower. Apple ( AAPL ) to me is just a problematic name, though I am glad it is back to old highs as that is supportive of all of the big-cap tech names. As far as Netflix ( NFLX ), I haven’t been watching it lately, but all this talk of various other streamers bundling might give pause to the bulls. Tesla ( TSLA ) is contending with a lot of overhead resistance on the chart. I have successfully shorted it when it got to $250, and I will do so again if it manages to reach there again. I would get long at around $200, this is an established pattern and has nothing to do with Musk’s recent hijinks. Ok, well what do you all think of my notion of buying at this elevated level? If you leave respectful comments I will respond before the weekend. Thanks!

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