Be careful with market moves until after Labor Day. Don’t get us wrong, we’ll take an up day for stocks anytime. However, it could be easy come easy go for gains with losses reversed in a flash for the next two weeks. Activity, measured by volume, is likely to slow down this week and hit the brakes even harder next week, especially Thursday and Friday.
Price movement reveals sentiment or mood, i.e. bullish when stocks rise and bearish when they fall. Volume measures conviction. Heavy buying or selling usually lets you know where the markets are heading. It’s an old Wall Street axiom, volume proceeds price.
Big volume on an up day, no matter the size of the move higher, lets you know investors are in a buying mood. Of course, the opposite is true, heavy volume on negative days equals a bearish tone.
Days like Monday, with volume a fraction of its normal amount, should be viewed with skepticism. The S&P 500 traded 2.2 million shares on Monday versus the average daily volume of nearly 5 million. A little bit of selling could wipe out the positive start to the week in a matter of minutes. It doesn’t mean stocks are going to fall. Light volume on the buy side will continue to push stocks up, but experience says that small volume moves, up or down, are corrected when traders return to normal activity levels.
So, be careful.
Guess who’s back, back on top: technology stocks. It’s not surprising to see when Invesco QQQ Trust (QQQ) is one of the best performing ETFs on our leaderboard. The first six, not including QQQ, and 10 of the top 11 were all within the tech theme. You could say all 11 as Communication Services Select Sector SPDR Fund (XLC) was the lone non-tech, according to our classifications.
We analyzed the charts of the top 11 sectors/industries and didn’t like a single one of them. They all look weak and ripe for some profit taking. However, Global X Cloud Computing ETF Global X Cloud Computing ETF (CLOU) does have buy rating according to our technical scorecard.
Since we aren’t fans of any of the tech ETFs, we looked inside CLOU’s holding to find, surprisingly, that Alphabet Inc. (GOOGL) might be the best value in the portfolio. The behemoth search engine has some of the best sales and earnings growth prospects, one of the highest ROEs (return on equity) and is amongst the cheapest based on price to sales (P/S) and price to cashflow.
GOOGLE finished the day (August 24th) at $1,585.15 and appears headed to new highs as the stock is perched near its intraday 52-week high of $1,608.78, set today. The last time Alphabet established in new highwater mark, its price rallied more than $200 in the next three and a half months.
Analysts expect GOOGL’s earnings per share (EPS) to come in at $56.59 next year, up from 2020’s consensus estimate of $44.26. (1) In the last five years, the mega-cap tech stock has traded with an average price to earnings (P/E) ratio of 29.24. If it hits the street’s prediction, shares price out at $1,654.69. As we type, Alphabet has a 34.68 P/E. Using its current valuation and 2021’s EPS target generates a price tag of $1,962.54.
With the presidential election becoming the center of attention, stock prices are likely to become more volatile. Investors considering adding Alphabet Inc. (GOOGL) might consider waiting for one of those ugly downdrafts, maybe even on a light volume day.
May all your longs go up and all your shorts fall.