By Nigam Arora
• The chart shows a new trend line with a higher slope that started forming last year. This is a positive.
• The chart shows that the recent pullback was shallow. This is a positive.
• The chart shows that during the pullback, the accelerating trend line held. This is a positive.
• The chart shows that Applied Materials reported good earnings.
• Earnings were better than consensus and whisper numbers.
• The chart shows a technical breakout for Applied Materials stock. This is a positive.
• The chart shows the stock breakout occurred on heavy volume. This is a positive.
• RSI shows that Applied Materials stock is overbought but there is room to run.
• When a stock with steadily rising trend lines breaks out like Applied Materials has done, RSI should be used only for tactical purposes and not for strategic stock selection.
• The chart shows a cup and handle pattern. This is a positive pattern in the stock market especially when a breakout occurs on heavy volume.
•Semiconductor stocks have outperformed the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.98% , the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.44% and the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ -0.06% , which tracks the Nasdaq-100 Index /zigman2/quotes/210598364/realtime NDX -0.06% .
Megacap tech stocks
The stock market is led by the five megacaps: Apple /zigman2/quotes/202934861/composite AAPL -0.88% , Amazon /zigman2/quotes/210331248/composite AMZN +0.19% , Facebook /zigman2/quotes/205064656/composite FB +0.78% , Alphabet /zigman2/quotes/205453964/composite GOOG +0.79% /zigman2/quotes/202490156/composite GOOGL +0.83% and Microsoft /zigman2/quotes/207732364/composite MSFT -0.43% .
Apple is an obvious user of semiconductors. Many investors are oblivious to the fact that other megacaps are also huge users of semiconductors in their data centers. These megacaps are making significant progress in artificial intelligence and machine learning.
To gain an edge in megacap technology stocks and semiconductor stocks, consider using segmented money flows.
The U.S. dominates the semiconductor industry, and therefore China is highly dependent on U.S. companies. During the trade war, President Trump effectively used the U.S.’s position in semiconductors as a Sword of Damocles. It is natural for China to try to get out of this situation.
Sooner or later the coronavirus will run its course. When China gets in the mode of increasing its semiconductor abilities, Applied Materials will benefit.
When and how to buy
This stock market is controlled by the momo (momentum) crowd. If you have drunk the Kool-Aid of the momo crowd, then it is real simple: Buy shares of Applied Materials and keep in mind that semiconductor stocks are very volatile.
What if you are a prudent investor? Then you need to bring significant sophistication to buying, holding and managing this stock. The chart link above shows the Arora buy zone.
Is there any advantage to being prudent anymore? Applied Materials’ stock is carried in our Model Portfolio from an average buy price of $16. Since our original buy, the stock has fallen numerous times into our newer buy zones, giving investors excellent opportunities. Often when the momo crowd was losing money and its stops were hitting, we were buying the stock. The answer to the question asked at the beginning of this paragraph is yes — in the long term you will generate higher risk-adjusted returns.
Other 5G stocks include Qorvo /zigman2/quotes/209919828/composite QRVO +0.56% , Qualcomm /zigman2/quotes/206679220/composite QCOM +3.75% and T-Mobile /zigman2/quotes/204659678/composite TMUS -1.27% . Note that Sprintis being acquired by T-Mobile.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.