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The U.S. stock market is overbought, and the weak seasonal period is upon us.
Overbought markets look for excuses to sell off. Please see “Will Trump’s lack of leadership become an excuse for a big selloff in stocks?”
If the momo (momentum) crowd that has been running up this market panics and their panic results in a big spike down, it may create buying opportunities in many stocks. I often get asked: “What is the one stock to buy if the market dives?” Even though I advocate a portfolio approach, this is a legitimate question.
Alibaba BABA, -0.09% stock is the one to buy. First and foremost, let me disclose that Alibaba stock is in the model portfolio of ZYX Buy Change Alert of The Arora Report, and there are nice unrealized gains on the stock.
Many call Alibaba the Amazon AMZN, -0.10% of China. A strong case can be made that Alibaba stock is much cheaper than Amazon, and the company itself has better growth prospects and a better business model than its U.S. rival. In China, JD.comJD, -0.05% is more similar to Amazon than Alibaba is.
Alibaba just reported earnings that were better than the consensus and better than the whisper numbers. Stocks move, not based on actual earnings, but on the differential between reported earnings and guidance compared with the whisper numbers. I can write here details of the numbers and all sorts of fundamental statistics. However, such data have been regurgitated thousands of times on dozens of sites on the internet. For this reason, such data provide no edge.
To be successful in the long run, you need an edge. Let me help you with an edge in Alibaba.
Please click here to see an annotated chart of Alibaba stock.
Let us start with what has affectionately come to be been known as Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next.” The chart shows the first support zone. If Alibaba dips into the first buy zone shown on the chart, consider buying one-fifth of your full position in that zone. If the market experiences more than a garden-variety correction, Alibaba can easily dip into the second buy zone shown on the chart. If such a dip happens, at that time I will provide a position size to be bought to The Arora Report subscribers.
Please note from the chart that there is a gap under the second buy zone. The top of the gap is likely to provide strong support. However, it is important to be cognizant that in panic selling, gaps often fill, provide a great buying opportunity, and then a stock with strong long-term fundamentals takes off to new heights. For this reason, in the ranges shown on the chart, the stock should be accumulated for the very long term without stops. Of course, it is always good to have a catastrophic stop.
This is how the “smart money” accumulates good stocks. Properly scaling in when most are panicking provides the edge.
If overall market conditions cooperate, then Alibaba stock has the potential to reach the target zone of $235 to $250 and possibly much higher in the long run.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.