I’ve been a fan of financial technology stocks for a long while. Up until recently the choices were a few, and pretty much limited to Visa (NYSE:V), MasterCard (NYSE:MA) or American Express (NYSE:AXP). During the last few years, two worthy competitors entered the arena: PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). Even more recently, more companies like Affirm (NASDAQ:AFRM) and Sofi (NASDAQ:SOFI) sprouted roots on Wall Street. Today we focus our attention on AFRM stock, as it has made serious waves of late.
I’ve been bullish on this company from the first time I saw it. But today I will sound a bit more cautious. This is not because I changed my mind about its business outlook. The company still has a long runway ahead of it. But I am constantly aiming to find smart entries into stocks.
My goal is not to find the perfect price level but rather to avoid the obvious mistakes. Chasing the stock after a 70% rally in a matter of days is not something I usually do. This is where I add it to my shopping list to buy into AFRM stock on dips.
Too Much Love for AFRM Stock
The rally came in two giant bursts, one from the Amazon (NASDAQ:AMZN) partnership headline. But the other was from its own earnings reaction. Each of these left a giant gap below. Although that not every gap fills, having two this big makes me uneasy about the stability of the chart below.
Add to this that the markets in general are at all-time highs, it leaves me with a lot of hesitation.
The stock fundamentals are strong even though it hasn’t had that long history on wall street. The company has been around for a while but not public until recently. The financial metrics make sense but they are still too new to use with emphatic conviction. If the stock market is higher in the future, AFRM stock will also be higher.
Looking left on the stock chart, however, I have concerns. It is now trading close to the highest levels from the first month of operation. There might be investors who have been waiting for it to come back so they can get out even. This is what they call on Wall Street having overhead supply. If the stock breaks out into a new high, then momentum traders can chase it.
Look for New Methods
If you twist my arm to trade it today, I would use options. There I can sell puts instead of buying shares into the gaps and leave room for error. This would be a bullish position starting today but one that does not need a rally to win. In fact, the stock can fall 20% and I would still have the opportunity to profit from it.
The worst case scenario is I end up buying shares at a much lower price. Initiating a strategy like this doesn’t even require any out-of-pocket expense. I collect the premium in order to get along the sock, maybe. If nothing happens then the premium dies in my favor.
Next week, we have a Federal Reserve event where they might announce some taper news. I don’t expect them to actually start reducing the buying. But they might hint at the meeting date when they will. Confused? To use their style of words: They will “talk about talking” about tapering toward the end of the year.
My gut says they won’t do anything before Christmas. The wounds from their 2018 efforts are still too fresh. Fed Chair Jerome Powell might also be vying for reappointment. The last thing he wants to do is ruffle feathers and create a crash on Wall Street before this happens.
I expect to have new all-time highs before a 10% correction in stocks this year.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.