Qualcomm Stock Presents Classic Dilemma for Traders

 | Sep 13, 2018 | 11:21 AM EDT
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Asian stocks bounced overnight and that helped to keep the momentum going Thursday, created by news of new trade negotiations with China. In addition, inflation numbers came in lower than anticipated and that is leading to a perfect storm of economic conditions. There is strong growth but limited inflation, which means the Fed can take it time raising interest rates.

Breadth is good with around 4,200 gainers to 2,500 decliners and the number of new 12-month lows has shrunk dramatically. We have around 280 new highs to 75 new lows, which is the sort of ratio you would expect in an uptrending.

Despite the strength my screens are mixed as many of the small-caps I favor aren't keeping pace. That happens when the action is driven more by headlines and the indices rather than individual stock-picking.

The S&P 500 is at intraday lows as I write and traders will be watching to see if the opening gap is filled. A big intraday reversal would ignite the anticipatory bears who have been so frustrated lately.

One good example of the type of stocks that are attracting momentum buyers right now is Qualcomm (QCOM) . QCOM has been on a tear after reporting EPS growth of 22% on July 26. The stock gapped up again Thursday after announcing a $16 billion "accelerated" share repurchase plan. Analysts at Barclays like the news and put a $95 target on the stock this morning.

QCOM presents a classic dilemma for market players. The stock has very strong momentum, but it is now technically extended and you have to wonder how much more it can run without consolidation.

The buyback undercuts any arguments about valuation, which doesn't seem to be overly aggressive. Like many other chip stocks QCOM does not tend to trade with high multiples at peak earnings due to fears the cycle may be turning.

The best way to play QCOM is to take a small initial position and then hope you will be able to add on some pullbacks. This is not an easy buy at this point but there is no way to know how much longer this momentum can continue.

The repurchase plan should provide strong support and there will be fear of missing out as the gap created this morning holds.

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