Should Investors Buy Boeing’s Current Bottom?
In spite of Boeing’s recent troubles with one of their aircraft, and their stock plummeting as a result, there are some at least who think that their stock looks good down here.
Bottom hunting can be a risky business, which has us trading against the bigger trend in the hopes that it may be over. While we never really want to jump on something that is currently falling in the short term as well, there are times where it at least appears that the worst is over with these moves and entering can appear pretty tempting.
Boeing’s stock certainly looks like it qualifies here, from pretty much any investment time horizon, whether you are looking to get in for the long haul or perhaps even looking to trade this current bounce and hope that it moves up toward where we were before all of this happened.
We do need to be more careful with these plays though, and we really wouldn’t want to stay in the move if the support line ever gets broken, which isn’t that far away right now. This does serve to define our risk at a pretty acceptable level though, which is only about $6 away as of Wednesday’s trading, and that’s not a lot to risk to shoot for gains several times this size.
The risk to potential return ratio is an important one not just for traders but for investors as well, even though few investors would have much of an idea of what this even is. This is more than just defining our risk, the point where we are planning on exiting if we hit this certain price point, as ideally these points should be defined by the market as well and not just some arbitrary number that we come up with that fits our risk appetite and needs.
We therefore need to strive to have our exit points jive with the charts, like this example of using the support level from March 22 as our line. Perhaps our risk tolerance is not this high, and it certainly wouldn’t be for a lot of traders, whose systems of trading are not designed for losses anywhere near this big, and therefore need to pick other technical criteria for their stops, ones that fit their trading style better.
This is a pretty small number for investors though, and some may think too small, but do we really want to be in this if we go below this March 22 number? The risk of the stock’s going lower certainly picks up here and we should not care so much about how long our outlook may be because we can always get back in when the dust settles.
How a Strategy Works Over Time is What Matters
Whether or not a particular exit like this would work out to be beneficial in this case isn’t particularly important, and this is where many investors get stuck. You sell, the move lower doesn’t materialize, and you regret your decision.
This might seem like a pretty normal reaction until you consider that this is all a numbers game, and one instance is far from a statistically significant one. It is only when we look at doing this thing many times that we can properly judge its merits overall.
This is perhaps the most basic lesson in learning to trade, and it’s also one that investors need to learn as well, at least those who are looking to time their investments. Traders get to do these things a lot, where investors may only occasionally trade, so there is a far less opportunity to learn, and in particular, to make mistakes and learn from them.
Picking bottoms is not really that suited for those who have little experience and knowledge in knowing how to handle these trades though, but if we can find a situation where we can easily limit our risk well, even the least experienced investors can find a good foothold where if the trade stays above this line, they can’t go too far wrong no matter what else happens.
This is because the risk to potential reward ratio looks pretty good with Boeing right now, along with the fact that this move would be so relatively easy to manage. This ratio looks at the potential for the trade to work along with how far it may move if it does, and compares how much we may lose if it doesn’t.
We can’t really know what the probabilities really are here, but we can look at what may be more likely than not, and if things are more likely to go up than down, that can be enough if the amount that we win is larger than the amount we are risking. If the potential rewards are high enough, it can even make sense to trade it when it’s less likely than not, because we get paid enough when it works to make up for the times it doesn’t and still allow an expected value high enough.
We Need the Right Conditions for a Good Bottom Play
We need to be careful though not to just jump on every bottom, and we need certain conditions present, including a recent sell-off along with at least the likelihood that the stock is attracting enough buying interest that the market does think that it is a value down here.
We may not be at that point yet with Boeing, as we really need to wait for enough confirmation from the market that it has actually decided to bring it up, but we don’t want to wait too long either, as this does risk missing the move and entering when things may be cooling down.
We can get into real trouble here, where we’ve increased the distance between where we enter and our technical exit, and we also see a limitation to some degree on the upside, the part that we’ve just watched happen.
Boeing did put in a nice day on Monday, on a day where the market traded pretty flatly, and has moved up a bit more since then at least. We do have to worry that Monday’s move was just some people loading up without that much of a consensus, and therefore, we may want to wait to see a bit more conformation before we swoop in and buy it.
Those who have held it through this all this trouble have probably been wise to not panic and dump it yet, although it does pay to watch this closely to see if the will to drive it considerably lower than this materializes.
Boeing has of course been taking some good slaps from some analysts through all this, but we really don’t want to pay that much attention to this as far as the timing of this particular potential trade is concerned, but we do need to realize that these things do influence investors and we want to wait until this influence wanes enough to shake out those more eager to get out and allow us to get back on track more.
Not all analysts are reluctant with Boeing here though, and Baird analyst Peter Arment believes that “both short and long-term investors should buy Boeing.” He has a price target now of $470 a share, which would have us making back more than twice the amount lost from this current sell-off due to the crash.
Arment is a fundamental analyst, and doesn’t really spend much time looking at charts and looking to time his entries, but having this view on our side certainly doesn’t hurt, especially given that these fundamental outlooks are traded upon in the market and do influence things at least somewhat on balance.
Boeing is at least at an interesting juncture, and while people might want to wait and watch right now, it may indeed pay to watch this stock pretty closely over the next little while.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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