October 28, 2015

Investing Technicals vs Fundamentals with Twitter

Technicals vs. fundamentals" is an age old argument.

While I use technical analysis sparsely (and facetiously call it "voodoo"), I appreciate that others use it as a predominant form of trading and investing.

I'm respectful of this and admire it when they succeed -- but "it's not for me," as Grandma Koufax used to say.

A good case in point is my take on Twitter. Morgan Stanley downgraded TWTR to Underweight...., and the shares are likely to take a small hit as a result.

But Bob Lang, one of RealMoneyPro's technically oriented contributors, wrote earlier this week that he liked Twitter's chart and was buying the December $30 calls for about $3.25.

As Bob noted: "For the better part of 2015, Twitter has been a name to avoid, showing massive amounts of negative flow indicative of institutional distribution." That's very correct, in my view.

But Bob also said: "With positive earnings and seasonal strength, we could see Twitter finally get back to the mid $40s by year-end." While I wish that were true, I feel it's unlikely.

So, as I've previously noted, I've been reducing some of my Twitter exposure.

Basically, I saw Twitter as getting a strong, temporary bounce and becoming overbought on the news of Jack Dorsey as new CEO and ex-CEO Steve Ballmer of Microsoft becoming a major investor.

But after those swift rallies, Twitter now faces some heavy lifting to turn around monthly average users, sales, profits and cash flow. This will take several quarters.

So, Bob got me to thinking: "Why not take the other side of his trade and write the same calls against my holdings?" Which I did at $3.20 to $3.30.

Bob saw an opportunity based on the charts to buy Twitter calls, and I saw an opportunity based on my views to sell Twitter calls. This respectful difference of opinion highlights how a technical analyst and fundamental analyst see things differently.

Stay tuned for the results of this "Technicals vs. Fundamentals" debate. We'll only need two months to see which view was correct in this case.

Note: I've maintained TWTR on my Best Ideas list because I believe that in the fullness of time, the company will execute its strategy properly and take advantage of the extraordinary opportunities that the Twitter platform provides.

Position: Long TWTR (small), Short TWTR calls