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2 Good Reasons to Buy the Dip in Alphabet (GOOG: GOOGL)


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Many things can cause a stock to move, but there are two things that experience has taught me are frequently reasons to oppose a market trend. The first is when a move happens based on unsubstantiated rumor and the second, a more recent phenomenon, is when Donald Trump tweets and the market reacts.

Logically therefore, when Donald Trump tweets based on an unsubstantiated rumor, fading the resulting move is extremely attractive. That is what we are seeing this morning regarding Alphabet (GOOG: GOOGL).

The stock is down nearly one percent in early trading this morning and the reason looks to be a Presidential tweet saying that the administration will “look into” accusations from tech entrepreneur Peter Thiel that Google is, in the words of Trump’s tweet “working with” the Chinese government.

It is little wonder that the President is reacting to these allegations, as they come at a time when he is deeply suspicious of Google and seem to come straight out of his own playbook.

The suspicion comes from a belief on the right of American politics that social media and internet search companies are biased politically and are effectively suppressing conservative ideas and opinions. The similarity to a Trump accusation comes from the fact that so far, Thiel has offered no evidence to back up his accusations and that both his and Palantir co-founder Joe Lonsdale’s supporting comments are of the “people are saying” and “everybody knows” variety.

Those phrases have come to the fore recently due to frequent use by Trump, but my familiarity with then goes back a lot further. In the largely unregulated interbank forex market of the 1980s where I started my career in dealing rooms, they were frequently heard. Some traders, when caught in a bad position, would start asking everyone they spoke to if there was any truth to things that “people were saying.”

What they omitted was that up to that point they were the only person saying it, largely because they had just made it up. It may be a “rumor” of central bank intervention or leaked data, or just about anything. The specifics of a made-up story, after all, are not important. Sometimes, if the market mood was right, a manufactured story would gain some traction and cause a move in the desired direction. When it did though, those moves were always short-lived.

There is an old saying that there is no smoke without fire, but in financial markets where million if not billions of dollars are at stake, that is a dangerous assumption.

Part of the appeal of opposing a rumor-driven move is that the downside to the trade is usually somewhat limited. The stock reacts to the rumor and that takes the sting out of the reaction to the news itself. In this case, given the serious nature of the accusations, that may not be true, but that same seriousness makes the chances of any evidence to support the claim being produced much less likely.

I know that there are those that believe in big, deep conspiracies, but do you really believe that Google is an agent of the Chinese government and has managed to keep that secret so far?

Even Trump’s tweet on the subject is vague. There is no talk of any specific action, just a promise to investigate the allegations, something that I assume the CIA and other government entities would do as a matter of course.

There has been some speculation as to Thiel’s motive here, but really that doesn’t matter from a trader’s perspective. It could well be that he is just a patriotic American who is worried by things that he is hearing and is trying to prompt an investigation. What does matter though, is that first thing this morning, Alphabet stock dropped on a Presidential tweet about an unsubstantiated rumor.

That means that, based on experience and logic, the stock is a buy on that dip until there is hard evidence of a real problem, if there even is such a problem that exists in the first place.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Stocks , Investing Ideas
Referenced Symbols: GOOG , GOOGL



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