Mega-cap stocks like Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL) haven't performed well in 2021, but Amazon (AMZN) is set to break to the upside, according to one veteran trader.
Taking a top down approach, JC Parets, CMT (Chartered Market Technician), founder and chief strategy officer of allstarcharts.com, reverse engineers this trade. He begins with his belief the general market is heading higher this year combined with the outperformance of the consumer discretionary sector versus the consumer staples sector.
"[If] the stock market's going to go up — the S&P 500 (^GSPC) to 4,500 — which is where I think we're going, consumer discretionary, in my opinion, needs to be one of those leadership groups — particularly relative to staples," says Parets. "And if discretionary [stocks] are going to lead, Amazon can't be making new lows, right? That's just math. So we're reverse engineering this trade."
In fact, if you don't own Amazon, you are actually short the e-commerce giant, according to Parets.
"If Amazon is above 3,000, I think it needs to be owned. It needs to be part of a portfolio. I think not doing that almost makes you short. By not having that exposure, you're essentially shorting Amazon because you're losing that alpha," he says.
Parets believes Amazon has 60% upside. Based on Monday's close, that establishes a trading target just short of 5,000. With a stop just under 3,000, the potential reward-risk ratio on the trade is more than 16-to-1. A 4,500 target on the S&P 500 points to 18% upside for the large cap index.
But it's not only U.S.-listed stocks that are benefitting from the global reflation trade. Emerging markets are surging, with Chinese stocks leading the way (notwithstanding Beijing's crackdown on some of the biggest tech names, like Alibaba (BABA) and Tencent (0700.HK, TCEHY).
Parets points to China as a barometer of global risk appetite. "At the beginning of the fourth quarter of 2018, right before the stock market really sold off, Shanghai was breaking down to new lows. We're not in that environment. It's the opposite, and Shanghai's breaking out [along with] Chinese internet [and] Chinese technology. And when Shanghai goes — when Chinese stocks go — they really go."
Parets also notes that the consumer discretionary, technology and communications sectors represent half of the entire emerging markets index.
"This is EM [emerging markets], baby — all day long," Parets says.