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  • Using The S&P 500 And The Nasdaq To Buy EBay 0 comments
    Apr 23, 2013 10:47 AM | about stocks: AMZN, JCP, RSH, EBAY

    The following is based on a largely technical perspective.

    An opportunity to maximize gains by going long on (NASDAQ:EBAY) stock will happen when EBAY and the NASDAQ Composite Index are both below their respective 50, 100 and 200-day SMAs. As of April 21, 2013, EBAY stock price is too high for a reliably profitable entry point. A significant correction or recession that would drive EBAY prices below the aforementioned SMA levels will present a better buying opportunity.

    Though a fundamental analysis would certainly help this recommendation's credibility, a detailed look into the financial fundamentals of eBay and relevant competitors such as Amazon (NASDAQ:AMZN) is beyond the scope of this article.

    Technical Analysis

    Prominent stock indexes such as S&P 500 or the NASDAQ Composite Index (^IXIC) are good proxies for the direction, though not magnitude, of EBAY stock behavior. Over the last ten years, EBAY had a positive correlation with the NASDAQ index. EBAY is notably more volatile, and this volatility can affect final returns over a given time frame. For instance, the 10-year time span between April 14, 2003 and April 15 2013 has given both, ^IXIC and EBAY investors a roughly 120-130% return on investment. By contrast, Jan 3, 2000 to Jan 4, 2010 shows EBAY giving nearly 50% gains, compared to a 40% loss for ^IXIC.

    Despite this discrepancy in final capital gains in the second example, the key is that both securities move in the same direction. EBAY's gains had to do with the stock having much stronger price volatility compared to ^IXIC. Nevertheless, note the same overall direction of movement. Furthermore, observe two shorter time frames:

    1. Sept 23, 2002 -- July 28, 2008. Final gains end up very close, with ^IXIC up 90% and EBAY up about 70%. Once again, ^IXIC and EBAY move in the same direction, though not to the same magnitude. Even EBAY's prominent spike in Dec 2004, and subsequent drops to match ^IXIC by Oct 2006, are mirrored by gentler bumps and dips in the NASDAQ Composite Index. As ^IXIC goes up and down, so does EBAY.

    2. Mar 2, 2009 -- April 15, 2013. EBAY stock shot up nearly 400% with NASDAQ clocking in a relatively anemic 150%. Once again, EBAY stock seems like a close mirror of ^IXIC price movements, with EBAY having more prominent "noise" that magnify return percentages.

    These examples serve to drive home the point that EBAY is a good buy when NASDAQ is undervalued.

    Consider the last five years. Using 50, 100 and 200-day SMAs, note that ^IXIC was significantly below all of those moving averages October 2008 through February 2009. On smaller scales, though using the same SMA values, the index had similar pullbacks in July 2010 and Aug 2011. Each pullback was a good buying opportunity.

    Going back to EBAY analysis in the same time frame, observe how the same story plays out regarding pullbacks under the 50, 100 and 200-day SMAs. The company has shown an ability to weather recessions. An EBAY price drop concurrent with a similar decline in the ^IXIC signals a buying opportunity.

    Note that an EBAY drop below the aforementioned moving averages without a similar ^IXIC drop may be noise or an indicator of near-future price declines of the ^IXIC. Such a drop will very likely spell further EBAY price declines. It is important to remember that there is no apparent hint as to whether eBay stock price leads or follows ^IXIC. Therefore, an entry point into EBAY should be confirmed with ^IXIC and other major indexes. All should be below their respective 50, 100 and 200-day moving averages.

    It may be objected that a single company like EBAY is not as resilient as the NASDAQ Composite Index. Therefore, it could be argued, the index is not a reliable indicator to confirm future eBay stock behavior. One may claim that an EBAY price drop is not a buying opportunity; it may signal long-term decline. This is a point worth considering.

    Due to its size and popularity, eBay has become a cultural phenomenon. Any systemic decline will be noticed and publicized by analysts and professionals in the field. As with (NYSE:JCP) JC Penney's and (NYSE:RSH) Radio Shack's recent forecasts of failure, big companies generate plenty of press, flattering and otherwise. Such warnings will give an investor long on EBAY stock plenty of time to lock in gains.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: AMZN, JCP, RSH, EBAY
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