6 Ideas for Trading the Magnificent Seven

March 8, 2024 Joe Mazzola
The Magnificent Seven stocks—tech giants Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—are a volatile group that could be of interest to some traders.

Last year, seven market behemoths—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—accounted for nearly two-thirds of the S&P 500® Index's gains.1

That's in part because these stocks constitute an outsize proportion of the index—28% as of year-end 2023. But six of the seven appear also to benefit from a "wide moat," or competitive advantage that's expected to last two decades or more. (Tesla, the outlier, has a "narrow moat," or competitive advantage expected to last 10 years.)2

These mega caps have proved especially tantalizing to traders, who may see profit potential in their higher-than-average volatility. However, moving in and out of the market's most popular stocks isn't without risk. Here are six considerations for trading the so-called Magnificent Seven.

1. Beware overexposure

Many traders limit any single position to a specific percentage of their total trading portfolios (5%, for example). However, given these seven stocks' high prices—which range from $140 to $490 per share3—holding even a handful of shares could mean taking on a larger position than your self-imposed limits. For example, if your total trading portfolio is $50,000 and you buy just 10 shares of Nvidia at $490 per share, that stock alone would account for nearly 10% of your portfolio.

2. Watch for corrections

A potentially attractive entry point for any trade is the price at which the stock appears to be technically oversold and due for a rebound. But this can be difficult to gauge with the Magnificent Seven, whose bigger-than-average price swings make it harder to identify a trend reversal.

This is where a stock's relative strength index (RSI)—which tracks the strength of a security's price against its own history—comes in handy. Generally, a stock is considered oversold by technical analysts when its RSI dips below 30, but traders typically research the specific stock's historical trends to find its unique RSI threshold. Also, be careful not to jump in too soon; waiting for the RSI to clearly break back above 30 (or whatever threshold it respects) can help confirm the selling pressure has dissipated and a trend reversal may be underway.

Trading Apple

Traders who bought Apple when its RSI dipped below 30 in mid-August or late October 2023 benefited from steep upswings shortly thereafter.

Apple's stock price dipped sharply in mid-August and late October 2023, which coincided with its RSI briefly breaking below 30. In both instances, the stock experienced a sharp rebound shortly thereafter.

Source: Schwab.com.

Data from 01/01/2023 through 11/08/2023.

3. Reap the earnings run-up

Due to heightened anticipation in the lead-up to earnings day, some traders may attempt to turn a profit by opening and exiting a position in the days before the numbers hit. Closing a position before the release date also helps avoid the potential negative impact of an earnings miss or disappointing news shared during the earnings call. Before the trade, you may want to check how the stock has performed ahead of earnings announcements over the past year or two; a habit of strong performance before earnings or turbulent reactions after earnings may be worth particular attention.

Trading Tesla

Tesla's stock rallied ahead of two of the company's 2023 earnings reports, creating significant profit potential. Traders who exited just before the January earnings announcement would have missed out on an even steeper post-announcement climb, but those who sold just ahead of the July release could have pocketed tidy profits—as well as avoided the sharp price decline that immediately followed the release.

Tesla's stock price increased more than $100 to almost $220 per share from just before the January 2023 earnings call to February and climbed from below $180 per share in May to above $280 in July before the Q2 earnings call.

Source: Schwab.com.

Data from 01/01/2023 through 12/21/2023.

4. Be careful when considering a downtrend

Given how widely held and traded the Magnificent Seven are, it can be difficult to judge when investor sentiment turns negative. Even when the technicals have turned south, investors can still pile in, causing unpredictable jumps in share prices that can undermine a short position, cause you to miss getting in with a low-priced limit order, or trigger a sell order when the stock is still rising—among other disappointments. If you feel that one of the mega caps is due for a dip, you could consider a buy limit order at a lower price that represents the level at which you feel comfortable owning shares, but be prepared to change to a more aggressive price if the stock turns bullish. That way, you'll add positions at a discount if the stock does fall, and if the price rises instead, you can reevaluate and consider if you still want in at a higher price.

5. Pay attention to PEG

After their stellar run in 2023, all seven stocks have been trading at elevated price-to-earnings multiples, perhaps indicating they're overvalued. But for these stocks, in particular, their price/earnings-to-growth (PEG) ratio may be a better measure of valuation because it factors in the company's expected earnings growth. By that metric, four of the stocks—Amazon, Alphabet, Meta, and Nvidia—were trading at discounted valuations as of November 2023, with their average PEG sitting at 0.97, compared with 1.8 for the median S&P 500 stock.4 The PEG ratio shouldn't be used as a valuation metric in isolation, but it can be useful for identifying relative value—that is, how expensive the stock is in an earnings sense but a bit more nuanced than what P/E ratio can provide—particularly after a pullback.

6. Take notes

While these suggestions may be helpful at the start, be sure to pay attention to what's working—and what's not—with your own trades. If you can't seem to find your way forward with one of these mega caps, there are plenty of other candidates to choose from.

1Bloomberg, as of 12/27/2023.

2Morningstar, as of 12/27/2023. 

3As of 12/27/2023. 

4Bloomberg, as of 11/16/2023. PEG ratio for the median S&P 500 stock was calculated using a forward P/E of 19.3 and an estimated median growth of 11% for 2024.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled "Characteristics and Risks of Standardized Options" before considering any option transaction. Call Schwab at 1-800-435-4000 for a current copy. Supporting documentation for any claims or statistical information is available upon request.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

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