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Warren Buffett is renowned for being a legendary investor. But the Oracle of Omaha didn’t just stumble upon decades of beating the overall market, he uses a number of tools, indicators, and analytics to buy up battered-down companies, then reaps the rewards once the ‘fear’ settles down. Buffett currently holds a record $168 billion pile of cash. This is one part recognition in the overall market's frothy valuations, but another in the fact the company is able to get over 5% in near risk-free money due to high treasury yields. In the meantime, Buffett can wait for things to cool down while still raking in a clean $8.4 billion in cash from the interest on their bonds.
Buffett doesn’t hoard his knowledge, either. The Oracle regularly shares his advice and holds a massive, open, shareholders meeting every year where he answers questions about Berkshire Hathaway (BRK.A) (BRK.B), and tons of questions from young investors. One of Buffett’s most famous quotes was a message to investors in times of volatility, “be fearful when others are greedy and to be greedy only when others are fearful.”
While this is great advice, without more context, it’s hardly actionable. One of those previously mentioned tools Buffett keeps in his toolbox is known as the Relative Strength Index or RSI. It’s become colloquially known as the “Fear and Greed Index” because it’s a combined measurement of momentum, trends, volume, and similar important metrics to measure when a stock is overbought, oversold, and by how much.
RSI is essentially the “average gain during up periods” divided by the “average loss during down periods” and then put on a scale from 0 to 100. 30 is considered “undervalued,” while 70 is considered overvalued. Stocks rarely sit above those lines for long, and the longer they do, the more violent the reaction when they come back to reality. It doesn’t tell you how much a stock is going to move, but it can predict important trends. For example, if an RSI of a beloved stock is at 10, it’s considered incredibly oversold and due for a bounce. If it's at 85, the stock is likely due for a drawback.
That might just be the case with one of the most hated stocks on Wall Street right now. Crowdstrike Holdings (CRWD) is a name most have heard in recent days due to an update pushed out that caused system-wide failures across millions of Microsoft Corp (MSFT) computers. This has led to an anticipated $500 million lawsuit from Delta Air Lines Inc (DAL) and a whopping 44% sell-off in their stock over the past month. The sell-off isn’t unfounded, as it will certainly eat Crowdstrikes cash holdings, hurt their brand, and potentially lose them customers.
Notably, Crowdstrike's RSI on the one-month chart is currently sitting at a nearly unheard-of 9.51. On a longer-term scale, it's sitting at roughly 15.5 on both the three-month and one-year charts. This indicates there’s a lot of fear around the stock, but also indicates the company is due for a violent bounce up over the mid-term. It's difficult to catch a falling knife, so this doesn't necessarily mean investors can make money based on RSI alone, but it does indicate the company is trading based on fear rather than fundamentals. Going back to Warren Buffet's famous quote, that usually means there's opportunity in the stock.
While some lawsuits and unhappy customers are surely going to hurt in the short term, Crowdstrike has lost roughly $44 billion in value over the past two weeks, and the ‘fear index’ indicates the worst of this specific controversy might be coming to an end. Notably, the company is down over 4% again today with no clear indication as to when the pain will be over in the short term. Alphabet announced today that it had cut its stake in the company, which comes alongside many major indices that hold positions in small-cap stocks.
While the company is due for a bounce in the short to mid-term, the company's RSI on the five-year chart is starting to bottom, too. While it hasn't completely bottomed, it is sitting at 33, meaning it might begin forming a bottom.
On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
