Weekly Briefing 2/14/21: Momentum Stocks - The Forecast

Weekly Briefing 2/14/21: Momentum Stocks

Weekly Briefing 2/14/21: Momentum Stocks

As record amount of new traders continue to open brokerage accounts with fresh stimulus money, we want to impart some wisdom regarding certain pitfalls in the potentially treacherous investment world.  Many investors ask themselves if they should consider the casino momentum stocks – stocks that make dramatic moves in short periods of time normally originating from online activity in social media and message board posts. The months of January through May offer the best climate for momentum in smaller capitalized stocks.  They will then typically remain quiet until late November and show signs of life in December before a fresh trading year kicks off. Due to Covid-related lockdowns last summer, they showed more life than usual. Expect things to go back to normal as momentum leaves the markets as markets correct into late spring. Knowing seasonal patterns in any asset class is a valuable tool.  The temptation to constantly enter trades in these stocks is surely present year-round as evident by the recent run in GameStop, chart shown above. The stories continually change but the game remains the same. Without any real fundamentals that are capable of producing short term revenue, these spikes seldom last and give back virtually all of their gains. If GameStop was wise, they would have cut a deal with short sellers who wanted to buy stock and cover their massive shorts. In the process, they would have re-capitalized the company and could have rebranded and grown their revenue stream in a new direction that was sustainable in today’s gaming market. However, greed led to a series of poor decisions and dreams of a $1000 share price, and insiders selling their positions at insanely overvalued prices never occurred. The stock’s run was built on technical factors of egregious short sellers bullying or preying on smaller companies, like GME, to generate what they considered risk free gains. However, with no fundamentals to help sustain the rally, it was sadly destined to fail.  Funds and banks normally lick their chops and begin counting profits the day they see online day traders get overzealous and run up price on a speculative stock. They begin to layer in shorts, some legal and some naked, as price rises. They have enough capital to wait out any potential prolonged battle and can stay short longer than long traders can maintain their enthusiasm. With little or no real catalysts to drive price higher, confidence in day traders and swing traders is quickly dashed.  Their backs are broken by fresh attacks of shorts with endless capital.  At the first sign of a downturn most traders jump ship. With no solid fundamental foundation of an investment thesis, it takes very little to turn fresh buyers into motivated sellers. Whether investors should partake in this casino action is ultimately up to each person, but if you choose to partake, one should always keep in mind the facts and big picture of the trade and never overstay your welcome. If you are a trader that is focused on the home run trade in these speculative names, you will most likely end up losing a lot of money. If you do choose to invest in this sector, know the seasonal months of greatest returns and act more like a hummingbird going from flower to flower, quickly taking a little at a time for prolonged success. If you trade year-round and your trading is comprised of a high percentage of this type of speculative trading, it will be challenging to have sustained dependable gains.

Shown above is another momentum name that had a great run the past 6 months based on solid fundamentals in the EV car market. They produce technology that integrate into the charging process of electric vehicles – a good story with expanding revenue and a small float with relentless online social media activity has given PLUG a huge run with a currently sustained rally. However, just because they have fundamentals behind this move does not mean price will stay elevated. Ultimately, as larger players move into the space, competition will become fierce for this small company based in Latham, NY. Price will most likely retreat and fill gaps lower and we would not be surprised to see the company bought out.  When small companies in public markets have great runs in a new area of growth and technology, shareholders must always be on guard. Larger players with the ability to produce at greater scales will enter the same market and undercut price. There are no guarantees PLUG can sustain this move. So even when fundamentals are in your favor in a momentum name, taking profits along the way is key. If you are in early a good strategy is taking your initial investment off the table and letting your free shares ride. A few home runs will eventually land in your lap but do not set out with expectations of achieving one in every trade. Apply good risk management and shoot for base hits. Profits can be fleeting in todays market’s.  Next week we will examine the perils of penny stocks.
Due to closed markets on Monday for President’s Day, the next Nightly Briefing will be published Monday evening. We expect major moves to begin this week in all three major markets of metals, energy, and in particular equity indexes. Investors should be raising cash.