On Monday, the markets started the day with such promise only to have significant gains erased in seconds late in the day. One could assign blame on the Syria related press conference or just good old-fashioned profit taking.
The froth fizzles first and fastest...
Monday, traders saw how premiums come out fastest out of the frothy tickers. Two cases in point consider. First, Tesla (NASDAQ: TSLA): The stock opened up with the markets then at about 1:00 pm E.S.T the markets started the afternoon slide.
Tesla didn't even wait to see how shallow will the pullback be. The stock sold off all the way down to 160 and closed just above that and way off the day high. Similarly, traders saw almost exactly the same price action from another frothy name Netflix (NASDAQ: NFLX).
Here too one can see that the selloff in Netflix coincided almost exactly with the start of the afternoon market slide (See charts below where the /ES is above TSLA and NFLX)
Froth Fizzles First and Fastest at the First Sign of Trouble
Value holds up better...
Conversely, days like today highlight the importance of buying value. Consider the price action of two stocks whose prices are not in the proverbial stratosphere: Goldman Sachs (NYSE: GS) and Home Depot (NYSE: HD). The charts below will show that the stocks actually tried to linger at the first trouble zone before they finally declined to close lower.
Unlike the two previous examples of momentum stocks that let go at the first hint of trouble.
Value Holds Up Better then Momentum Stocks
Don't drink the froth... It is true that these four aforementioned examples are based on one day's intraday price action. But, this will translate and hold up for mid and long term trades.
If traders go long frothy tickers at frothy levels they would be buying shares from the smart money who has been manning the dispenser and been riding the froth up and now are cashing in their profits.
In today's super fast trading environments where information spreads in milliseconds, unless traders are in on a frothy run BEFORE getting frothy then they are buying too late.
Nicolas Chahine is a former CFO for a successful web startup. He now manages his own fund, which is built around his credit-spread trading strategy. He is the mind behind the “Mastering Credit Spreads” online course and “Create Income with Credit Spreads” newsletter on Marketfy.com.
Nic’s offering to buy half the cost of your first month’s subscription of “Create Income With Option Spreads” newsletter. He’s that confident! Click here to learn more!
The continued rise of stocks like TSLA and NFLX are partly the product of very poor monetary policy by the Federal Reserve. By doing everything possible to keep interest rates near 0%, the Federal Reserve has created a new bubble in many publicly traded stocks. Just as was the case with Bernanke's predecessor, too much stimulus has a cost in the long-term, and that is that the stock prices will ultimately collapse producing more economic calamity than was saved while these policies were instituted. In addition, this type of monetary policy, "quantitative easing" is allowing the big banks to decide on their own where to put this cash. As a result the cash ends of with the big corporations who put it to use repurchasing their shares. Thus, a higher stock market and very rich CEOs from stock compensation, while the middle and poor class continue to get squeezed as this trickle down economics is really just a con-job by some of the very wealthiest in America.