After weeks of dramatic moves, the S&P 500 finally seems to be getting comfortable at current levels. While we are still experiencing elevated volatility with 1% and 2% daily moves, they have largely been offsetting each other from day-to-day around 2,800.
While the market has been finding its footing, there are a few stocks that have definitely been taking advantage of this calm to reassert their dominance. NFLX and AMZN are inherently well-positioned to do well during these lockdown times because they cater to customers at home.
As expected, these two companies navigated last month’s stock crash relatively well, losing less than the indexes. No surprise there. But then something curious happened Monday. Investors started piling into these stocks with reckless abandon. There wasn’t a definitive headline driving this strength. Instead, retail investors were hungry for something to throw their money at and these two stocks happened to be the beneficiary.
Fundamentally, nothing changed between last week and this week for NLFX and AMZN. Neither one found the cure to the Coronavirus or unlocked the secretes to sustained fusion. These were some of the best run and best-positioned companies last week when no one was paying much attention to them and they are the exact same well-run companies this week. The only thing that changed is they are now popping up every Tom, Dick, and Harry’s stock screen. Nothing attracts a crowd like a crowd and these two mega-caps are the hottest thing going right now.
Of course, this should look familiar to anyone who’s been following the market over the last few months. In late January, we saw the same thing happen with TSLA. A company that was doing well and going about its business when all of a sudden it became the hottest trade in the market, for seemingly no explicable reason. There wasn’t a headline breakthrough. TSLA reported earnings a couple of weeks before and showed a small profit but not much happened after earnings. And then all of a sudden, one day out of nowhere, the stock started racing higher, much like NFLX and AMZN are doing today.
Like TSLA before it, NFLX and AMZN are nothing more than momentum trades. People want to get in because they’re afraid of being left out. They’re not buying AMZN and NFLX because they love the companies. They’re buying them because everyone else is buying them. And unfortunately, these things rarely end well. I warned people to lock-in TSLA profits when the stock slipped under $800 and I definitely hope a lot of readers heeded that advice. As similar as NFLX and TSLA’s stock charts look here, only a fool would expect this to end any differently.
Unsustainable moves are unsustainable. They’re great while they last, but always recognize it for what it is. Stick with what is working and ride this higher, but never let it go to your head. Make sure you stay disciplined and use a trailing stop to protect your profits. No doubt this will pop like all of the other unsustainable surges higher that came before it. Some people will make money and other people will lose money. Make sure you are one of the people who end up on the right side of this trade.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.