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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
TSLA continues smashing all sensible expectations and closed above $2k for the first time ever.
Stocks that are hight tend to get even higher and that is definitely the case here. Back in June I accused TSLA of being in a bubble and with prices 100% higher today, I stand by that assessment. But unlike most people, I don’t fear bubbles, I chase them. That is exactly what I told readers two and a half months ago when TSLA first broke $1k:
This is a red-hot stock and there is a very good chance this is another bubble. While that scares some people, what should we do when we see a bubble? Why, buy it of course! What a silly question.
I’ve long since lost count of how much more TSLA is worth than all of the other auto manufactures combined. Obviously, this kind of insane valuation isn’t sustainable, but as traders, we don’t concern ourselves with these long-term outlooks. Instead, if the market doesn’t care about sensible valuations, then neither do we.
Now, don’t get me wrong, I’m not saying we should buy this and hold it no matter what. In fact, that is the exact opposite of what a savvy trader does. But we definitely shouldn’t let this insanely high valuation scare us off.
While buying TSLA at $1k would have been great, now that we are at $2k, people want to know what comes next.
First, this is a crazy volatile stock and we should be prepared for anything. While we’ve seen this huge surge higher, don’t forget markets love symmetry and spectacular moves higher are often accompanies by spectacular moves lower. With TSLA, we don’t have to go back very far to see examples of this stock collapsing more than 50%. And even a couple of weeks ago it was down more than 20% from its previous highs.
Because of this insane volatility, it makes a lot of sense to trade smaller sizes to limit our risk and to be ready to take profits proactively if prices violate key support levels. As I often remind readers, most of the people who hold this all the way up will also hold it all the way down. Please don’t be that guy.
$2k is our new highwater mark. The most adventurous speculator can buy this level if we see prices continue racing higher tomorrow, but keep a stop near $2k and be ready to abandon ship at the first signs of weakness. The thing about selling defensively is we can always buy back in if the dip proves to be a false alarm.
For anyone that is sitting on a 100%, 200%, or 300% profit, remember, we don’t make money until we sell our winner. We can continue riding this higher with a tight trailing stop, but given the size of the move over the last few days, it even makes sense to take a portion of your profits off the table proactively. Half of your profits guaranteed and half riding higher with a tight trailing stop is not a bad place to be. If prices continue trading well, we can always buy back in.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped modestly following Tuesday’s record close. There were not any definitive headlines driving today’s weakness, instead, this was nothing more than a little profit-taking and “selling the news” after yesterday’s push to all-time high.
One day up, the next day down. That’s what markets do. But as long as we keep experiencing more up than down, this rebound remains alive and well. For months I’ve been saying markets go where people are looking. That little quirk made this unthinkable rally possible despite the greatest health crisis of our lifetimes. Does it make sense? Of course not. But anyone who’s been doing this for a while knows the market doesn’t always make sense. In fact, more often than not, it does the exact opposite of what most people expect, hence why contrarian investing is such a successful strategy.
Unfortunately, with yesterday’s record close, the crowd is no longer fiated on a singular level and figuring out what comes next is a little less clear. But as is always the case, there are three possibilities; up, down or sideways.
Down is the most widely anticipated outcome given the dreadful economic environment surrounding us. But paradoxically, that’s exactly why down is the least likely outcome over the near-term. Everyone knows the economy is dreadful. (Duh!) But if confident equity owners refused to sell those headlines last quarter, last month, and last week, why would anyone assume their mood changed all of a sudden? Confident owners remain stubbornly confident and that isn’t going to change anytime soon. If they were not fazed by the sharpest economic decline since the Great Depression, I cannot think of anything more spectacular that will finally convince them to abandon ship.
Up, that’s a strong possibility. Momentum is a very real thing in markets because people love joining the herd, especially when that herd is making money. But given how far, consistently, and slowly this rebound has been traveling, everyone’s seen this move coming from a mile away. If a person wanted to buy this rally to all-time highs, they already bought it. While that buying was enough to get us here, I don’t expect there will be enough to keep us going for a whole lot longer.
My best guess is momentum carries us higher for a week or two before prices settle back and consolidate near 3,400 for a month or two. From there, it all depends on how the fight against the virus progresses this fall. A big second wave and stocks will slump. If the situation remains status quo, then stocks will continue edging higher into year-end. (With some obvious and temporary volatility surrounding the election.)
But most people don’t care why the market is doing what it is doing, what they really want to know is how to trade it. Easy, keep doing what has been working. That means holding for higher prices and keep moving our trailing stops up, now spread between 3,320 and 3,360. If prices race higher in an unsustainable way, I’ll consider locking in some profits proactively ahead of a pullback to 3,400 support. But more important than anything is protecting the mountain of profits we collected this summer. Remember, we only make money when we selling our winners.
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By Jani Ziedins | Free CMU
Cracked.Market University:
Yesterday I wrote about the compelling benefits of buying the Covid bounce using a 3x leveraged ETF. No doubt the impressive 200% gains grabbed people’s attention. But no discussion about leveraged ETFs is complete without also discussing the negatives.
I often have people ask me why they shouldn’t just buy-and-hold leveraged ETFs. If 1x is good, obviously 3x is even better, right? Not so fast. There is a weird quirk in the compounding of leveraged ETFs that makes losses loom larger than gains.
I will dig into the math in a future post, but for now, we don’t have to look any further than the current market swings for a striking example of this damaging quirk in action.
The chart in yesterday’s post was a little deceptive because I truncated the timeframe to include very little of the Covid selloff. If we expand the timeframe to include the previous highs, as I did above, it becomes strikingly obvious what the problem is.
While the S&P 500 recovered all of the Covid selloff this week, the comparable 3x leveraged ETF is still down a shocking 29%!!!
Any patient, long-term investor that held a 3x leveraged ETF through the Covid collapse and subsequent rebound is still down a staggering amount of money. And that’s only if he had the tremendous courage required to sit through a 75% plunge during the Covid lows. I don’t know about you, but I would definitely have second thoughts if I saw my life savings shrivel by 75%.
Leveraged ETFs are wonderful tools when used for short-term swing trading. But holding them for longer time frames is a dangerous and foolish thing to do. If you only remember one thing from all of this, let it be:
Leveraged ETFs are ONLY suitable for short-term swing-trades.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis
It was another good day for the S&P 500, this time finishing just a whisker shy of a record close. Not bad for the worst economy since the Great Depression.
But anyone who reads this blog knew this was coming weeks, if not months ago. As I often say, a market that refuses to go down will eventually go up. As counterintuitive as this rebound has been, riding these gains has been fairly straight forward for anyone that wasn’t overthinking the situation.
And to the victor goes the spoils. Anyone who bought the June dip using a 3x leveraged ETF is up nearly 50%. The more aggressive buyer who jumped aboard this bounce in March is up nearly 200%. Not bad for a lowly index trade.
As much hype as highflying stocks like TSLA or ZM get, there is really good money to be made swing-trading the indexes. In fact, I find the risks to be lower and the rewards greater. I’m planning on writing a series of posts covering how I swing-trade the indexes using leveraged ETFs and showing readers just how profitable this strategy can be, even when compared against the hottest stocks.
Granted, I haven’t been snoozing at the wheel since the March lows and I moved in and out of the market several times since them. But when we can move all-in and all-out in a few mouse clicks, it makes sense to step aside when things appear uncertain. As easy as it is to jump out, it is just as easy to jump back in when the latest dip proves to be a false alarm. In fact, if you do it early and get a little bit lucky, you actually make more money selling the top of these little gyrations and buying the minor dips. It doesn’t always work that well, but even riding through a few minor whipsaws sure beats watching a losing position swell or watching the next breakout leave without you.
Now that we finally reached the old highs, what comes next? That’s a good question. We should expect prices to pause for a little bit as investors gather their bearings. After that, a frenzy of breakout buying could push us sharply higher. Or waves of contagious profit-taking send prices tumbling. Or thirdly, stubborn owners refuse to sell, reluctant buyers refuse to buy, and that stalemate leaves stocks drifting sideways for a while.
My guess is we see a modest breakout push prices higher over the next week or two, but that strength ultimately fizzles and the index retreats back to the old highs where we consolidate for a bit. I will continue holding for higher prices but will move my trailing stop nearby so my profits are protected if I’m wrong.
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