No trades for me today. But color me outright bearish for the next month.
The momentum traders are fleeing the high-priced, high-flyers first, as evidenced by that crashing sound bursting into a ball of flames called “Tesla”. Indeed, I think that stock is now short-able for the next two months or so at least. Might want to wait for a pop, but I think that $TSLA has another 30% downside if the markets truly pullback here like it looks like they are doing. And as subscriber noted to me earlier, did you know that three Tesla valuations is equivalent to one Ford and it only takes two Tesla valuations to get one GM.
I’m heavy cash and have been actively trimming our longs and raising our short exposure via outright shorting things like the SPY and also buying puts in things like $P and the $SPY and others. Speaking of which, another stock I think might be a great short candidate in a down market here would be Priceline. Earlier today in my Scutify Feed, I wrote –
All of which leads me into updating our “Relative Valuation Game”, that I have written about several times in years past. Step back and ponder how these valuations of disparate tech companies out there have developed and where they might be headed from here.
LinkedIn is worth almost as much as Yahoo! is, but is worth only half of the aforementioned Priceline.
Yelp is worth more than Blackberry. So is Pandora.
Netflix is valued at 8x what AOL is currently valued at, which is 97% less than what Time Warner paid for AOL back at the top of the dot come bubble. Time Warner is worth 3x what Netflix is valued at right now. Five years ago, Time Warner was worth 30x what Netflix was valued at.
Yesterday I noted that the best value investor I know wrote –
“One indicator I like is the Value Line 3-5 year median stock appreciation potential chart. Currently its 30%. This is bad. It has ranged from 20%-200% over the past 50 years. 30% means market top. Occasionally, the average stock valuation can deviate significantly from the mega-cap weighted S&P500. This happened in 2000 and 2007. Right now, the average stock is 17.5 x’s above normal profit margins, so appreciation potential is modest for most stocks on a long term basis. This is a rifle shot market, IMHO.” – RobertMarcin
That last sentence there has really been stuck in my head like the Beverly Hillbillys theme song used to. What I mean is, I’ve been thinking a lot about that “rifle shot market” concept and its fascinating, really. Maybe what these wild relative valuation concepts show is that it’s always a Rifle Shot Market? If you buy Revolutionary companies early and/or as the markets come out of a crash, won’t you always end up ahead? Well, if you’re willing to sell and take some profits while stocks are in a bubble, right?
In sum then, I’m saying that I think the markets are in a downtrend and the path of least resistance is likely headed lower over the next week or two finally ending with a big contrarian sell-off when the Debt-Ceiling/Budget/Obamacare nonsense is resolved at some point one way or another in the next two or three weeks. I think that the highflyers like Pandora, Yelp, Tesla, Netflix and Priceline are probably due to get hit hardest. After a 10% or so pullback in the broader indices and a 20-30% pullback in many of the highest-beta and highest flying stocks out there, we’ll probably put in a new near-term bottom and the bubble blowing will commence once again.
I sure don’t suggest trying to game this near-term action with any sizeable chunk of your portfolio. Nothing’s changed in the overall playbook here, other than my expectation that the bulls are about to get tested and scared. Feet to fire, I guess if you’re truly wanting to try to profit on what I’m laying out here, I’d suggest using a small amount of capital thrown at some out-of-the-money puts dated out into November or December here, especially in the highest flyers.