Sure is easy to make money trading stocks these days, huh? People are chasing hundreds of different penny stocks that are up 1000% over the last couple months. Tech stocks, especially the ones we’ve been long for a while, are on fire too. Seems like everyday we have at least a handful of stocks up 5-15%. Every day.
Tesla is up 500% from where we made it our largest position last year giving us 333% annualized gain since then. That might seem pretty good. But come on, think about it, talk about lame! Docusign is up almost 200% since we added it to our portfolio on March 12 for a 1828% annualized gain. Zoom has zoomed 150% from where we bought it at that same time for a 1411% gain since we bought it. And how about Dynavax , which has more than doubled since we bought it just two months ago, meaning that if the stock will simply keep moving at the pace it has been since we bought it, a year from now we’ll be up 6267% on that one.
These kinds of moves are not sustainable. These stocks were not terribly “cheap” when we bought them and they’re quite wildly valued at this point. And while I don’t think these stocks are going back to where they were when we bought them, I do think we are going to see lower prices in most all of stocks in the stock market at some point in the next three to six months or so. Here’s a sample of some of the older and more recent Trading With Cody names and their annualized gains:
Look, we are all pretty thrilled about how well our stock picks and our portfolios have been doing on absolute terms and also on relative terms this year and for the last five years and frankly since we started picking stocks and building portfolios together at TradingWithCody.com years ago. And I continue to search and look for new opportunities that could give us the same kind of huge returns in future years that we have grown accustomed to around here at TradingWithCody.
Long-time subscribers will recall times in the past when we have had our terrific long-term stock picks get slammed along with the broader markets. Long-time subscribers will remember posts like this, from 2016, when the Nasdaq was down 20% over a one-month period:
“Stock markets are rallying big today with the Dow Jones up triple digits early this morning and threatening to break above the 18k level again. Maybe it’s because everybody’s so bearish right now. I mean, I can’t hardly believe the overwhelmingly negative/angry/contemptuous response to my recent articles and newsletters about why I think the economy is actually stronger than people realize with reasons to be bullish. For example, last week’s ‘The economy is booming, the Fed is likely to raise rates, so be bullish’.”
Also recall just a few months ago, back in March when we were loading up on new names like ZM and DOCU and buying more of our existing names, including Tesla, FB and SQ at much lower levels than they have rallied to these days:
“Here’s my strategy for today and the rest of this week, and it’s a lot like my strategy has been since the Coronavirus Crisis hit. I’m covering a little bit of shorts. Rolling down some puts, meaning that I’ll sell some, say, SPY puts for $40 or so that I bought for $3 or so a few weeks ago. Then I’ll take some of those proceeds and buy a few SPY puts dated out to the end of this week or next week at or just in-the-money for say $6 or so. Likewise, I continue to bid on some of my favorite names when the markets get slammed like they are again today, putting bids in below where I last bought them. I’m doing that across the board in most of our long positions, today including some TSLA, SQ, FB, QCOM, TWTR, etc.”
Fast-forward three months now and these markets and most stocks look like better sells than buys right now. In fact, most of the extremely high valuations and parabolic charts I see everywhere I look have me hating most stocks right now.
History never repeats exactly, but cycles happen over and over. I knew when I started writing today’s analysis that I was having a bit of deja vu, so I went back and found the last time I was this worried about valuations and parabolic stock charts. In fact, here’s some of my analysis from late 2007, wherein I thought we would soon have a major crisis in the economy and a pullback in the stock market (the market did crash in 2008):
“It’s certainly possible that the markets could flatline over the next few years, regardless of just how bad real estate in the U.S. gets or how badly inflation ramps up with our dollar losing value against most any other currency or commodity.
But again, I just don’t think that’s likely and that it’s more likely some major pain in the markets ahead of us, given how we’ve arrived at this point and the reflexive nature of the markets, as the good times drive good psychology, until it doesn’t. And vice versa, of course. I’m no chartist, but the parabolic long-term charts of many important sectors of our economy underscores why you’ve got to be at least a bit cautious in the summer of 2007 as we’re hitting these highs. Good times don’t last forever, and it’s been a long five years of good times out of that Great Tech Depression. Most of all, don’t be greedy by getting levered up in the summer of 2007.”
I was bearish and mostly in cash throughout 2008-2010 when I started looking for this ongoing Bubble-Blowing Bull Market and loaded up on stocks in anticipation of it. Since 2010, my analysis has pointed to the fact that we have been in a Bubble-Blowing Bull Market creating another Echo-Techo-Bubble:
Bernanke says “Let’s inflate the biggest stock market bubble ever”
July 13, 2011
Do you remember how in the mid 1990s how the Fed kept rates at artificially low rates, eventually dropping them all the way to unprecedented levels in the midst of a market boom over stupid concerns about Y2K? Do you remember how that was a large part of what propelled us into a great tech/dot-com/telecom bubble?
Do you remember how the Fed kept rates at artificially low rates, especially starting in 2002 and on through to 2005 or so, eventually taking them to levels yet again unprecedented levels and leaving them there as the stock markets boomed and real estate went wild? Do you remember how that was a large part of what propelled us into a huge real estate and banking bubble?
Long-time readers know that I’ve been betting my time, money and reputation on the idea that we’ve been heading into the greatest bubble ever in large part because. Think about it…You know what I think I’ll be writing in five or ten years?
Most likely it’ll be something like this:
Do you remember how that the Fed kept rates at artificially low rates, especially starting in late 2008 and 2009, eventually dropping them all the way to a truly unprecedented 0% rate and then going on to create trillions in brand new quantitative easing methods, even as the stock market and commodities have been in big-time boom mode? Do you remember how that was a large part of what propelled us into the greatest asset bubble that the world had ever seen?”
Well, here we are ten years since I predicted that I’d be writing just about what I did end up writing today. We are probably right now living through the final stages of “the greatest asset bubble that the world has ever seen.” I’m not sure when the curtain comes down, but be careful out there. I’m not buying much of anything and am getting ever more cautious and almost outright bearish as the bubble is acting a bit like it could be the blow-off top part of the cycle.
I’ll leave you with this thought from above that I wrote in 2007 one more time: The reflexive nature of the markets, as the good times drive good psychology, until it doesn’t. And vice versa, of course.
One other note — I’m working on a spreadsheet for Winners/Loser of a Post-Covid World. Let’s open source it. Love to have your input.
Finally, we’ll see you tomorrow for this week’s Live Q&A chat at 10am ET tomorrow (Friday), in the TWC Chat Room or just email us your question to email@example.com.
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