Time To Take Some Profits And Run – Don’t Be Fooled By This High-Risk ‘Walking Dead’ Market http://seekingalpha.com/article/3957719?source=ansh $GRPN, $YELP
Mar 11 2016, 08:53
Includes: GRPN, YELP
The longer investors are in this market the more risk they face of losing gains from the bull market.
Outside of safer blue chip stocks with fairly predictable dividend performances, it doesn’t make a lot of sense to retain a position in most companies.
Those in it for short term price swings should quickly take money off the table – many recent double-digit upward moves are retreating fast.
Slow moving negative outlook and performance is lulling a lot of investors to sleep, creating the illusion there still is time to generate some serious profits.
Over the last couple of months or so there have been some nice investment opportunities for those looking to make some quick returns on stocks they take a short-term position in, as daily there were many giving double digit returns.
Even some of the out of favor tech stocks like Groupon (NASDAQ:GRPN) and Twitter (NYSE:TWTR) made some nice moves recently. The oil rally also pushed a number of companies up, as did the general commodity sector. In this market though, what goes up quickly, for the most part, is going to come down quickly, and that has already started to happen.
A lot of this is the result of very few opportunities for gains, with short-term investors looking for momentum stocks in response to that scenario.
In the midst of one of the longest bull markets in history, investors are starting to get more concerned over how long it can last. Even if it still has some legs to it, many are starting to take money off the table, and I agree it’s the right thing to do in most circumstances.
The exception to me is those that are in the market for the long term and are building a retirement portfolio, focusing primarily on blue chip, dividend stocks with a proven performance history.
Reports of the anniversary of the birth of this bull market also reminded investors it has started to age. They are getting skittish and ready to exit a position very quickly. All of us should have that same attitude if we aren’t going long.
One of the interesting patterns I’ve seen in a number of sectors, as well as the overall market, is there isn’t a sense of panic in general, but there has been a slow, emerging consensus it could implode very quickly once the pieces all move into place, which they are doing in my opinion.
Walking Dead market pace
What is potentially dangerous about this particular economy and market is the overall pace at which it is disintegrating. Add to that a presidential election year in the U.S. where the media will underplay the weakness of an economy to shore up their desired candidate, and it masks the many signals the market is sending investors to beware of the pitfalls that are now upon us.
For now there isn’t going to be an imminent collapse, but the longer it takes to seriously correct, the deeper the consequences will be. This is happening already with many stocks, but it will increase exponentially in the months ahead.
Watching the short-term wins followed by quick downward moves reinforce the idea most of the double-digit gains enjoyed by some companies have been based upon momentum and not fundamentals or a competitive advantage justifying the rally in share prices.
A shuffling zombie market can create the illusion of little danger, but when fundamentals weaken and surround your holdings, many times it’s too late to get out without a significant bite being taken out of your profits. That’s the danger all of us that have made quick gains now face.
For those that have been enjoying the bull market for many years, outside of retirement holdings and dividend factors, there needs to be a serious and quick assessment of actions that should be taken to protect our gains and portfolio.
The challenge is we are now at the fear stage of the process. Not only fear of losing capital and gains, but fear of losing opportunities the market may offer at this time. I believe where things stand at this time, the risk outweighs the reward, and we should be glad to get out before the market collapses and takes a long time to recover.
Losing out on potential gains is all psychological, and we need to discipline ourselves to accept the fact we could lose some opportunities, but we can and should be satisfied with the investment success we have enjoyed.
That doesn’t mean we shouldn’t take anymore short-term positions in stocks, only that the stops have to be very tight and the time frame we hold them should get shorter. That means a lot of volatility going forward, and rather than try to extract every gain out of this aging market we can, it’s best for most investors to start to protect their gains rather than further them. But for those that can’t help themselves, paying attention to stops and taking gains quickly off the table is the only way to play the market now.
Some examples to guide the way
Let’s look at a couple of stocks now to give an idea of what to expect over the rest of the year.
Groupon has been out of favor for some time, but recently enjoyed a temporary resurgence, generating some quick gains for investors. That has reversed direction after a short period of time, as the fundamentals caught up with the momentum and are now dominating the outlook for the company.
A major negative catalyst for Groupon has been its inability to differentiate from giant competitors like Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL). And in spite of its recent upward move, it is down almost 50 percent over the last year.
One of the reasons is the local ad market has in the past been somewhat ignored or being developed as to the best wait to target the various markets. The tech giants are now honing in on local markets, and Groupon is struggling to differentiate and position itself to effectively compete.
It is unclear how Groupon can compete against the deep pockets and innovation of its major competitors – with local ads and e-commerce business.
After its earnings exceeded expectations during the last quarter, the market digested the performance and doesn’t like what it saw. Not too long ago UBS downgraded Groupon because it doesn’t see earnings being strong going forward, and the boost in its share price being aided by short covering. Primarily it’s the lack of a long-term competitive advantage that brought about the negative sentiment.
As for Amazon, it’s fairly easy to see how its focus on same-day service is undermining the local ad and e-commerce business model Groupon has.
In the short term these are the types of clues to look for to see whether or not temporary momentum is the primary driver an upward move in the share price of a stock that has been underperforming for some time.
What the market does is take advantage of a temporary positive catalyst – usually something that surprises and is carried during a news cycle – knowing it will drive up the price for a small amount of time. The thing to understand is if investors aren’t aware of the impetus behind the price movement, they can lose most if not all of their gains. That’s where we’re at now with many momentum stocks.
Another weak, small tech company enjoying a strong month is Yelp (NYSE:YELP), which over the last year is down over 55 percent. It also received a downgrade from UBS.
Among the reasons for the downgrade what it perceives as a shrinking ability to innovate as growth slows down.
UBS analyst Eric Sheridan wrote this:
“Yelp will enter a period of slowing revenue growth and heightened margin pressures, driven by increased competition in Yelp’s core business and share gains by larger digital ad companies.”
When revenue growth for small companies declines, the resultant decline in margin and earnings lowers the amount of capital it has to invest in improving products or services. This is where Yelp now stands, and it also faces similar competition from the same competitors Groupon does.
This is again a competition issue, as well as the loss of profits it can use to grow the business and compete better.
When seeing and knowing these things, it shouldn’t be too hard to identify those stocks that are only gaining momentum from a temporary catalyst traders then create a short-term self-fulfilling prophecy, which quickly comes to an end.
This is what is being faced now, and those investors taking risks with these stocks need to lower than time frame outlook otherwise they’ll be doing nothing more than moving money in and out of the market with little to show for it. And with volatility potential growing, not only could gains be lost or shrunk, but it could eat into capital if the share price goes negative on them from the point of entry.
I’ve focused primarily on investors taking short-term positions in momentum trades, showing I hope the need to be increasingly diligent in order to maximize gains and protect their capital from a loss if the share price suddenly crashes. When nothing is behind an upward move, there is no real floor once momentum is lost. Add to that additional negative catalysts like the downgrades mentioned above, the longer a stock is held after short-term gains, the more risky it becomes.
This is obvious, yet we all know what happens when emotions take over and greed sets in: we want more of the gains that were generated. In a market like these we should settle for quick gains and be willing to take them off the table. Either that or tighten up our stops in order to protect our profits. Seller’s remorse shouldn’t be allowed to settle in if the price continues to go up. In the past when I’ve done the same, I simply forget about the stock and go on to other companies or sectors.
What concerns me about where the market is right now is the conflicting data which has disallowed a deep correction into a bear market. Why that is concerning is some of the data is neglected by the media, in my opinion, to keep the bull market in play, or at least to keep it level.
Investors with the intention of holding stocks for the long-term don’t need to be too concerned, although I would forget the so-called “buying the dip” play so many like to regurgitate, as if there aren’t times that can be a dumb and destructive action.
Outside of retirement or possibly sifting through a portfolio being held for the long term and making a few adjustments in my holdings, I would take as much short-term money off the table and enjoy the gains.
We have entered into a period where protecting capital and gains is more prudent than trying to beat the high-risk odds represented by this very fickle market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.