‘Momentum Works Till it Doesn’t’

The casino is open, no age limit or skill necessary

Warner Bros.

While this market may not be the looney land of 2021, make no mistake that the casino’s doors are wide open, with no skill necessary.

Nothing said it better than a story the other day in the Wall Street Journal headlined, “How I Got Hooked on the hottest Trade in Markets – and Bagged a 2,200% Return,” with the subhead...

A WSJ reporter tried her hand at trading the explosive short-dated options bets that have made financial markets riskier than ever

That reporter, Gunjan Banerji, went on to write...

There’s a hot new trade on Wall Street, blurring the line between investing and gambling like never before.

It involves contracts known as short-dated options, bets on everything from individual stocks to indexes that run for just a few days, or in some cases mere hours.

Part of their appeal, and risk, is that the contracts can be like placing chips at a roulette table, or buying a scratch-off lottery ticket. There is the potential for huge, nearly instantaneous gains, or the loss of everything you put down.

The options have drawn in scores of rookie investors, many who take to social media to tout staggering wins, or moan about losing thousands of dollars in the time it takes to shower.

Long story short, in five days she turned $500 into $2,200.

Investing Gone Wild

And we’re not even talking about the hottest of the hottest options trades in the current go-round, known as zero days to expiration, or 0DTE... which I guarantee is over the heads those of us who do not trade – and even some who do. As a story in Bloomberg explained several months ago.

Zero-day options emerged as products tailor-made for 2023’s markets, their uptake driven by traders trying to navigate incessant volatility amid an uncertain economy and evolving central bank policy. Partly because of their low absolute price tags — a $1 investment amounts to a $1,000 stock bet — the contracts quickly found their way into the mainstream, at one point capturing more than half of the S&P 500’s total options volume.

And if the original 0DTE isn’t enough, as Jim Bianco of Bianco Research posted on social media the other day...

All of this is the equivalent of the investing world not just having gone wild, but insane... again.

Yet through it all, there are still investors who invest the old-fashioned way – in stocks, based on fundamentals.

I thought about this over the weekend when Bob Marcin of TB Partners – no stranger to my readers – posted a few thoughts in a private group group of seasoned Wall Street pros I formed. The group includes around a dozen former analysts and portfolio managers (and the likes of yours truly), who swap thoughts and observations throughout the day.

Most of us, by nature, are fundamentally driven. Some use options, some don’t. And while a few trade on momentum – and more than a few have a lottery ticket or two – there doesn’t appear to be a true gunslinger in the group.

Still, they’re all opinionated, and they all talk their book.... meaning it’s their money at stake, not others, which in my view makes them more authentic than the typical blather.

Sticking with Stocks

That’s why Bob’s candid comments, intended for our private group and akin to thinking out loud, resonated so much. He’s in his mid-60s, and having survived more than a few volatile markets, sticks to what he knows best... stocks.

He started with a table…

Saw this on Twitter. Momentum works until it doesn't. So says the 50-day rule, which is when the market is up plus 5 % after 50 trading days. See the table for results.

Bob went on to say…

I know its ‘billionaire lament chic’ to be negative on economy and stocks. I have spent much of the last 20 years holding 50%/80% cash because I refused to buy stocks until the S&P 500 hit 100% of sales.

In the last 30 years, that happened only once, for a few month in 2008-2009. The prior 50-year range was 35% of sales bottoms and 110% of absolute tops. My buy target was a compromise.

At 300% of revenues for the S&P 500, I am conceptually a raging bear, but still remain 70% long in my growth capital book and 95% long in my income portfolio. 

The latter are all MLPs acquired in last two years at a 13% cash yield, which today are priced at around 8%.

The growth stocks trade at 1985-1995 valuation levels. Or they have comps many times the valuations of my longs.

He continued…

I realize the next bear market should be a bloody one. Hopefully I will sell/hedge enough to limit damages. My half to one-times next year’s EV/sales positions should help mitigate downside.

But I keep grinding away to find that next Bel-Fuse ($BELFB) at $13 or SolarEdge ($SEDG) (2018) at $13, or inTest ($INTT) at $8. These were all experiencing large product demand cycles that drove EPS of 3-5-times in a few years, despite paying 25%-65% of sales.

Those numbers seem quaint today in a growth stock market of 500-1000% price/sales levels.

I might have lotto winners in Spire Global ($SPIR) at a $4 basis and Electrovaya ($ELVA) at the same $4. The former is already well in the black from my November purchase.

I am not trying to be an obnoxious A-whole when I related that 99.9% of the stock market names underwhelm me from either having too high valuations or h too low secular sales growth rates.

My standards for longs are quite insanely rigorous. I don't have the burden of investing other people’s money, which is a totally different endeavor the cherry picking a handful of stocks.

Lord, I don't know how I would be able to accomplish that in today's market.

Bob’s bottom line…

I will hold my longs a little longer with all the momentum patterns like the 50-day rule, suggesting the rally gets the benefit of the doubt.

I have "too cheap to be true" on my side and well above market average growth rates to help should the bear emerge sooner rather than later.

You can read more on what he means by “too cheap to be true” in something I wrote a few months ago, regarding another of his favorites.

No Magic Formula

Truth is, there no magic formula on the best way to “play” the market. That’s a casino. But it’s still possible to invest, which was the point of another friend’s text to me last night, when he said….

I think it’s become more of a stock picker’s market

He quickly added…

But WTF do I know?

I responded...

People have been saying that it’s a stock picker’s market for years. Maybe because it’s always a market for stock pickers.

As for what you know? No more or less than anybody else.

Barring the use of insider information, that is.

Everybody else, best of luck.

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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!)

Feel free to contact me at herbgreenberg@herbgreenberg.com. You can follow me on Twitter (X) and Threads @herbgreenberg.