Yesterday was one of the more interesting days in the stock market in quite some time. If you dialled the S&P 500 at the end of the day you would have assumed nothing happened. The SPX was down less than two points and the range on the day was rather muted. But behind that calm facade, some of the highest flying stocks were absolutely pulverized.
Tesla, the seemingly gravity defying electric car maker experienced its biggest down day in months.
Other market darlings like Facebook were also trounced.
The bigger the gain over the last few months, the more vulnerable the stock was yesterday. In contrast to the S&P 500 that basically closed unchanged, the Nasdaq 100 was down big time. In fact it closed at the weakest level in a month, breaking an important support level.
What was the catalyst for this move? Market pundits will come up with a host of reasons, but the reality is that we were due. The market was getting heavy. The buyers were getting tired and had simply pushed stocks to unsustainable levels.
I had spoken about the increased supply from the onslaught of secondary and new issues. Many will blame Alibaba specifically for sucking up all the buying power. There is no doubt that this is a contributing factor. But if it wasn’t Alibaba, it would have been blamed on some other straw.
Contrary to the action of the past few years, stocks don’t usually go up in a straight line. The un-natural bid created by the constant QE programs has given investors the impression that stock indexes are like zero coupon bonds, gradually rising to par – but that is not how stocks usually behave. Now that the QE programs are winding down in the US, we will hopefully return to a more normal environment where traders can tactically trade both sides of the market.
I have been fortunate enough to concentrate my equity short position on the Nasdaq, so for the first time in a little while, my trades seem to be heading my way.
Now that the market is breaking down some bears are crawling out of the woodwork. I still think that we are headed lower, but at the risk of being too cute, I am covering a little bit of my equity short into this dip.
I still contend that Yellen & Co. are going to err on the side of dovishness. Now that short term traders are leaning short due to the very obvious breakdown, we could get a little bit of a snap back rally. Markets very rarely trade technically so cleanly. My bet is that over the course of the next few days we are going to get a chance to put shorts out at higher levels again.
Don’t get me wrong – I am not turning bullish! In fact I am going to stay short. Just at the margin I am going to lift a bit of my position in an attempt to re-short it later in the week.
GoPro – just not too “pro” if you know what I mean…
I don’t usually talk about individual stocks, but I do want to highlight a high flyer that might be vulnerable. By now everyone probably knows (and most likely loves) the camera company GoPro.
Of course we all need a way to video tape a day in the life from the perspective of our dog.
Or when you are giving your new flying squirrel wingsuit a whirl, you want to make sure you record it.
And finally when you and your Russian buddy that you met in bus station while travelling through Asia decide to illegally climb the second highest tower in the world, you need to have your GoPro to film it.
But I don’t know what is scarier, the heights that these kids climb to, or the valuation on GoPro’s stock price.
Since the company IPO’d at $24, the stock has been on tear. It has almost tripled to over $70 yesterday morning.
This stock is the epitome of today’s frothy market. A sexy technology story whose small float can be jerked around by the big boys. GoPro was expensive at its IPO price, but at $70’sh, it has ventured into the absurd. Nothing like an $8.5 billion dollar market cap for a faddish camera company.
When the 180 day IPO lockup expires at the end of December this stock will have a hard time holding these sorts of asinine valuations. Right now the small float allows these sorts of shenanigans, but this is just a warmup for the real floating of the rest of the company towards the end of the year.
We saw major problems with Twitter’s IPO lockup expiration due to the initial small float, and I fully expect GoPro to suffer the same fate.
In the mean time, given the yesterday’s terrible action in the high flyers, I have decided to prematurely short some GPRO. I was surprised that the stock was actually borrowable. Usually in these types of small float situations with a big lockup on the horizon the hedge funds hoover up all the borrow. Twitter was not borrowable until after the lockup. But in a testament to today’s bullish environment, there is plenty of GPRO available to short. After all who would be stupid enough to want to bet on stocks like GPRO going down? Well, although it is a little scary, I am going to step up to the plate. After all, it is a long way down if I am right…
Buying a little of the front end of the curve
I have decided that not only am going to cover a little of my Nasdaq short because of the possibility of the Fed surprising to the dovish side, but I am also going to buy a little of the front end of the yield curve.
My guess is that the Fed is loath to guide the market tighter. Given the recent pull back in the front end of the curve, I think that buying one year Eurodollars is a decent way of expressing that view. It won’t be a big position, but I do want to hedge against the risk that Yellen’s dovish nature wins the day.