We know that Wall Street does not like uncertainty. And these days, it seems like we have nothing but that. We know that equity markets are on edge going into the end of 2020. Proof of it is that the fear gauge known as the CBOE Volatility Index (VIX) is twice as high as it should be. This makes trading hot stocks especially difficult because they move fast under their normal circumstances, let alone now.
Momentum stocks — as I call them — are difficult to trade because they never signal for clear trading levels. They move rapidly in both directions, creating FOMO urges in us. However, we can use a few tools and apply simple logic to avoid the easy pitfalls from that. Investors would have much better results if they could just avoid committing these unforced errors.
So now, we will approach three hot stocks that are in the news. They are tempting the bulls to just grab them regardless of the dangers. And now, we hopefully can accomplish the goal of raising the level of caution against them.
The intent is not to bash the companies but rather to highlight the potential downside of panic buying their stocks. In fact, I’ve traded all three of them mostly on the bullish side in the past.
The three companies are:
With all that in mind, let’s take a look at each.
Hot Stocks to Avoid: General Motors (GM)GM
This year’s hot topic is the booming electric vehicle (EV) SPAC space. This week, GM stock spiked 8% when they revealed their electric truck entrant into the space.
They dubbed it a super truck because of its price tag and performance metrics. It won’t be available until the end of next year, but that didn’t stop investors from buying the stock. The fundamentals on GM stock are reasonable, so it is by no means bloated. The business is also very healthy, so there’s no risk from that either. Long term, though, the stock is fine.
The main cautionary tale here comes from the chart. This spike brings price into a zone that will be challenging for the bulls. This is the same spot from which the stock collapsed almost 60% into the pandemic low. It is not a hard line in the sand, but rather a wide zone between $34 and $38 per share. I don’t think the bulls will have enough power to burst through it on the first try. Ideally, they fade a little so they could build a better base near $32 per share.
Overall, I would buy the dip in GM stock if and when it comes rather than chase it here. Technically, the bulls can argue that the breakout already happened $5 lower and that the target is still higher. I’m OK letting it go without me to fill that potential. The goal is to not get into a stock at a potentially obvious resistance zone. This is how investors avoid mistakes even if at the cost of missing out occasionally.
BIDU stock has been broken for a while, but its recently showed improvement. Wednesday it rallied 3.6% on a day when markets were not particularly frisky. I used to trade Baidu often, but then it lost its footing in 2018 and never recovered. It spent two years in a downward spiral that shed 72% of the stock value. It finally bottomed in March, and is mounting a comeback.
That’s the good news. However, the bad news is that it is now entering a major pivot zone which can become a problem. Near $150 per share, give or take $5, there lies the scene of the May 2019 accident. It was a big event and the stock tumbled 40% from it. That said, I doubt that it will be easy to slice right through it on the way back up.
The bulls also have opportunities because above $139 they could launch a bullish pattern. The target could be $20 higher, which is the 2019 fail point. There is short term resistance halfway through from January. It would be interesting to see if they could do this. My guess is that they would fail with their first efforts.
The proper way to trade this is to fade this rally and buy the dip closer to $128 per share. By then, Baidu stock would have built a better base of investors and had retested the recent breakout line. This would make for better footing and a stronger push to tackle the $140 failure from Oct. 14th. For trading purposes, I would buy the breakout from $140 with tight stops.
The metrics on Baidu are mixed, but they are not obviously bearish. It carries a high price-earnings and a low price-sales ratios. In one sense it’s too expensive, but on the other hand, the price is not full of hopium. I call that a draw and not a reason to short it. BIDU stock would make for a nice recovery bullish bet. But I believe investors could have a better starting point soon.
Hot Stocks to Avoid: Twitter (TWTR)TWTR
Twitter rallied 8.4% on Wednesday because of the good earnings results that Snap (NYSE:SNAP) delivered. Snap stock, in turn, soared 35% because they absolutely demolished expectations. I can attest to that because I’m now buying more stuff from social media platforms. But I have been never been tempted by any ads on Twitter, and I am on it all day. Meanwhile, I only spend about 10 minutes per day on Instagram, and I bought several things from them just this month. This is to say that I don’t think Twitter is going to deliver the crushing beat that Snap just did.
The buyers after this rally in TWTR stock might be disappointed after seeing the actual upcoming results. I am not knocking the company, I am merely saying that the expectations are now likely too lofty. In fact, I would buy the dip in Twitter stock closer to $42 per share. And if the company disappoints by a wide margin I may have the chance to buy it at $38.
This will upset a lot of the fans, but don’t mistake this to be statement to short Twitter outright. I am willing to let it rally without me. And I would be more tempted to short it at $56 per share but not here. The stock is in the hands of the buyers and I would take advantage of dips to ride the bullish wave. I would definitely avoid buying it here into the earnings.
Collectively, we live in bifurcated times — and even investing these days is very emotional much like everything else in this country. Therefore, it’s important to remind the readers that the point of this article is not to criticize the companies. This beef is with the hot stocks price set-ups going into uncertainty. Note that I am willing to buy the dips in all three stocks if and when those happen.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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