We Reach the Twilight Zone

 | Apr 25, 2014 | 7:03 AM EDT
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Here's something to think about. When you look at the bedraggled biotech and software-as-a-service sectors, do you ever see much insider BUYING? When you look at the companies that are still coming public in these sectors, do you ever see ANY earnings?

Have you noticed that the ones coming public now are either early-stage biotechs that you would never finance yourself or incredible niche software-as-a-service players for some small vertical that you would never invest in yourself?

We are truly in the Twilight Zone of these stocks, where unless there is some consolidation or some insider buying of note, or a sense that the companies think that profits actually DO matter someday, you can bet that the selling is not done.

Plus, while I am not a chartist, have you looked at the charts of these? They are among the most perfect head-and-shoulder patterns I have ever seen.

Worst of all the insiders are now thinking OK, if Facebook (FB) shot the lights out with the best growth that's actually ever been seen since the Apple (AAPL) and Google (GOOG) breakouts, and if Gilead (GILD) could have the biggest launch ever, in history, and not go higher, how about my little software-as-a-service provider for the coffee room? How about my biotech lab that has nothing that can even be inflicted on mice yet?

Honestly, when people call in on stocks that are speculative right now from these two areas and they want my blessing, I don't even know what to say. Gilead and Facebook are executing flawlessly and it isn't enough. Meanwhile, UPS (UPS) and McDonald's (MCD) blow the quarters and they aren't even down. ServiceNow (NOW) delivers plus-60% revenue growth, something that would have gapped it up three months ago and instead it rallies a dollar and then pirouettes 10%, even as every analyst reiterates Buy. What happens when one breaks ranks? That's been the pattern.

If you are an insider at one of these companies, aren't you calling your broker and saying, "can you line up a basket of like-minded software-as-a-service companies and short them to hedge my software-as-a-service exposure?" If you own locked-up shares in a money-losing software-as-a-service human resource company, why not short another money-losing software-as-a-service human resource company? What's the difference at this point? You need to protect yourself and your obscene profits before they disappear into the ether.

Oh, and just to be sure, I know whereof I speak. Back in the previous heyday, in 2000, when I was locked into millions of shares of TheStreet.com, broker after broker offered me a chance to short a basket of other money-losing dotcoms as a hedge to the potential TheStreet.com losses. I didn't do it. Didn't seem right to me. But these days, when hedge funds legally run ahead of takeover bids and high frequency traders run ahead of everyone, I guess running ahead of the selling in your own stock by shorting a bunch of analogues makes sense.

And, believe me, that's exactly what's going on. Who can blame them? The supply is ridiculous. The glut is immense. The software-as-a-disservice to your portfolio days are upon us. They won't let up until we see mergers and insider buying instead of pump outs and insider selling.

That could be a very long time.

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