The most common question I'm getting from friends and family right now all cover the same topic. How do you feel about the market? Are we in a bubble? What do I do now? You can add most any derivation you like to this short list.
It has me thinking about the turn of the century.
In the late fall of 1999, I remember sitting at lunch with a group of traders talking about the dot-com insanity. We all agreed things were getting out of hand and talked about buying long term puts. The group had a decent market feel, but we were all younger. We all had been aggressive with our buying and chasing, so saying those words about buying puts or a bearish feel felt foreign.
Ultimately, the group proved correct in their thinking, but that thinking was short term costly. At the time, the Nasdaq had recently broken above the 3000 level. At that point, it was up around 50% for the year. By March 2000, it hit 5000. Not only weren't we at the top in November 1999, we still had another 40% to go higher. And with the stocks I was trading at the time, this equated to triple-digit gains for most.
And on the way back down there were certainly some rough days early but for those participating on the way up, there was plenty of time to exit with strong profits. Were account values at highs? Nope. But the accounts that went all cash in October or November 1999 weren't any better off. The folks that really suffered were those that remained stubborn, never took profits along the way, and continued to buy all the way down. I get the feeling margin usage was higher back then plus restriction on day trading weren't what they are today.
So, while I think we echo the dot-com action, we may still only be in the October through December 1999 area rather than February through March ending. Keep that in mind before you crawl into a trading hole.
The toughest question is on what to do. The only correct answer in my view is it depends. I talked about time frame yesterday, which remains extremely important. But we also have to measure risk and reward. For instance, let's talk about Special Purpose Acquisition Corp (SPACs) that are pre-deal. I tend to rank these in a simple format.
(Remember these are pre-deal, pre-LOI)
If the SPAC sits below $12, I'm generally comfortable taking a shot. The closer to $10, the better. Anything in the low $11s provides a solid risk-return in many cases.
As we creep above $12, I need to pay attention to the strength of management and track record along with the targeted industry.
Once we cross $13.50, the need to dig deep picks up speed. I've entered the area where I'm already paying 35% or more for a SPAC that hasn't announced a deal. This market has been forgiving enough that this is still working out more than not, however, this will be one of the first things to vanish when the market changes.
At $15 or above, I need to see a rumor that is so strong the upside still outweighs downside significantly. The target needs to be tantalizing. Even then, this is still a tough buy. If I'm wrong, my downside could be 30%-40% in quick fashion. Any new entries will be small. If options are available, I prefer it. This is also a case where warrants might be the better path.
The hard truth is paying a 50% premium for a blank check company is a rigged coin flip any other year. Right now, it's just a coin flip. Given how many SPACs are out there, I'm willing to plow through the fields and find the ones in the $10 to $12 range that still check the boxes to make them worth a gamble.
Of course, once a deal is announced, you can throw that scale out the window and work based on what is being bought rather than what could be bought.
Good luck out there!