Momentum. That cruel temptress. She teases. She flaunts. She gets you to chase her. And when you catch her at just the right time, everything feels right. Everything feels... easy. In a flash, easy becomes painful. Teasing becomes punishment. Chasing becomes begging and pleading.
Don't plead with your stock, it's not a good look, whether investor or company executive.
This morning, the beauty of momentum turned ugly in the electronic vehicle names as well as the special purpose acquisition corps (SPACs). Honestly, many of the SPACs lost steam before Tuesday, especially post-merger names.
None of this should come as a surprise. Yesterday, we discussed the approach of trimming momentum names as they run higher. When you start to feel the market is losing its grasp on realistic pricing, take some profits. When you believe there is no way the stock can continue to move any higher, take some profits.
But the momentum game isn't that simple. Unfortunately, unlike buy and hold, it's a what have you done for me lately. For momentum traders, you're the hunter in the pack, constantly on the prowl for the next meal. It might be all day long or it might be after the market closes. We know we'll have pullbacks and rotations. That means, after the market closes, you need to prep for what might come the next day including pullbacks.
When everyone is puking up shares, where are my buy points? If I do buy at those levels and the stock(s) don't bounce, then where am I adding or stopping? If you don't have the answer to those questions before the day starts, then you are already one step behind the other trader fighting for the same dollars. No, this isn't a zero-sum game, but you don't want to be the hyena surviving on scraps. Momentum traders want the meat.
At some point during your investing or trading career, momentum will ensnare you. It's the nature of the beautiful beast. Fast profits. Big profits. Excitement. But if you aren't ready to continually hunt down your next big kill, momentum will eventually drag your portfolio into the depths along with it when it ends. The biggest mistake I see is a momentum trader unwilling to accept a trend has ended. Worse, they usually double down and triple down on trading positions that become investments that become an albatross on your portfolio.
While there are many strategies and approaches, the last piece of experience I'll bestow this morning is about the chase. There will be new pockets of momentum on a daily or weekly basis. If it is not a space you are familiar with already or one on your radar, if you immediately try to get involved on the first day you are alerted to it, then you may get lucky if the momentum is strong and/or widespread. But I prefer using that first day to observe and learn as much as I can about names in the space. I'll generally go to the chart first, but I will look at the short interest, the floats, the stories behind the name or names moving. The purpose is not to identify the name with the strongest fundamentals or long-term potential, but the one with the most potential or strongest catalyst. That's the difference between a momentum trade and an investment.
Speaking of momentum, if they ban TikTok in the U.S. rumor gains any momentum, then the 8% move higher in Snap (SNAP) today will only be the start. It's a name I've liked since May, and despite it being up 42% since the last mention, we may not see this run end for another 20% because of what we've seeing battered around TikTok. Keep it on the radar if it isn't there already.