My two trading focuses for June have been Special Purpose Acquisition Corporations (SPACs) and electronic vehicles (EVs). The irony is I have never been a fan of Tesla (TSLA) nor did I think anything resembling a reverse merger would catch my interest after the multiple fraudulent Chinese companies that made their way to the markets in that manner many years ago.
What has changed now is the legitimacy of the companies in "SPAC Land" as well as the acceptance of the commercial and retail markets in the adoption of EV technology and usage. While that's good news, the problem for traders just finding these names is you are very late to the party.
Sure, any SPAC announcing an LOI (letter of intent) sees its stock and warrants pop. Any SPAC announcing a merger agreement pops another 10% to 25% with the warrants often climbing 40% to 100%. Those moves are often immediately bought -- without regard to the underlying company being purchased.
It's no wonder we're seeing quite a few deals with intriguing names consummated. Whatever the deal, it seems the market reacts by awarding an immediate significant bumps to the market cap of the SPAC and the company agreeing to being purchased.
I don't expect the rampant SPACulation (speculation) to last, but it has created some fantastic opportunities.
EV is a bit different. I do expect it to last, but the market feels like it is pricing in the replacement of every fossil fuel-consuming vehicle to occur in the next few years. While I believe we're seeing a start to that happening, it will take decades.
With each new EV entrant into the market, the piece of the pie shrinks. We also know the legacy car makers are moving in this direction whether it be direct or with partners. The picks and shovels, rather than the final product, may be the long-term winner. I would also keep niche and vertically integrated companies at the top of the list.
As for buying today, you're late, probably too late. The moves we've seen are likely reaching points where risk now outweighs reward.
The possibility of a squeeze remains the major risk of shorting, but today is a day to partially scale out/take profits from these high flyers. If you're on the outside looking in, wait for the one or two-day big hit both of the groups will take in the near future.
Many SPACs were hit hard from June 19 through June 24. It will happen again. That's the nature of momentum and "hot groups."
I wish I could tell you what will cause the next pull back in SPACs or EV names, but I think it will simply be a blow-off top -- people start taking profits, then the downside momentum takes hold.
And when you find yourself thinking there is no way I'm going to touch those things, now is when you should be starting to search hard for your preferred entry.
Rather than list all of them, I've significantly reduced my positions across the board in SPACs and EV-related names. This has been a great run, and it may continue, but if it does, it will do so with me holding only fliers on most names. As I see it, the short-term downside risk outweighs the short-term upside reward.
Unfortunately, there is nothing about either group that entices me to go short. Either be long, hold a few speculative fliers, or be on the sidelines. These names carry with them some insane tail risk that might hurt you if you are too heavily long at the wrong time, but they will absolutely ruin you if you are short at the wrong time.
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