Earnings for tech stocks have generally been excellent…
Since November 2021, the names of the technology have been sold at every opportunity. The narrative was that every high-dollar stock was painted with the same brush. Names with profits, good cash flow and growing revenues have been sold. We believe tech stocks are about to turn the page. In the last Weekly Analysis article, I speculated that equities would suffer ahead of the Fed meeting and awaiting news of the 0.50% rise.
Once Powell announced the increase, I expected the market to rally as eventually all variable risks would be discounted. Instead, the market was more volatile but turned around and finished strongly positive. I have observed several attempts to sell off this reverse market. I can only conclude that the bad news has been brushed aside. That doesn’t mean that bad news can’t derail a rally.
I say the downside is probably limited at this point. If we are at the bottom, any trading idea based on good emerging news can be bought. Just make sure the idea isn’t obsolete or the stock has already increased recently. During the last six months, each new position you would take is a difficult exercise. When the market is down because growth stocks are perceived to be overvalued, it just wasn’t a good idea to take a position. Now that we have eliminated all the excess value from growth stocks, at least that is my determination, it is time to be aggressive.
For the first time in a long time I went long with a full stance
Today I executed a quick trade for the first time in months. I did this because I realized better odds are with me because the market bottomed out. Even though it is the “A” low and not the “LE” low, May 11 is another look at the CPI, if it slows its growth, the market will react. In fact, I think this week’s market momentum is picking up an indicator of slowing inflation. While there is no improvement yet, the market has blown a lot of air into most growth stocks.
Everyone was saying big-cap tech names had to go down as well. Guess what happened and what might still be happening. Today, Airbnb (ABNB) fell on the earnings report from Expedia (EXPE) and fears that ABNB will also disappoint tonight. Their ER was a hit, and I picked up the shares from $145 to $142 today. Last time I looked in the release marker, ABNB is trading at 155. I also think the market overreacted to EXPE. I can start a position in EXPE too. With EXPE, I will have the luxury of building this position over time. I know EXPE at 150 is also low.
Instead of being let down by ABNB, they totally outperformed. Their ERs were successful, and I picked up shares from 145 to 142 today before the report. Last time I looked in the post marker, ABNB is trading at 155 in pre-market last night. This morning I sold the stock on the fly at 156.76. I also sold my ABNB Call Spreads today
I also think the market overreacted to Expedia I started a small position in EXPE too. With EXPE, I will have the luxury of building this position over time. I know EXPE at 150 is a good starting point. I also went long in a call spread. I know changing strategies can introduce misfires, I already have an example, I bought Uber (UBER).
This does not mean that I will swing full positions with every trade.
I always buy in small increments and sell in small increments. It is the height of madness to expect a buy at the low and a sell at the high. Unless you make a quick trade to take advantage of a dislocation. If you are building a long-term investment or even a medium-term trade, it makes sense to take a position.
Serop Elmayan takes over
Today, for the first time, I’m sharing an article with my partner at my subscription service – Dual Mind Research. He approaches trading quite differently from me. I’m not sure he agrees that we’re at rock bottom, he negotiated quickly and successfully. The following crafts are his, and how he describes them is his. I wanted him to show his strategies which were different from mine. I asked him to pick stocks and describe his trades. I know I recently wrote about UPST, but that’s his analysis. Yes, I told him about UPST but he did his own homework.
Long boot (UPST)
We’ve covered UPST for quite a while now. I believe it is punished like other unprofitable growth stocks. However, if we check the facts, UPST is a growth stock that is currently profitable; in 2021, they had revenue of $801.27 million with a net profit margin of 16.9%.
For those who don’t know what UPST does, it is a cloud-based AI lending platform that connects its platform with banks and other large companies. They have one of the lowest default rates in the market. They use more than 1600 parameters to determine the optimal loan (amount, interest rate, etc.) depending on their client. The good news is that UPST is expanding into other areas like auto loans. They have reached an agreement with Volkswagen and Subaru for an optimal car loan experience.
Here are some words from Platinum Volkswagen’s Josh Lever: “When we first started working with Upstart Auto Retail, they were a rising start-up in digital retail. just not our needs. Having worked with them for so long, it’s just been a success.” I did some additional research on personal loans on Google Trends. With the keyword “personal loan“, we can see an increase in searches in April. I believe this should be good for UPST, especially since they report their income on May 9th.
Its AI model benefits both consumers and banking partners, and it is constantly improving over time. I personally own 500 shares of UPST with an average of 78. Something exciting is happening with UPST since earnings come in May 9th and the stock is volatile. The stock’s implied volatility rose to 170%. It’s a huge percentage. Implied volatility is directly related to VEGA in options (vega shows the change in option premium for each % change in implied volatility). The higher the volatility, the higher the premiums, so from what we would understand, the premiums on UPST are super inflated.
Here’s an example, if I sell a put on UPST at 88 expiring the next two weeks, the premium is $10, which amounts to $1,000. The action being at $93, it is already a return on investment of 9.3% without any risk. If the stock goes above $88 in the next two weeks I will collect that $10 premium, otherwise if it falls below $88 I will buy 100 shares at the strike price and collect the premium, which will reduce my average at 78 while the stock is trading at $93.
Since the premiums are very high, I can do the same and earn income for every 100 shares I own. If I want to sell my shares at $100, I can sell covered calls at $100 expiring after two weeks. The premiums are $11 (equal to $1,100) on the 500 shares I own, I can sell five contracts that are worth $5,500, if UPST stays below $100, I will collect the $5,500, or in worst case scenario if it goes over $100, I need to take profit on my $100 stock and collect the $5.5000 premium, all I’m saying here is writing options on stocks with high implied volatility can be very profitable. Going on the long side is generally a bad idea because if you buy these contracts you will lose against theta and vega (time and volatility).
TECS Inverse technology ETF short
Usually in the markets there is a lot of turnover. Investor funds move from sector to sector in rapid succession because there is a lot of fear in the markets. We are seeing rising prices from oil and gas companies. Still, tech stocks have sold off. Money that was once in technology is being invested in oil and value stocks. This presents great opportunities in tech stocks, and there are many undervalued names in the market. What caught my eye was TECS, a bearish technology ETF with 3x leverage. This means that when tech stocks go up, this ETF goes down.
If I bet tech stocks will go up, we need to short the TECS ETF. By shorting a bearish ETF, I will actually profit from rising tech stocks. Why not buy the bullish ETF? I do what I do because it gives me an unfair advantage. You are always told to only trade leveraged ETFs. I turn this inconvenience to its advantage by bypassing it. Let me show you what I mean. Check the long term chart of TECS over time, it always goes down and converges to 0.
You will probably ask why is this happening? It’s actually because of a simple mathematical concept. Let me explain.
An index is trading at $100 and a 2x leveraged ETF is at $100.
If the index falls 25% from the highs (from $100 to $75), the leveraged ETF will fall by 50% (from $100 to $50).
Consider the scenario where the index is now at $75 and then the index increases by 100%. Using the latest prices, the new index price will be $150 (100% out of 75) and the leveraged ETF price will change from $50 to $100. (It’s already behind.)
Now you can see that the leveraged ETF ended up below the index price, even though it is a 2x leveraged ETF, so it all depends on those percentages. The same thing happens here – TECS is a 3x leveraged ETF. for this simple reason, it always goes down, and it’s almost impossible to get back to where it was – the only logical scenario where it will outperform is when the stock market is constantly falling without any bounce which is impossible in the stock market!
The only risk is short-term volatility. If tech stocks continue to fall sharply, this ETF will be volatile and my position may be at a loss. But, in the long run, you don’t have to worry.
I think the idea of using leveraged bearish ETF weakness to our advantage is just brilliant, and I’m happy to share Serop’s insights with my loyal readers. So if you want to follow Serop more closely, come join Dual Mind Research. You have two free weeks so you have time to decide. Plus, if you join now, you’ll be a past subscriber and get a 40% discount.