For the first time since 2012, investors are contending with some serious market volatility. The vicious whipsaws were on display Tuesday as stocks launched higher after the both the Russell 2000 and the Nasdaq Composite threatened to fall below their 200-day moving averages for the first time in three years.
Click to Enlarge The selling has been led by a breakdown in momentum stocks that hedge funds and retail investors alike piled into. Many are already down more than 20% from their highs.
And while that has been a drag on parts of the market — especially the tech- and biotech-sensitive Nasdaq (which was down 7% from recent highs) — we haven’t seen the damage hit the overall market really hard just yet: The S&P 500, for instance, is only down 1.6% from its all-time high. The credit markets are also holding up, with corporate bonds resilient.
But like a cancer, the weakness is spreading. Over the past few days, airline stocks — also an area that enjoyed strong price momentum over the last two years — started rolling over.
Here are three momentum stocks at the center of this new selling pressure that, while bouncing a bit today, have already succumbed to bear markets of their own. Like a cancer, you should consider cutting them out of your portfolio. And if you’re more aggressive, they are attractive short side or put option candidates.
Bear Market Momentum Stocks: Tesla Motors (TSLA)
Click to EnlargeTesla Motors (TSLA), everyone’s favorite electric-car maker, is down nearly 27% from its late February peak and has been diving toward its 200-day moving average — a level that hasn’t been breached since September 2012.
Excitement in TSLA has been driven by a number of things, such as an eventual release of the more affordable Model E, or the much-vaunted plans for the Gigafactory — the jumbo-sized battery factory that Tesla estimates by 2020 will exceed 2013 global battery production.
TSLA stock at one point boasted 684% returns within the past year, but it’s all unraveling now. Even in the midst of a small short-term rebound, Tesla still appears to be succumbing to its worst breakdown since last November.
Bear Market Momentum Stocks: Amazon (AMZN)
Click to Enlarge The unveiling of the new Fire TV set-top box and reports that the company is prepping the launch of a new glasses-free 3D smartphone later this year hasn’t been able to stem the slide in Amazon (AMZN) as investors lose faith in the growth first, profits later strategy of the Seattle-based online retail behemoth.
AMZN stock is down nearly 22% from its January high, and has fallen dramatically from the head fake rebound seen in February and early March. From the March high alone, AMZN is down 16.8%.
In mid-March, I recommended the April $350 AMZN puts to my Edge Letter Pro clients, a position we just closed for a gain of nearly 340% — which goes to show you how lucrative betting against the herd can be when the panicked exits begin.
Bear Market Momentum Stocks: Facebook (FB)
Click to Enlarge The acquisition of VR headset maker Oculus VR and word the company is moving into the electronic payments market hasn’t been able to reverse the slide in Facebook (FB) stock, which is drifting in and out of bear market territory as I write this — down about 20% from its March high.
Like Amazon, I recommended put options against FB stock in mid-March to my Edge Letter Pro clients. Specifically, the April $65 calls that we just closed for a gain of 333%.
Anthony Mirhaydari is founder of the Edge