Equity bulls have complete control of the market despite tremendous trepidation. We have arguably the worst economic conditions ever, with unemployment over 11%, yet investors cannot stop buying stocks.
Hot stocks are in high demand these days and the frothier the better. They tend to move fast in both directions so they make an enticing opportunity for a quick buck.
This is perhaps exaggerated now because of Robinhood investors. There have been many more extended rallies than bad days so there are a lot of very sharp rising wedges in charts. The bad thing is that they have become susceptible to severe drops without much warning.
But as long as overall sentiment on Wall Street remains this high, the rally can continue for a while. Trading hot stocks is tricky because they do not provide easy entry points. Ideally investors want to catch them on bad days, and this week we’ve finally had a few of them trip.
Therein lie the opportunities today. At some point, momentum fades and even the hottest stocks have a day of reckoning.
Our three hot stocks to trade now are:
In total, today we will discuss one bullish, one bearish, and one foolproof bet.
3 Hot Stocks To Trade Now: Nikola (NKLA)
This week Nikola reported earnings and investors did not like what they saw. As a result, NKLA stock fell 10%.
Right or wrong, the stock continues its downfall from grace. It is now 60% below its June high, but the opportunity here gets more attractive as Nikola approaches $30 per share.
This is a company still in the pre-revenue stage, so the fundamentals are but a dream. Investors have to believe what management says is true about the future and then hold them accountable to certain milestones.
The thesis has a lot of time on its clock so it’s wrong to short it now. This was the same for Tesla (NASDAQ:TSLA) just last year and the bears failed to kill it when they had the chance.
While Nikola is no Tesla (yet), it is now in a similarly precarious situation. The bears think they have it against the ropes, but I bet that the fans will defend the support zone below. Meanwhile this remains a speculative trade because Nikola stock is definitely high risk.
Catching falling knives can be costly, especially with hot stocks like this. Therefore using the options markets makes a lot of sense, because there investors can leave more room for error.
For example a trader could sell the October $20 put and collect $1.4 for it. Theoretically this trade has an 85% chance of success and it won’t start losing money until price falls below $18.6 per share.
Those who believe in the stock for the long term should just buy and forget about it, because it needs time to mature. I doubt it will be the next Tesla, because there is only one Elon Musk. Nevertheless the EV market is growing fast and there is plenty of room for multiple suppliers to prosper.
In March we saw how strong a stock price driver fear can be. The Covid-19 crisis caused system-wide selling at record speeds regardless of fundamentals. Investors sold all types of stocks, and they sold them in size.
Amazingly, the markets have completely recovered from that crash and even set new highs. Some of the star stocks are those in healthcare companies involved in the fight against the virus. Novavax stock went from a penny stock and almost being de-listed last year to almost $200 per share this week.
Just yesterday it fell -33% to 103 and then rallied to +28% to 198.5 from the $155 base. This shows tremendous emotions tied to the trade of NVAX stock. This also suggests that conviction is very low from both the buyers and sellers. There’s no reason for the bulls to give up one third of the value of the stock in minutes.
Conversely it is strange that the bears allowed a 50% point rally minutes thereafter. Somehow both sides found catalysts to crash it and rip it in minutes. This is more gambling than investing.
This price action is very rare and it shows a lot of bifurcation. The NVAX stock chart is now worthy of a bearish trade attempt. Shorting stocks outright carries unlimited risk and is almost never a good idea especially when sentiment is so positive. They have never had a vaccine come to market, nor have anyone else ever had a successful vaccine for any other coronavirus, odds are that there’s already too much hope baked into the stock price.
The outcome of the research is binary, meaning they will either get it or not. Currently the NVAX stock price is 200 times its full-year sales so that’s 200 years worth of sales built into it already. That’s a lot to live up to.
Using options traders can risk a finite amount for that bearish opportunity. I can buy the January $110/$90 debit put spread for a total cost of $7.5 per contract. This is the maximum potential loss versus the $12.5 potential gain.
When buying options time is the enemy so I would need price to fall through the spread to capture my max gains. The faster just happens the better.
Management will have its chance to wow investors soon so what they say about their milestones matters more than the actual financial results. They currently have money from the government so the hope is that they will have a vaccine solution for us.
The third stock today is the no-brainer of the bunch. There’s never a sure thing when investing in stocks, but AAPL comes close.
Yet this week analysts downgraded the stock to a “sell” rating. To me, his reasoning should put a sell rating on the whole market. If Apple stock is going considerably lower in the future then so is the stock market as a whole. There is absolutely no reason why Apple stock fails in the future all by itself.
This is arguably the best company on the planet with a fortress balance sheet. They sell out of every widget they make and at a premium price to boot. Its consumers are extremely loyal and they self-proclaim that they are stuck in its ecosystem. Moreover, Apple now derives more than half its revenue from services and this reduces its dependency on the hardware sales cycle. Shorting AAPL seems like the dumbest idea in the long run.
Shorting the price action could work, meaning traders can short it on extended runs for a trade but not as an investment thesis. The easy solution is to buy the dips and fade the rips. Currently Apple stock looks like it could use a breather, so I don’t completely disagree with the analyst.
What I find mind-boggling is the discussion of the analyst rating in the media. About a year ago an analyst from Goldman Sachs cut the AAPL price target to $165 per share, yet it more than doubled since then.
The bottom line is that Apple is a buy for as long as we expect higher stock prices in the future. Listening to an analyst and shorting a stock like this is ridiculous. Sentiment is the main driver in the stock market today.
This week we will have a jobs report on Friday, which has the opportunity to make or break this rally. Wall Street expects another strong report, but if it comes out as weak as the ADP payroll report the markets might throw a little fit.
Also Beware of the Nasty Politicians
Sentiment is the key to this rally and politicians are putting this in jeopardy because they are still squabbling over the new stimulus plan. They need to get this done because consumers will miss the $2,400 a month if they don’t replace it with something else.
The U.S. economy depends heavily on people spending and if we feel poor we hold back. The data will very quickly show signs of it and sentiment will reverse on a dime. The indices are, like hot stocks, now in very sharp rising wedges, which we already know are susceptible to sudden drops.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.