In a sign equity markets may be running out of steam, at least on a short term basis, momentum stocks which have led the 2013 rally and again the recent market advance have for the most part suffered
reversals in the past few days. This should not come as a huge surprise after the post-shutdown rally which I sensed would turn out to be too much of a good thing for momentum traders. While broad indices have continued to power higher, the list of popular momo names coming under selling pressure has grown :
Netflix, LinkedIn, Facebook, Tesla, Yelp, to name a few and many solar stocks.
Controversial short-seller targets chinese stock
Of note, NQ Mobile a momentum stock which was obliterated last week by a Muddy Waters Research report accusing the chinese company of being a fraud and telling investors the stock should be "a zero". Muddy Waters run by short seller Carson Block has such a large following after having called the fraud at Sino Forest in 2011 that the firm has become controversial for the impact its reports can have on the stocks it targets. To be fair not all of Muddy Waters'calls result in big moves, but NQ had a very small float making for a volatile issue. On Thursday 24 at 1pm ET, NQ Mobile collapsed within minutes, before the news of the report even came out, and kept falling throughout the day despite several volatility halts by Nasdaq. It lost an unbelievable 60% on the day before Nasdaq halted the stock indefinitely after 2 pm. The stock did not resume trading until sometime in the morning the next day. This highlights the new risks of momentum trading strategies on US markets as trading halts can make an exit impossible for investors. In my opinion the Nasdaq system and procedures are broken and traders have to exercise extra caution when playing the momentum game especially with second tier names. At least those traders who had a stop in the market were able to get out and if you followed a rule such as the 8% stop-loss rule recommended by Bill O'Neill's CANSLIM approach you would have exited the stock without much damage. NQ Mobile's fast growth in sales and earnings had drawn investors to its stock, a unit of hedge fund SAC Capital was listed as of last week as its biggest institutional holder.
Social networks disappoint investors, Facebook's stock has volatile after-hours session
LinkedIn then Facebook came under selling pressure today on the back of their earnings report. Facebook initially rocketed more than 10% higher in after-hours to a new all-time high above $57, but
the stock collapsed later, giving back all its gains. The drop is attributed to comments by Facebook execs on teen usage during the Q&A session, teen daily usage was actually down on the quarter confirming fears that Facebook may lose some of its appeal and coolness among this user group. Most of the growth in users was coming from Asia and "rest of the world". My opinion is that the new users in developing countries will be more difficult to monetize over the long run. We have been long the stock in recent days only because of momentum but no longer have a position. Today's after-hours session was a reminder that trading in after-hours during earnings announcements is fraught with risks and should only be attempted by experienced traders. Facebook made a new all-time high above $54.80, hit $57 and change then retreated to finally collapse back under $49 where it closed the regular session. A new high would be expected to hold and lead to a sharply higher open the next day, but that was a trap, only tight risk management and experience could allow an after-hours trader to avoid steep losses. This type of action is not unusual these days on earnings releases and this makes after-hours trading ever more treacherous.
Fickle teens are getting tired of Facebook, that means volatility
