Back in the middle of October we wrote a piece which delved into the extreme risk/reward nature of momentum stocks, which hedge funds love to run up fast and dump equally fast at the first sign of a turnaround in the trade. These high-growth, high-beta and high P/E stocks can create a tremendous case of whipsaw for even the best of traders, as the data in Stocks We Love ‘Til We Hate pointed out.
Last night, on his ‘Mad Money’ show, Jim Cramer did a segment which borrowed liberally from highly regarded Wall St. technician John Roque, who has developed what he calls his “Pretty Girl Index”. This “index” includes many of the same stocks we wrote about and the timing of the segment was coincident with yesterday’s big move up in the indices, in which many of the high momentum stocks led the way.
Mr. Roque remains bearish on the group and Cramer took the audience through a look at several of the charts which are almost uniformly making lower lows and lower highs over the past several months. Mr. Roque advises extreme caution, which was seconded by Mr. Cramer.
“The charts as interpreted by John Roque say you shouldn't allow yourself to be seduced by today's fabulous rally in the pretty girl momentum stocks, since they still have a long way to fall before they're done going lower,” Cramer said.
The “Mad Money” host said he’d use this rally to “lighten up” on these high flyers and circle back to higher yielding names, holding out Yum Brands as one of his personal exceptions.
Major names include:
- BAIDU (BIDU)
- CHIPOLTE (CMG)
- DECKERS (DECK)
- ESTEE LAUDER (EL)
- FOSSIL (FOSL)
- GREEN MTN (GMCR)
- HANSEN NATURAL (HANS)
- LULULEMON (LULU)
- NETEASE (NTES)
- NETFLIX (NFLX)
- PRICELINE (PCLN)
- SALESFORCE (CRM)
- WHOLE FOODS (WFM)
- WYNN RESORTS (WYNN)
- YUM BRANDS (YUM)
The action yesterday and today was fairly demonstrative on how these stocks can move. Let’s just look at two. In yesterday’s trade Baidu (BIDU) was up 6.6%, today it is down 5.5%. Priceline (PCLN) had lows Monday at $455.210, highs yesterday at $480.09, and traded down to lows today at $464.51. Saleforce.com (CRM) might be the poster child for “you’re hot and then you’re not”, with a P/E in the hundreds and trading -39% off 52-week highs. (The ORCL news yesterday not helping matters). Despite this, we are still seeing 24 out of 36 covering analysts still rating CRM a “Strong Buy”, perhaps on relative valuation and futures earnings potential, certainly not off its P/E.
As Cramer more or less stated, a “Pretty Girl” might be someone you would like to date, but perhaps a long-term marriage is not always in the cards.
Baidu Last 12 Months
Priceline Last 12 Months
Salesforce.com Last 12 Months
Good Trading!
David W. (aka The Underground Trader)
Manager The FlashTrading Service
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