Morning Market Thoughts

Good morning. Futures are up this morning, with the Nasdaq slated to open about 45 points higher. Facebook (FB) hit a grand slam with its earnings report last night, beating analysts’ estimates for revenue, ad revenue, user growth and earnings. The stock is up $13 bucks (about 7.4%) pre-market to $179, and JPMorgan has hiked its price target from 182 up to 210. The stock is quite extended, so use caution if you are planning on buying a gap like this. It worked with Boeing (BA) yesterday. But that was more the exception than the rule. There is always significant risk in buying a stock that jumps more than a few percentage points unless it is breaking out of a volatility squeeze. Facebook will be up about 15% since its breakout in early July. If you do intend to buy the stock, then make sure you have a plan for risk mitigation. Set a stop at a price point where, if the stock hits it, you know you’re wrong and you close the trade. One suggested method would be a $1 risk. Watch the stock open. If the opening print holds for a few minutes, then set a stop $1 below that level. Multiply the number of shares you own by the price difference between your purchase price and the stop level. The result is the amount of money you are risking on the trade.

This isn’t a suggested trade. High profile stocks like this will often make a big gap, and then reverse as professional sellers fill the massive retail demand and then cover at lower prices after the retail demand has dried up. This is a common outcome of these types of gaps. But, it’s not inevitable. Sometimes the stocks keep running. So if you are going to take the lower probability trade, at least manage your risk!

The Q2 earnings report confirms what everyone knows about Snapchat (SNAP). In a one-on-one duel between FB v. SNAP, Facebook is giving Snapchat a cold stare, and stealing its lunch without apology. The one of the key differences between the two (other than slowing growth in SNAP vs. faster user growth in FB) boils down to money. While Facebook is dominating Snapchat by virtually every measure, Snapchat is the King of Cash Burn. In Q1, Snapchat spent $2.3 billion to make $149 in revenue. That’s a bit of a problem, particularly when you consider that it’s burning more cash than Twitter ($TWTR) and Tesla ($TSLA) put together. And Snapchat is not planning on flying to Mars in a Teslaship, and POTUS doesn’t use Snapchat. POTUS and the White House do, however, have Facebook pages.

As previously noted, every day the market is open is a great day to sell Snapchat ($SNAP). Particularly when you consider that 400 million restricted shares will become freely traded on Monday. The average trading volume of SNAP is around 14 million/day. So 400 million more shares doubles the float and would take about a month and a half to unload if shareholders were the only ones allowed to sell.

Look, I have nothing against Snapchat (nor do I have an account). I just don’t want you to fall prey to the “Snapchat has bottomed; it’s a steal!” game. Facebook suffered the same fate as Snapchat, losing over half its market cap during the first 2 quarters of trading. THAT was a buying opportunity. But think about it — Facebook didn’t have a competitor (MySpace doesn’t count). It revolutionized social media. Snapchat is trying to get into a space that’s now dominated by Facebook and Twitter. Enough said.

OK. Good session last night and we received quite a bit of feedback about our “Would you rather…” conversation at the end of the class. Completely spontaneous…and those who attended saw a great example of the concept of “Hobson’s Choice.”

See you in the forum.


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