After a rough June, the stock market has rebounded to start the second half. But volatility has risen and declines in former high-flyers such as Lululemon (LULU), Rackspace Hosting (RAX) and Lennar (LEN) suggest even more-than-normal risks to momentum trading.
Howard Lindzon, CEO of StockTwits, is often described as a momentum trader; he first gained public notice with WallStrip, an eclectic, entertaining video series that focused on stocks hitting 52-week highs.
“I am chasing winners because winners tend to continue to win,” Lindzon says. “I try and fish in areas where valuations don’t matter [because] in a liquid market and with proper money management you can get out” when the uptrend (inevitably) breaks.
Still, Lindzon acknowledges “momentum investing” has negative connotations – “people shudder” when they hear the term, he quips – and so recently has begun adopting a new moniker: Eclectic Opportunist.
“If I can understand the catalyst, I don’t necessarily care about the price,” he explains in the accompanying video. “Stocks in motion tend to stay in motion. I can ride these companies based on relative valuation for certain periods of time.” Lindzon describes how stocks like eBay (EBAY) or MercadoLibre (MELI) can reach what seem like extreme valuations but he’ll be a buyer because “there’s so many institutions that have these as proxies” for certain trends or investments.
He also describes recent investments in Yelp (YELP) and iRobot (IRBT). “These companies are leading; they’re leading for a reason but we may not know about it for six more months,” Lindzon explains. “The risk is they are overvalued and they drop 20%, but that’s part of the business. I like to fish on the leading edge because of the liquidity I can get."
Again, Lindzon's point here is not that these stocks will go up 'forever'; he fully expects the momentum will eventually break. While the focus of this post is Lindzon's rationale for buying certain stocks, more important is his strategy for when and how to sell them.
“It’s not a system as much as a pattern that I have learned to recognize,” Lindzon wrote in a recent blog post that examines his trading in Tesla (TSLA). “I will never be early and hope never to be the last guy in the room. I believe there will be a thousand more Tesla’s in my investing life and prefer focusing on these type of opportunities that the stock market brings.”
While admitting he sold Tesla too soon, Lindzon believes there will be “plenty of chances to buy it again,” citing consumers’ love for the cars and the aura now surrounding founder Elon Musk.
“He’s over the chasm,” Lindzon says. “There’s an ecosystem and people are willing to invest in derivatives of Tesla like Mentor Graphics (MENT). Mutual funds can’t own enough Tesla, but there’s only so many shares of Telsa. This is how the market works – derivatives of companies. Figure out where the money is flowing and be an eclectic opportunist."
Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at firstname.lastname@example.org.
More From The Daily Ticker: