Swaggy's Top Stonks
Swaggy's Top Stonks
May 15, 2021
Welcome newcomers to Swaggy's Top Stonks and thank you for subscribing. We'll be taking a look at events that caused a disturbance in the market this week and the most popular stocks on the Internet. There's a little bit of everything for everyone here, but if this isn't your cup of tea feel free to unsubscribe below. For all others if you have any questions or comments you can actually respond to this email and I will do my best to respond to you as soon as possible.
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Market Update - What's going on in the markets?
Mr. Dow Jones is at all time highs (super nice guy BTW), the Nasdaq is barely down, while all growth stocks (mainly tech) have been blasted to smithereens. The narrative of “growth stocks tremendously over-valued” has been pushed since February during the start of this decline. Is that really the case or is there something going on behind the scenes? I find it hard to believe that the aggregate market would find a 40-60% decline (extreme bear-market territory) for some of these names to be normal solely based on the fact of a “stretched valuation”.
The list of tickers that have blown up is endless, but most of them can be found in any ARK ETF. Cathie Wood is being scrutinized for buying the dip in her funds, but why? Do people really think that after declining 60% in 2 months those same stocks will continue to drop even further? It's clear her fund is in trouble, just look at the 3-month chart for ARKK (this is sarcasm).
The ARKK ETF has had a 30% decline over the last several months. This is what Twitter investors see when they think of Cathie Wood and ARK. I’m not defending her list of higher-risk, WallStreetBets-esque stock picks, but if you zoom out on the chart past the last 3 months you’ll see she is still up very handsomely. Here, I'll do it for you with this look at the 2-year chart.
Even after this 30% decline the ARKK ETF is still up over 100% over the last 2 years. Disastrous!
Inflation Worries - Are They Legit?
Moving along, it seems that “inflation risk” is the number one headline over the last several weeks. It could be that investors are worried the Fed will soon need to increase rates to tame the dragon that is inflation. Why growth stocks are being targeted in particular is because they are generally heavy in debt and need to borrow money while they are in the early stages of growth (and burn through cash).
Raising rates to taper inflation = more expensive to borrow = more risk
Hedge fund algos that also run sophisticated DCF models will discount these stocks based on interest rates expectations. One thing I always ask myself is *how* does the Fed not see that inflation is already here?
Housing Market? Massive bubble
Commodities -> Metals? Inflation
Commodities -> Agriculture? Inflation
Commodities -> Energy? Inflation
Revenue per Instagram Model? Inflation!
Here’s a quick look at a few charts: crude oil (energy), corn (agriculture), and copper (metals). They have all been on the rise over the last 6-8 months.
Yet Fed remains certain that inflation is very much uNdEr CoNtRoL. This is because they measures inflation through a metric called Personal Consumption Expenditure (PCE) not to be confused with Consumer Price Index (CPI). Although they are comparable, they are different in what they measure.
The Fed has been using this metric as a measurement of inflation for years. Is it time for a change? What is the true measure of inflation? Some might say a better reflection is seen in housing market, equities, and the CPI (which just came in hotter than expected). There can be a lot of different takes and opinions so it’s hard to say what’s right or what’s wrong. In the end we’ll just need to accept that our groceries and OnlyFans subscriptions will end up costing us more.
Option Flows - Where was momentum this week?
I caught some unusual options activity and momentum plays this week. After what has felt like weeks of bearish flow coming through in tech stonks it seems there's been somewhat of a turning point, at least in terms of volume in aggressive call option buying. Here's a bubble/heat-map mix of option volume in some popular names.
Before you come at me with "for every buyer there's a seller", of course there is. There are also ways to measure who was the aggressor in the trade. Here's a real life example: You are craving some chocolate, KitKat's specifically, so you go to your local 7-Eleven to buy some. When you get there you notice there are only 2 bars left. The store clerk says "These are the last 2 KitKats we have, we may or may not get more shipments tomorrow, but we might also not get any until next week or even the week after". The thing is, since there's only two left these KitKat's are selling at a premium of $2 instead of their original price of just one dollar. Do you wait until next week and get them for a buck? You want them ASAP and you aren't sure if you can wait until potentially next week to eat some chocolate. In this case you buy the KitKat's for $2 a piece and you are the aggressor of the trade.
Similar things happen in the options market. Someone is looking for 5,000 call option contracts when only 2,000 are available. He pays a premium to get the fill he needs. In this case the extra "premium" paid might only be a few cents per contract, but that is still a few pennies to the ask side. The opposite can also happen when a large seller comes through and there just isn't enough liquidity, forcing the price down. Something something "supply and demand bro".
Going deeper, a lot of unusual option activity can also be a "chicken or the egg" scenario. Here's some activity from Friday morning at the open on Snowflake (SNOW). The format inside each bubble displays as:
TICKER-Expiration Date-Call/Put-Strike and total premium below it.
The largest bubble in this chart shows SNOW 2021-06-18 calls at the $205 strike price. Total premium = $3.82 million.
Large bids in "aggressive" call buying came through right at market open. The stock opened at $195 (+3%) and then shot up to $203 (+7%) shortly after. The call buying most likely contributed to somewhat of a micro "gamma squeeze" that created pressure on market makers to buy shares. In my opinion, these things move quickly and are extremely difficult to time when you look at it from an intraday perspective, however, they can often be telling in a more macro outlook. From Friday's activity we can see that most of the option blocks bought were anywhere from 1 month to 18 months out, a good mix in timeframes.
What could have happened? In the last 3 months SNOW was down nearly 60% (!) from all-time-highs. The dip-buyer may have potentially been thinking this is a good time to buy and purchased 2023 call LEAPs. Will be interesting to see how this one plays out, I'll keep my eye on it.
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Thank you for coming to my TED Talk and the rest of the newsletter is designated for our weekly trending tickers. See you all next week!
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