Netflix Down, Is It Time To Take Profits On Momentum Stocks?

Submitted by Joel Laceda as part of our contributors program.

Netflix Down, Is It Time To Take Profits On Momentum Stocks?

Momentum stocks are like dominos, when one falls most of them eventually fall.

Today’s ‘Trading Lessons From A Hedge Fund Trader’ will focus on Netflix, Inc. (NASDAQ:NFLX) as per our reader’s request for free research, available here at BehindWallStreet.com.

The chain reaction in the momentum stocks was in glorious display on October 22, 2013. Netflix gapped up all the way to $389.16 and plummeted all the way down near $320. That was a 18% drop from the open in 1 day’s trading session.

Netflix reported earnings with revenues up 22% to $1.11 billion and EPS of $0.52.
The life blood of the company is the subscriber base and boy did they added subscribers, up 1.29 million in the US and 1.44 million foreign.

With a strong consumer base and a global brand name, how is it possible for a company with a market cap of $19.59 billion to lose almost 18% from the opening bell in 75 minutes.

One word: Momentum. AKA (Also known as) hot potato. Momentum sounds more sophisticated but hot potato is easier to understand.

It is always important to understand the fundamentals but when something is popular and in motion then the rules of hot potato and musical chairs apply. That is the only way to explain the 18% drop in 90 minutes of a $19.59 billion market cap stock.

Forget about the valuation and the fundamentals, when a stock is being propped up by the momentum investors, traders and trading computers then understanding Newton’s First Law of motion, ‘a hot stock that’s rocketing up stays in motion until a bunch of big investors sell a ton of stock and a bunch of little guys get hurt.’

Sure I’m way off on Newton’s First Law but it sounds more official than Joel Laceda’s first law on momentum stocks.

FYI Carl Icahn just unloaded about half of his position in Netflix but that’s not the only reason why Netflix got killed on October 22, 2013.

Did Carl Icahn’s move force other’s to reevaluate their position in the other high flying stocks? It is possible but it just shows how Wall Street is full of a bunch of leaders and followers. When the big guys move their positions then the rest follow.

So how are you suppose to invest and trade the momentum stocks without losing your shirt? All I can say is to be very careful because the air can quickly deflate out of your high flying stock and you can be easily on the wrong side of momentum. That my friend can be a very expensive lessons that is totally avoidable.

I will be analyzing the following momentum stocks in great detail, including trading levels and ways to potentially profit on these high flyers at BehindWallStreet.com:

Netflix, Inc. (NASDAQ:NFLX)
Tesla Motors Inc (NASDAQ:TSLA)
LinkedIn Corp (NYSE:LNKD)
Amazon.com, Inc. (NASDAQ:AMZN)
SolarCity Corp (NASDAQ:SCTY)

These are the popular high flying stocks that are in play today. How did I select these stocks? I didn’t, my readers at BehindWallStreet.com asked me to analyze them.

The other problem with momentum stocks is that the average investor is looking at them and wants more analysis on them and I’m guessing they want to buy these stocks.

With the big guys like Carl Icahn taking profits on Netflix and the average investor wanting analysis on these stock, that creates the perfect environment for a huge sell off in the entire momentum stock space.

They won’t all fall at the same time, they will take turns. Only the strongest companies, with real earnings and realistic valuations will be safe.

Stop by BehindWallStreet.com and I will show you how to analyze the momentum stocks and how to potentially profit from the next big move.

We already have a catalyst for the sell off in the momentum stocks. You can thank Netflix and Carl Icahn’s brilliant play on Netflix for that.

For information regarding stocks we do like, check out our Flagship and ETF Newsletter.

This is a cursory look at Netflix, Inc. (NASDAQ:NFLX) and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.

By Joel Laceda – October 23, 2013 BehindWallStreet.com