GameStocks - Fun While It Lasted...

So how about GameStop (GME) and AMC (AMC)? That Silver short-squeeze? Fighting the man? That was fun while it lasted.

I don't want to lecture anyone or say that I told you so. During one of my newsletters last week, I even said that I tip my hat to anyone who profited from this—all the respect in the world.

Me personally, though, I would never trade like this. Monday (Feb. 1) and Tuesday's market (Feb. 2) was nothing more than a reality check. GameStop's stock has lost nearly half of its value, and other Reddit darlings like AMC, Blackberry (BB), Koss (KOSS), and Silver (SLV) tanked.

Stocks don't go up forever.

Stonks especially don’t.

Who knows, maybe the party's not over. But I think the plummet in the Reddit stocks was bound to happen. Bubbles always eventually pop.

The market seems happy that the earth is back on its axis in stockland. The indices have recovered nearly all of last week's losses already.

I didn't call the GameStop short-squeeze, but I had called last week's downturn for a while. The recovery so far this week wasn't entirely surprising either.

Be that as it may, I remain concerned about complacency in the markets and overstretched valuations, plus the potential return of inflation. But the breather last week was needed and brought the indices to less overbought levels.

Generally, investors and analysts are bullish these days. According to a recent Bank of America survey of 194 money managers, bullishness on stocks is at a three-year high, and the average share of cash in portfolios, which is usually a sign of protection from market turmoil, is at the lowest level since May 2013.

We have still not declined 10% from the record highs- the minimum needed for a correction. Although the market needed last week's downturn, we're once again mostly right where we were several days ago.

I know what you’re thinking. Amazon (AMZN) and Alphabet (GOOGL) are the latest companies to crush their earnings estimates, how could we possibly have a correction?

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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William K. 2 months ago Member's comment

I had thought that share VALUE, as opposed to share PRICE, would be more closely related to the cost to earning ratio. Of course "cost" is a somewhat nebulous term as far as what it includes. But I am new to the stocks game, being a semi-retired engineer and a writer now. So a lack of insight into the stocks and Wall street is my handicap, also not being greedy. Probably I will never truly fit in. Oh Well.

Monica Kingsley 2 months ago Contributor's comment

If you were to take a long-term view, then what about being invested in an asset class that has better prospects than paper asset such as stocks? I like copper, precious metals, also oil - what about commodities then?

Matthew Levy, CFA 2 months ago Author's comment

I wouldn't be comfortable recommending only commodities to an investor myself Monica Kingsley. William K. You set yourself up for failure when you do not diversify properly for the long term. You might luck out and get in for an upswing (which seems possible here with a reflation trade), but I would not dismiss all stocks as an investment. Allocate some of your portfolio to stocks for the long term, and buy ETFs to get the diversification you need at minuscule prices. I personally have about 70-80% of my holdings in stocks that are not correlated to commodities or commodity assets themselves.

Monica Kingsley 2 months ago Contributor's comment

First, there has been no mention of percentage net worth available for investing. Second, no mention of investment horizon and willingness to tolerate drawdowns of specified size. Third, I am very far from writing off stocks, me the raging stock bull who sees great gains ahead. Fourth, we don't know about other investments of said gentleman. Fifth, commodities are still likely to outperform stocks in the current environment - that is worth posing the question I posed (no recommendation). What is long-term to the gentleman exactly anyway? Unless he tells, only he knows...

Matthew Levy, CFA 2 months ago Author's comment

In your case, it may be better to take a longer term approach and invest more passively? There's a reason passive ETFs have outperformed the vast majority of hedge funds in the last 10 years...

William K. 2 months ago Member's comment

Evidently a "correction" is when prices fall down to what somebody feels is the correct value. Certainly each organization has some number that represents the actual value of a share. That bears little relationship to the current share price, except in some strange exceptions.

Monica Kingsley 2 months ago Contributor's comment

I agree with the author on emotions, and just today said publicly that trading should ideally be really a boring activity, no adrenaline rush. Professionals lay down their plans well in advance, and adjust them for incoming (price and other) information - but more than the contours of each trade's parameters (risk, reward) are specified before entering the trade. Not overleveraged (risk per trade), just a reasonably small percentage of account being risked on a single trade (varies upon trading strategy: e.g. for breakouts much lower than for position swing trading) - so as to have always enough firepower left for many subsequent ones given your historical win ratio. In other words, you gotta be able to survive a series of bad luck. That's my surefire way of making money in bull, bear or sideways markets, whatever the instrument. Take care!

Matthew Levy, CFA 2 months ago Author's comment

Hi William K.! Yes, most companies would have an idea of their intrinsic values on shares, but you would be surprised at the amount of newsletters / stock traders / institutional investors that get into stock markets without any plan for an exit - what do you do if the price runs (to the moon)? What do you do if the price drops? Generally, a correction is defined as a 10% loss, with a bear market being 20%, but I think to put a hard number is not the best way to go overall - there are certainly markets that pulled back 19.5% that you could call a bear market, and 9.5% that you could call a correction, for example. So it is dependent on more than just a pure number, in my opinion. Of course, I went into more detail about these calls in the full paid version on Sunshine Profits, but if you didn't know already, I would highly recommend checking out Bob Farrel's 10 rules of investing - I look at them often in bull and bear markets to try to take my emotions out of investing, which is no easy task! Thanks for your comment, let me know if you have any questions about the piece. -Matthew

Monica Kingsley 2 months ago Contributor's comment

Well, in the prior author's post, a number of 10%+ was thrown around, taking down the risk level called justified - I argued that it has run quite far with 4% already - and we're some 30 points from prior top three sessions later. I comment on so many articles that discuss stock indices, precious metals, currencies, commodities or just oil - talking market actions' whys and whats, and own trading perspectives - because I write daily too.