The Nasdaq Composite Is Within 4% Of Its Dotcom Highs. Now What


The S & P 500 (large caps), the S & P Midcap 400 and Russell 2000 (small caps) closed at new all-time highs. People thought that the Nasdaq Composite will never go back to its dotcom bubbly highs, but here we sit in 2015 and the Qs are just 4% below their 2000 level. The difference this time is that they have the earnings to back it up. The story of the Nasdaq Composite is an extreme, but typical example of how momentum often works. Between 1975 and early 2000, the Nasdaq Composite went up 6500%. Then it had an 80% correction. In the late 90s, people thought that the Internet was going to change everything we do, which was reflected in the market. Those people were absolutely right, but very few of the Internet companies that went public in the late 90s managed to remain solvent before they figure out how to make money. Those that survived, thrived for the most part.


Take a look at the chart of Priceline. They IPO-ed on March 30th, 1999, raising 115 million dollars. Priceline sold its first shares to the public at split-adjusted $96 (in reality, it was 16, but later they have a 6 for 1 reverse split). Exactly one month after its IPO, Priceline was trading at split-adjusted 980. We are talking about 900% move in a month. For a brief moment, Priceline’s founder Jay Walker’s initial 25 million investment in the company was worth 5.8 Billion. Then the correction came. By early 2003, Priceline was trading at split-adjusted $6 per share. 12 years later, $PCLN is trading above 1200.

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Do You Really Want To Own The Best Performing Stocks Of Every Year?

Earlier this week, I posted on Stocktwits that boring businesses could have incredibly successful stock stories. I gave an example of Costco ($COST), which is up 2000% in the past 20 years. One of the comments on my tweet was – “So buy & hold could be a winning strategy?”. My reply at the time – sure, if u pick the right stocks and don’t mind 50% to 80% drawdowns along the way.

Now, it is a good time to elaborate on my answer. Yes, buy and hold could be very lucrative, but only if you hold your winners and have an exit strategy. All stocks are price-cyclical. All trends eventually end. Yes, there are stocks like $COST, which keep bouncing and hitting all-time highs, but the majority of today’s big winners won’t recover from their deep pullbacks.

Buy and hold forever rarely works. The market graveyard is full of trends that last only a few quarters.

$YELP went from 20 to 100 in 2013; then it declined 50%. They just hit new 52wk lows last week.

$GPRO went from 30 to 100 in about 3 months last year. It is down 50% from its highs.

$LNKD reached new all-time highs yesterday. It is up about 200% since its opening print in 2011, but it had a 40% pullback along the way. Not an easy stock to hold.

$P went from 10 to 37 in 2013 – early 2014. Today, it is trading around $15.

The biggest winners tend to be very volatile and they are not for the faint of heart. It is typical for story/momentum stocks to go up several hundred % in a short period of time and then give back >50% of their move.

Not every hot stock today will turn into a long-term winner. Most will turn out to be short-term fads. With some basic risk management skills, you could still make a lot of money in them. We don’t know how long a trend will last, but we know when it starts and when it is over for the time frame we operate in. This is all we need to know.

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