What does fake meat and marijuana have in common? The commonality is that investors either made a lot, or lost a lot, of money on shares of Beyond Meat and Tilray.
Let’s explore how investors could make money on those stocks. First, check out these charts.
Note the following:
• The big increases in both Beyond Meat and Tilray were the results of short squeezes, extraordinary pumps (pumps are usually followed by dumps), and the momo (momentum) crowd and mom-and-pop investors getting sucked in.
• There was no sound fundamental basis for the runup in either stock.
• Unfortunately as is often the case, Wall Street participated in the pumps in a big way, especially in Beyond Meat stock.
• There are not many things about the stock market that I can say with certainty even after over 30 years of experience. Investors are familiar with Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.”
• There are two things I know about the stock market with certainty. First, all short squeezes eventually end. The second: “Pumps” without fundamental support are often followed by “dumps.”
• In this twin certainty lies the edges that gives investors a consistent stream of profits.
• The chart of Beyond Meat stock shows that when the stock was hitting its highs, Arora’s call was to avoid the stock. I received a number of bullish emails on the stock comparing it to Tesla TSLA, -3.51%. Please see “Beyond Meat is more like Tilray and less like Tesla.”
• The chart of Beyond Meat stock shows the Arora signal to short-sell the stock at an average price of $160. We give target zones and stop zones well in advance at the same time when buy signals or short sell signals are given. This way investors can plan ahead.
• Beyond Meat stock chart shows that our second target zone given in advance has been reached. The low band of our target zone for Beyond Meat stock was $80. As of this writing, Beyond Meat stock has traded as low at $80.10.
• As the Beyond Meat chart shows, the relative strength index (RSI) is oversold. For this reason and due to heavy short interest, Beyond Meat stock can bounce from here but is likely to eventually drift to our third target zone of $50 to $63. As full disclosure, we have taken partial profits on this down spike on Beyond Meat.
• As the chart shows, Tilray experienced a similar “pump and dump.” The short squeeze was more pronounced.
• As the Tilray chart shows, the stock was sold short as high as $280. The last tranche of Tilray stock was bought to cover at $24. Please see “Here’s your game plan after marijuana stocks got throttled Thursday.”
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Professionals already know this but average investors seldom focus on a simple fact: They are competing with the best and the brightest on Wall Street. To consistently make money, you need as many edges as you can get.
Here are the three edges most investors can develop after some study and experience.
1. Short squeezes
2. Pumps and dumps
3. Momo crowd vs. smart money
It helps to have algorithms but they are not necessary to make money. All you need is the willingness to put in some screen time and the ability to visually recognize patterns on the charts.
You can use the two examples given above as templates. Both Beyond Meat and Tilray as well as other marijuana stocks such as Canopy Growth CGC, -4.94% and Aurora Cannabis ACB, -2.44% will continue to provide trading opportunities. Moreover, Wall Street provides an endless stream of short squeezes and pumps and dumps for investors to make money.
These edges to make money apply only when fundamentals do not support stock price moves. You can make money both from the long side and from the short side. There is significantly more risk when trading from the short side; for this reason, no one should undertake a short trade without a good understanding and proper risk-control measures.
Of course, in stocks with good fundamentals, it is often more profitable to take long term positions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.