Every Monday at 10 a.m., I have a call with one of Money Map Press’ “founding fathers”, Bill Patalon. He’s also a great stock picker and editor of Private Briefing. We talk about markets and business and some personal stuff, too.
This week I was one minute late dialing the number. Because I was watching these bars unfold on my trading screen:
Beyond Meat (BYND) had just gapped up to open and then taken off, eventually jumping an additional 10% in just 5 minutes. By 10 a.m. sharp, the initial $10 pullback had already happened.
Since Bill and I have worked together for many years, we usually exchange some pleasantries and get caught up on the personal side of things before we jump into market or business topics.
When he answered with a nice “Hello”, I responded back immediately with a curt nine-word sentence:
“If you own any Beyond Meat, sell it now.”
My reasoning was simple: much like nature abhors a vacuum, markets abhor a parabola. They can’t be sustained. On a price vs. time chart, parabolas are the visual representation of a mania.
Bill didn’t own BYND, though some folks he knows did. And Bill had made a great call, recommending the stock on its IPO day when it was trading in the 60’s.
I also like the meat replacement producers a lot. The science behind BYND is incredible. And it’s even more so for BYND’s chief competitor, Impossible Foods, whose IPO is expected later this year. And while I think these innovative companies and their stocks could be good long-term investments, when the market hands you an unexpected and very oversized windfall, it’s almost always wise to gladly accept.
Let’s look at some other recent market parabolas and what you can do (and a few things you shouldn’t do) when these come about.
Two More Parabola “Manias” That Made Us A Nice Bundle
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But first, let’s brush up our Aristotle a bit.
Aristotle is traditionally credited with the concepts behind the familiar idiom “nature abhors a vacuum”. It’s just a way of saying that when something is moved out of a space, something else will move in. In other words, there is no true empty space.
Great minds debated this concept through the centuries. Galileo, Blaise Pascal, Thomas Hobbes, Robert Boyle and even calculus co-inventors Sir Isaac Newton and Gottfried Leibniz got in on the act.
Modern science has answered this question with a few equivocations. From a quantum perspective there is no true empty space (it would still be filled with quantum fields) but there are a good deal of mostly empty space and partial vacuums.
The markets, like nature, find a few things abhorrent. Chief among these is the parabola.
A parabola is, at its essence, an exponential function. Galileo in his final work Discourses on Two New Sciences (from 1638) proved that trajectory of a projectile traveling through a nonresisting medium is a parabola. Like a cannon ball dropping back to the ground, trading patterns that look like parabolas inevitably come back to earth as well.
You may remember last fall that another stock with a small number of outstanding shares had an unsustainable run:
Tilray (TLRY) is a cannabis stock that got some positive news and because of that and the fact that it only has five million shares of stock being traded (called the float), it got pushed to far, too fast in a unsustainable melt up. Like Icarus, it has fallen to earth and is currently trading at $40 after dropping as low as $34 last week.
Here’s an easily remembered chart of Shake Shack (SHAK) not too long after its IPO:
SHAK’s price was cut in half in less than two months.
Parabolic moves can also go the other way, like this trade in gold miners that Stealth Profits Traders ended up making triple digit gains on for one tranche of the options:
Lastly, how has BYND faired since its parabolic/meteoric rise? Let’s just say that Bill’s friends are pretty happy now:
In a perfect example of a parabola, it has come crashing back to earth.
I’ll follow up in a article next week with a look at what happens with the nuts and bolts of trying to trade one of these manias – and dig into the trade offs and risk-to-reward thinking of trying to short into these manias or make an options play. Until then,
Great Trading and God bless you,