Lately we’ve seen a rush of money going into a few sectors and the IPO market. It’s easy to get caught up in the frenzy, so be careful when riding a hot trend. They have the tendency to get out of control.
Think twice before riding a hot trend
While plenty of traders have made big money recently, consider this your warning. A hot trend is a stock that is only riding momentum. In most cases, you’ll get severely punished.
Yes, momentum is a strong tonic for those of us who follow technical signals. You can ride momentum for much longer than anyone could imagine. But momentum tends to fade quickly. If you’re not watching closely, you’ll end up holding the bag.
One of the hottest sectors right now is the electric vehicle, or EV, market. Names in this group have soared in 2020 as sophisticated investors have flocked to Tesla and others (believe it or not, Tesla is not the only EV company out there). If you find yourself in this group, hold several names. Some will be winners and some will be losers – and the losers will be the bigger group of the two. (According to this article, one of them might be Tesla.)
Some sectors are in a bubble
The EV, bitcoin and biotech sectors are all in a bubble. As we’ve seen in past, when bubbles pop, everyone around gets hurt. In the late 80’s, it was a biotech frenzy. In the late 90’s, we had the dotcom explosion. At the turn of the 21st century, money flooded into alternative energy. The one thing all of these bubbles had in common? Most companies went bust, and the investors who were riding the trend were helpless when the selling commenced.
It’s okay to ride a hot trend. Just know that most of the names are not game changers. You likely won’t find the next Amazon or Apple. Tesla won’t be a white knight for your portfolio. Don’t get married to any one name. Watch the technicals, and get out before the bubble bursts.