Part Social Media Company, Part Super PAC
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When presidents become stock tickers… Why you should steer clear of these new leveraged ETPs… Remembering the man whose ideas helped shape TradeSmith…
By Michael Salvatore, Editor, TradeSmith DailyThe last few years have been rich with never-before-seen events in financial markets.
What’s another to throw on the pile?
On Thursday, March 21, Trump Media & Technology Group (appropriately, the ticker is DJT) listed on the Nasdaq exchange.
It is, on its face, a social media company whose primary product is Truth Social – the Twitter-like platform started in the wake of and in response to the former president’s ban during the Jan. 6 fiasco.
Digging deeper, DJT could prove to be a novel way of funding a presidential candidate’s campaign… novel in that it could be the first-ever political donation with a tangible return on investment.
It’s like a social media company and a super PAC all rolled into one! Oh, to be a fly on the wall of the regulation-happy Department of Justice right now…
DJT also represents a massive potential future windfall for Mr. Trump. Shares have climbed about 50% since they changed over from DWAC… and over 280% year-to-date.
Combined with the DJTWW warrants, the company’s reached a valuation of $9.4 billion as I write… and valuing Trump’s personal 60% stake north of $5 billion. (Though, he won’t be able to sell until a lockup agreement expires six months from now, and just over a month before the election.)
The shares appear to be defying gravity for the moment, mainly catching on as something of a “meme stock”… Because, let’s be clear, you aren’t buying this name for the sterling underlying business.
Trump Media lost $49 million in fiscal 2023… on just $3.4 million in revenue. That’s hardly the kind of productivity that should command such a large market cap.
But that’s also not what meme stock investors care about. For the time being, the stock is going up… and that’s enough for some people.
We don’t personally see that being a long-lasting condition. And if the Business Quality Score (BQS), Ratings gauge, and Volatility Quotient (VQ) are anything go to by – which, to be perfectly clear, they’re a great thing to go by – this roller-coaster ride is not worth taking.
Mind, the Green Zone and Uptrend indicators do flash green – owing to the recent upward momentum. But the stock holds a sky-high risk VQ of 78%, a lowly BQS of 37, and it’s currently in a peak zone from the Trade Cycles seasonality indicator. Those latter two factors, among others, are contributing to the stock’s Bearish Rating.
No matter how you feel about the name behind the company, this is likely not a place for anything more than “play money” for short-term momentum trades.
There are plenty of other high-quality companies around this market-cap level worth investing in, especially right now with seasonality and rate-cut tailwinds at their back.
I’d urge you to check out Jason Bodner’s latest research right here, for some more sound small-cap investment opportunities. (And stay tuned for a special feature involving Jason making its way to your inbox tomorrow.)
❖ Speaking of stuff you should only trade with unserious money…
A few exchange-traded products (ETPs) launched in Europe on Wednesday. See if you can guess what kind of trader they’re targeting:
Yup… It’s a laundry list of the last year’s tech trends, injected with an unfiltered dose of leverage steroids.
Where good money goes to die… or make quick, risky gains.
Chances are overwhelmingly high you should steer clear of all these names. And if you are going to trade them, I don’t suggest doing so for any longer than a single trading session.
Here’s why…
Buying something like the 5X Long Magnificent 7 ETP sounds like it would’ve been a great idea this time last year. You would’ve done five times better than a Magnificent 7 portfolio… right?
Not necessarily. You see, there are complex and criminally unclear mechanisms built into all of these products that makes them perform a bit different from what you’d think.
First off, the element of leverage in any context can be dangerous. If a product is going to give you 5x leverage, that cuts both ways – and what’d be a bearable down day without leverage quickly escalates into disaster with it. That 10% correction from last year? Imagine it five times worse.
Further, leveraged products undergo a daily “reset” where their exposure is recalculated. That could lead to more frequent capital gains distributions with some products, and in other cases may even result in worse results than holding non-leveraged exposure.
Just take this study from Charles Schwab showing how these daily resets impact returns. A 2x leveraged S&P 500 fund actually multiplied the move of the index by more than three times over a single year… just, in the wrong direction.
Suffice to say, if you’re going to trade any of these products, keep it in the ultra-short term.
And if you’re that kind of trader, I’m morally obligated to point you over to Jonathan Rose, founder of Masters in Trading, who’s sharing free short-term trading ideas in daily live streams every day the market is open.
Jonathan is a certified market expert, earning his stripes in the Chicago Board Options Exchange trading pits and then going on to create an online trading education company.
You’ll learn far more in 15 minutes a day with Jonathan than anyone else I’ve seen.
❖ In Memoriam: Daniel Kahneman – the ideological force behind TradeSmith…
You probably know that TradeSmith began by providing a simple solution to a common problem.Investors tend to act with their emotions. The speed that conditions change in markets, and the stakes people have in them, are what drive that mode of thinking… even if it usually leads to poor outcomes.
TradeSmith designed TradeStops 19 years ago, and all our other software since then, to remove as much emotion from your investing gameplan as possible.
But what you might not know is the idea behind TradeStops traces back to the work of Israeli-American psychologist and economist Daniel Kahneman.
Kahneman, whose research that won the Nobel Prize in Economics in 2002 and directly influenced our work here at TradeSmith, pioneered the idea that the human brain has two “Systems.”
System 1 defines our immediate responses to situations – “lizard brain” level stuff that we need on an instinctual level. With it you think, respond, and act quickly… driven by fear, anger, happiness, or some other kind of emotion.
System 2 is the opposite. It’s what you use when you’re doing your taxes, or shopping for a home, or writing an issue of TradeSmith Daily. It’s slow, methodical, and helps you make big, conscious decisions inspired by logic.
Many investors make System 1 decisions about investment matters, when they really should be thinking on a System 2 level.
We all know this intuitively. Financial matters are profoundly logical… and acting on them emotionally tends to bring trouble. Yet, the pain of loss and the euphoria of gains clouds our judgment and gets the lizard brain turning.
System 2 thinking is also incredibly energy-intensive. Anyone who’s spent time on a complex problem knows how easy it is to throw up your hands and give up, seeking solace in some low-stress activity.
TradeStops solves this problem by doing all the “System 2” thinking for you… and preventing you from tapping in to “System 1” and potentially locking in undue losses during moments of market panic.
I bring this all up because Daniel Kahneman passed away at the age of 90 this week. He leaves behind an enduring legacy in behavioral economics which, among much else, has taught us at TradeSmith so much about how to be great investors and to help others do the same.
Rest in peace, Mr. Kahneman. We’ll never be able to properly thank you for all you’ve taught us. But we hope your ideals can live on through our work here and in the minds of investors everywhere.
With that, we wish you a pleasant rest of your long weekend.
Like I mentioned earlier – tune in tomorrow morning for a special feature involving Jason Bodner and a couple other of our star analysts. You won’t want to miss it.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith Daily