People always ask me why I dislike parabolic moves. The answer is simple: When a stock rises significantly in a short period — resulting in a price chart that resembles the curve of a parabola — it goes down far faster than it can creep up, for whatever reason. Consider a parabolic move from a stock that goes from $18 to $30 over the course of 12 sessions. It will go back down, maybe not to $18, but certainly close to it in three days. You will give back some, but not all, of the gain if you got in at $21. However, you will most likely have given up all, and perhaps more, if you bought above $21. Moreover, the stock might have been going up on enthusiasm, but it might go down on nothing. On the way up, you will hear my voice trying to get you to stay away from this parabolic move. On the way down, you will just wish you had never bought stocks and will want to move on. In other words, parabolic moves force you to be a trader. You must take the gain before the inevitable collapse, except in those rare cases at the moment that seem immune to this trend. Right now, for instance, you can justify owning almost anything in the cyber, defense, and artificial intelligence fields simply because of the stock of Palantir . That company does have the best gross margins and revenue growth of any company I know. The Rule of 40 says a SaaS company’s combined revenue growth rate and profit margin should be at least 40%, and Palantir’s 60% is the highest in the S & P 500 . My view is that Palantir should not be used as a crutch to buy anything you want in those fields. Palantir is a company many admire — I can’t help but like it. But it is sui generis and shouldn’t inspire mindless buying in other stocks. Given both the visceral love for the company’s stock and its accelerating and profitable revenues, it seems almost immune to sellers. The stock’s 11% gain on Friday after moving from the lightly indexed New York Stock Exchange to the heavily indexed Nasdaq 100 can’t be justified on anything fundamental. But there is a lot of circular reasoning involved in Palantir’s stock, as in: “It’s going higher because Palantir’s stock is going higher, so get on board.” Palantir is now the darling of the S & P 500, eclipsing data center power company Vistra and Nvidia , which reports quarterly results after the bell on Wednesday. This new status, which seems forced upon the market by ferocious buying, is reminiscent of GameStop , which soared 1,500% over two weeks in January 2021, except Palantir is the real thing. That’s terrific. I will fight no one who wants to buy Palantir because I sense that one will be the last name to go down. It’s all the other stocks I worry about. All the uranium, space, SaaS, and enterprise software stocks have gone parabolic. And remember, the term parabolic is hyperbolic, in that it’s not a literal straight line. The more it slopes, the more likely you say, “Hey, I am fine, it’s not really parabolic.” This is a very poor rationalization. What’s wrong with just trying to ride a parabolic move and getting off on time? Theoretically, nothing. But parabolic moves are intoxicating. They rarely give signs of themselves beforehand. Therefore, you are never given a reason to sell. They topple only sometimes because of what happens to the companies they belong to. They are usually brought down through guilt by association. For example, if Nvidia disappoints — and from the way the stock acting now, it could bring down so many different stocks that it is almost worth holding off on any chip stocks until after Wednesday’s close. Unlike Palantir, Nvidia worries me because it has trillions of dollars in market cap and is owned by a lot of people who just understand the buzzwords of GPUs, or graphics processing units. It has been a bit of an Atlas toting this semi group around on its back with seeming ease, but that doesn’t mean the lifting isn’t heavy. You bring Nvidia shares down 20%, you bring down a huge number of fellow travelers. But I don’t think the people who own the fellow travelers know, or even care. They are along for the ride and they think that unless a company is regulatory hot water — like Super Micro , which is reportedly under federal investigation for its accounting practices — they are safe. The stocks wouldn’t have gone up to begin with if there were issues, they say, another bit of circular reason that rationalizes and justifies holding onto shares. However, the stocks that are going the most extreme parabolic now aren’t like Palantir, which is profitable, or Nvidia, which is immensely profitable. They are chiefly uranium and space flight plays, the former on hope that there will be a nuclear power renaissance and the latter because people want to find the next SpaceX before CEO Elon Musk sees his net worth go even higher; The company is being valued at $225 billion already. Both are slim reed investment themes. The nuclear renaissance will take at least seven years by even the most bullish of projections — meaning the start to finish of a greenfield production. And the space sector, while it has some very good companies included it in it, does not have a lot of hardcore fundamentals like earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization), or in some cases, revenues behind it. Consequently, while I am not doctrinaire, and I am the only person on television who encourages speculation — as long as it is done wisely with some knowledge of the company and its near- and long-term possibilities and it is only a small part of your portfolio — I do think parabolic stock moves force you to buy and trade. As someone who believes in buying and holding unless something goes wrong or the stock has gone parabolic, I feel it is incumbent upon me to tell you to take something off the table. There are, of course, two problems with my glib suggestion to take profits. First, if you take too much profit, there’s not enough left to make money. And second, you don’t know how to get back in. There’s no level with a stock that’s broken from a parabolic moment where it is safe to buy. So, my words of caution become a scold: “You kept me out of this for no good reason.” Which brings me — sorry about the roundabout — to last week, the post-election hangover. We saw lots of growth stocks pirouette and lots of food and drink stocks (I could call them Robert F. Kennedy Jr. stocks but I don’t want to personalize it) get wrecked. The latter had been coming down all week, perhaps because so many saw this RFK Jr.’s nomination to secretary of the Health and Human Services Department coming. But the collapse of the growth stocks was, in many cases, very much the unwinding of parabolas large and small. Why? Take Amazon . Here’s one of my absolute favorite stocks for my trust. When it broke down two quarters ago, getting hammered down into the low $160s, I am on record urging you to buy it. It walked up and then shot up right after the last quarter. Last week the stock hit $213. And then, with the proverbial eye blink, it fell $11 on Friday. On nothing. To me, this was a sickening beginning of some sort of decline that I have failed to take profits in. I can justify my thinking by saying we are in it for the long term. But that’s just Buffett-like nonsense, which Warren himself has been violating with his endless selling of the stock of Apple . The truth is that a parabolic move also inspires tremendous regret and recrimination. A really incredible trader would have sold some Thursday to be able to buy some back this week. If you didn’t sell though, and most of us mortals didn’t, you are now hung with nothing you can buy back and are doomed to what the market might give you. None of this would matter had the slope been less like Everest and more like Kilimanjaro. In other words, a parabolic move forces you to trade and yet we don’t do it. So we get caught with a case like Amazon, with nothing to do if it keeps going lower. I didn’t sell, and it is so far away from my basis, how can I justify buying more than a tiny amount? The good news with Amazon is that it’s profitable and there is plenty of good news ahead. Most parabolic stocks have no such positives coming their way. That’s what worries me. The combination of the realization that the surprising President-elect is offering surprising candidates for jobs — the oxymoronic nature of someone who surprises routinely picking surprising candidates is not lost on me —and a fractious bond market with the 10-year Treasury note driven ineluctably to 5% is now generating a ton of profit-taking. The profit-taking will hit the parabolic stocks the hardest. I suspect that these days will breed more fear, as we sense that the nation elected someone who seems to pick people just from the Fox News roster (hey, I worked there, I have the right to say it), and not much more. While Fox was extremely well run when I worked there and has continued its winning ways, the picks aren’t inspiring confidence among Democrats or Republicans. The latter, we expect, will roll over and champion these picks, so they seem like proverbial locks for the job even as it seems that some were picked almost in jest of the system. Even Richard Nixon at his most quizzically heinous would sense there was too much irony in picking someone who had been investigated by the Justice Department to run the Justice Department . I’m most concerned that the speed of this unabashed attempt to drain the swamp is taming and may even suffocate the animal spirits in the stock market. What are we doing about it? We, fortunately, own stocks with actual earnings and sales. The collapse of their parabolas will be like that of Amazon. We will get to buy, but not what we sold because we didn’t sell any. But if you peruse your portfolio and you see a lot of stocks in the VanEck Uranium and Nuclear ETF and somehow think they are diversified, I would “risk” taking some off the table. I would do the same thing with the stocks like AST SpaceMobile . The selling is not perilous. It is smart, even if it looks dumb as soon as the next day. If we just had Washington fireworks, we could handle it. If we just had the 10-year bond move to 5%, I wouldn’t even bother addressing the hidden dangers behind parabolic moves. But we have both. My late mother-in-law used to say — endlessly I might add — that if you have too much fun, someone will get hurt. That often kept us from having even a modicum of fun. Right now, there’s been much more than a modicum of fun. Time to take some profits in the unprofitable names, even if it seems like you are leaving a lot of gains on the table. Don’t worry, you aren’t. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Alex Karp, co-founder and CEO of Palantir, arrives for a U.S. Senate bipartisan Artificial Intelligence Insight Forum at the U.S. Capitol in Washington, D.C., on Sept. 13, 2023.
Stefani Reynolds | Afp | Getty Images
People always ask me why I dislike parabolic moves. The answer is simple: When a stock rises significantly in a short period — resulting in a price chart that resembles the curve of a parabola — it goes down far faster than it can creep up, for whatever reason. Consider a parabolic move from a stock that goes from $18 to $30 over the course of 12 sessions. It will go back down, maybe not to $18, but certainly close to it in three days. You will give back some, but not all, of the gain if you got in at $21. However, you will most likely have given up all, and perhaps more, if you bought above $21.
Tagged Amazon.com Inc, Apple Inc, AST SpaceMobile Inc, big picture, Breaking News: Markets, business news, GameStop Corp, Investment strategy, Jim Cramer, Markets, NASDAQ 100 Index, NVIDIA Corp, Palantir Technologies Inc, S&P 500 Index, Super Micro Computer Inc, VanEck Uranium+Nuclear Energy ETF, Vistra Corp