Palantir Momentum Hits Full Steam

Palantir

Market momentum is Green. Stocks with heavy short interest, high valuations, and low profits… are all squeezing higher. As I noted yesterday, hedge funds and leveraged funds were heavily shorting the market, exposing them to a short squeeze. I’ll break those numbers down in today’s issue.

Momentum trades continued to perform quite well in this short-term environment. Before I jump into Palantir, did you see Standard Lithium (SLI)? It’s a company that aims to reduce the time needed to extract lithium from the earth’s crust. Shares have popped more than 20% since momentum turned positive this week. 

It’s not like this company has a good balance sheet. Margins are negative. Return on equity is negative. EBIT is negative. But in this market – shares are roaring. Buyer beware. Because its liquidation value is under $1.00. 

Meanwhile at Palantir

Palantir (PLTR) is a company that mystifies me. I didn’t really understand what it did for a long time except for “artificial intelligence” and “government contracts.” Today, it is one of the primary beneficiaries of government demand for “facial recognition” technologies. Right now, 18 of 24 government agencies are using this technology. 

In addition, the companies benefit from the ongoing demand for data and analytics services at the government level. Today, Raymond James upgraded the stock, calling it a “cultural unicorn” with an addressable market of nearly $120 billion. 

The company generated $500 million in revenue for the first time in 2016, after 13 years in business. But it doubled that figure by 2020. And now it’s on pace to hit $2 billion. Raymond James slapped a $20 price target on the stock. But here’s what I know…

Palantir is a momentum stock that trades much like Charge Point (CHPT), Nikola (NKLA), Rivian (RIVN), and Lucid Group (LCID). So, it will trade on the whims of the bulls and the bears. Speculating on a big move higher doesn’t benefit investors right now. But if you’re going long with this stock, consider trading it for a “lower price.”

Puts Versus Credit Spreads

Right now, the PLTR $7.00 put for November 18, 2022, trades at $0.41.That represents a 6.2% return over 120 days and gives investors a chance to buy the stock at a breakeven level of $6.59 if shares fall to that level. 

But you don’t need $659 for 100 shares. You can sell a credit spread instead:

  • You can sell the $7.00 put and purchase the $6.00 put for protection. 
  • You’d sell the $7 put for $0.41 and buy the $6 put for $0.25. 
  • That gives you a credit of $0.16 on top of $0.84 in the spread. 
  • That’s a 19% return with an 82.5% probability of profit. 

Finally

Yesterday, I showed you the Commitment of Traders chart. As you can see, funds are well overleveraged on short positions. Because of these positions, even low volume pops can push these markets into a screaming rally. 

Tomorrow, we’ll receive an update from the CFTC on the positions of asset managers. I anticipate that we’ll see a movement toward “net positive.” However, I don’t think that this rally will have shaken out these positions entirely. 

As we head into next week, several economic issues could push the markets lower. In addition to multiple earnings reports from various tech leaders, we also have the Federal Reserve’s meeting on interest rates, an update on Q2 GDP (that could signal a recession), and numbers around housing costs (that may drive inflation higher).

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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