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AMC FUD Runneth Over: Panic at the Casino!

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My Marine son made over 300% on his AMC Entertainment (AMC - Free Report) shares this month that he bought in the teens. And even though he never called himself an "ape" as the kids do, he was following a lot of intel from message boards like Reddit's WallStreetBets.

It all started when he returned home from a deployment in the Middle East before Thanksgiving. He and his wife were getting more interested in investing options as their savings accumulated. I had already helped him pick some long-term funds a few years prior, but wanted to get them exposed to the cutting-edges of technology in ARK Invest funds like the ARK Innovation ETF (ARKK - Free Report) .

So we planned a pow-wow for Christmas to map it all out. But, as you may know, ARK "disruptive innovation" stocks went on a tear and the ARKK rallied nearly 50% in November and December.

Among the big winners, I saw my favorite CRISPR play Editas Medicine (EDIT - Free Report) soar 200% in just a few weeks. There was definitely some epic short-squeezing going on there!

And we bought Baidu right before it lifted off out of an 18-month base around $120. It went to $350 on Cathie Wood's blessing (and shorts getting squeezed). So I didn't want to put them on the ARK rocket after such extreme performance.

I told them that we'd wait and see what January brings. But I guess I forgot that feeling when you've got ready cash for the market and you just watch it keep going higher. My gamer son was also asking me about Advanced Micro Devices (AMD - Free Report) and I thought it looked good to scoop near $90 but that we should really wait for this bubbly market action to subside.

I was looking for a correction that finally came in February. And I taught them how to use a low-ball limit order to catch a spike lower when algos would eventually "run the stops." I told them to place a Buy Limit at $75 and just be patient.

Mission accomplished on March 8. I covered some of that in this piece...

Flush Draw: How to Beat the Algos When They Run the Stops

By the way, AMD popped on huge volume Thursday after being selected by Google Cloud for a new line of datacenter chips.

Will Hedge Funds Slip on the AMC Banana Peel?

Back to my son's AMC story. The Reddit/WSB trading bug bit him sometime in January while he waited for the bigger market correction I kept promising would come. He ended up buying AMC shares between $15 and $16 on the February 1 spike.

That means he had to endure more than a 50% drawdown into the single digits this spring as the initial short-covering mania fizzled out below $20.

But he wanted to hold on and he started to share some of the beliefs of the rising "army" that was going to take on, and take down, the hedge funds who tried to blast AMC into oblivion with their heavy naked short positions. He understood how much he could lose and thought it was worth the risk.

And this month he was finally rewarded with the blast above $60. He sold at $63, still above the highest daily close as I write this on Friday.

Trading vs. Investing and The Distribution of Skill

Last week I attempted to explain to the rest of the army how they had flipped a key "locus of control" in trading on its head. Specifically, I meant that trading is a game of psychology where you must conquer your own bad habits with probability, risk, and profit management and with emotional extremes like euphoria and despair.

But instead of "one person, one trading account" against the market jungle, the Ape Army was evangelizing new recruits under the banner of "Us Against Wall Street." That's definitely not what the greatest traders have learned as a long-term winning strategy. More about that in the video that joins this article.

And so I thought I should point that fact out because a lot of new traders could fall under the delusion that "always buying, ever holding, and never selling" the severely over-valued shares of a movie theater company was a low-risk and repeatable market strategy.

I also addressed the nature of political movements and religious revolutions that captivate the dopamine receptors of our brain at the expense of critical thinking and rational decision-making...

Dear Planet of the AMC Apes: Your Biggest Enemy Isn't Citadel (please read the article first as it's much better than my disorganized video)

And boy did I stoke the ire of the apes! The outrage that I would dare share my market opinions that were not completely aligned with "taking down the hedge funds" was amazing.

On Twitter and StockTwits I fielded their insults, confusion, and questions of all types, from the accusatory and sarcastic to the rhetorical and genuine. Many complainers were obsessed with notions that I was calling all apes "inexperienced" or "dumb" and that they were "all" about to lose their money.

I had assumed it was obvious that any endeavor with a sizable population of participants will necessarily have a wide distribution of skill and performance for that activity.

So I tried to elaborate with an example to help explain why the group-think was dangerous. I started a thread on StockTwits about the bell curve distribution of skill in one of the hardest jobs on the planet: trading.

You can read that thread without logging-in to either social media site with this link: Many Thousands Will Get Fooled on This Slippery Curve

One of the reasons the thread got a fair amount of "attention" is that veteran Street gumshoe Charlie Gasparino re-tweeted it as must reading for apes. Apparently, he's not on the good side of the AMC fan club either. And he probably works for Citadel like me (I kid).

My basic message is this: when you consider that the Ape Army could be anywhere between 1 million and 10 million strong, there will be at least 2% of that population with very little market understanding or experience. That means a group of people anywhere between 20,000 and 200,000 could end up losing more money than they bargained for.

Why Did Amazon Pay $8.5 Billion for MGM Studios?

In the video that accompanies this article, I discuss these possibilities and also address all the claims that I must be a "paid shill for Citadel" and so on. But all I really want to do is to get as many as possible in the army to look at their due diligence outside of the naked short thesis and the patriotic "fight" to reform Wall Street.

For example, it's definitely worth asking what AMC is worth. I know, I know. Don't talk about valuations like I did in "AMC Worth 10X Sales? Not So Fast Roaring Kitties."

Apes are definitely not in the trade because they have an idea of what AMC Entertainment should be worth. They are just in it for the short-squeeze. Oh, and to teach evil hedge funds a lesson. And to re-invent the stock market as a place where the little trader is always guaranteed to make money. And... you get the idea.

But when Amazon struck a deal worth $8.5 billion to acquire MGM Studios, it must make you think about valuations, right? Why did Bezos pay that sum and for what? For a massive content library that he can monetize over time.

What will apes own when they finally get their wishes come true and AMC shares are trading over the moon, say $100 or higher? Well, for starters, they will own a $50 billion movie theater which might recover to peak sales of $5 billion -- next year. Hmmm... so AMC is worth over 5 times more than MGM Studios library?

Of Market Fables and Casino Tables: Don't Slip on This Banana Peel

So if it's really all about the short-squeeze, then it's not really an investment. So no apes are really investors reforming Wall Street.

And if it's really all about the short-squeeze, it also becomes a very slippery trade at some point.

Because who will tell you when it's time to get out? And can all the apes get out at once before the price is much, much lower (and under their cost basis)? The pros know where they are going to get out and when. They have their levels and methods. And their bluffs. Because this is high-stakes poker for them.

But they are not going to tell you anything to tip their hand. As I often describe, there are many highly-skilled predators in the market jungle who you will never see or hear from. They take most of the money from casino tables and all with legal methods. They live for volatility, fantastic stories that create bubbles, and inexperienced traders to push the fables higher.

And while lots of apes talk about their cost basis being near $10, what about the new comers? Everyone being encouraged to buy-and-never-sell up in the $50s is raising their average cost basis up, up, and away into the canopy tree tops of a valuation that is bigger than Viacom, whose market capitalization roughly equals its annual revenues near $28 billion.

When the short-squeeze ends, no one will know it's coming. It will be fast and epic. In fact, there will be a few false signals that get people to buy back in, like when it hits the $70s again, drops 20% (scaring and convincing lots of folks "that was it!"), and then rallies again, giving big FOMO to those who don't want to miss the train to $100. Then it will fall hard in some double or triple-top scenarios.

The painful scenarios are actually plentiful. Because this will go down so much faster than it went up.

So instead of trading the slippery AMC, whose market value equaled 25% of Goldman Sachs when shares reached over above $60 last week (gee, which apes were selling up there?), I recommend stocks like AMD and NVIDIA (NVDA - Free Report) whose price target got bumped again this month to over $850.

NVDA is an amazing juggernaut of innovation in chips, software, automation and data. If you can't find a story every week about where they are busting new ground, you just don't know where to look. This week we're talking about autonomous trucking company TuSimple expanding operations in Texas using NVIDIA-powered Navistar technology.

And how about this under-the-radar application of Jensen & Co. engineering power...

NVIDIA Unveils Jetson AGX Xavier Industrial Module

New ruggedized module is engineered to bring AI to harsh, safety-critical environments (from a June 15 NVIDIA blog release):

From factories and farms to refineries and construction sites, the world is full of places that are hot, dirty, noisy, potentially dangerous — and critical to keeping industry humming.

These places all need inspection and maintenance alongside their everyday operations, but, given safety concerns and working conditions, it’s not always best to send in humans.

Robotics and automation are increasingly used in manufacturing, agriculture, construction, energy, government and other industries, but many companies have struggled to incorporate the benefits of AI and deep learning in the most demanding applications.

With the new NVIDIA Jetson AGX Xavier Industrial module, NVIDIA is making it possible to deploy AI at the edge in harsh environments where safety and reliability are critical priorities.

(end of NVIDIA blog excerpt)

I own both AMD and NVIDIA and I told investors earlier this month, if you didn't want to touch NVDA over $600, to definitely grab AMD near $80. They have big, bright futures ahead in technology innovation and disruption. It's the stuff movies are made of.

Speaking of movies, they've always been the dream factories. And so I want AMC Entertainment to succeed and once again become a thriving business that we get to enjoy with our popcorn and imaginations.

Now that bankruptcy is off the table, I'm just trying to get the Ape Army to be realistic and honest with their troops about how the campaign to make it worth more than Viacom is... just bananas.

Bottom line: Buy AMD kind of things, Not AMC kind of flings.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research. He cut his trading teeth in the pits of the Chicago Mercantile Exchange before becoming an interbank currency trader dealing over $100 million per day. He is the creator of the trader training simulation known as The Scylla & Charybdis.

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