What Will Happen To Netflix When A Bear Market Starts

fab 5 stocks

Continuation from yesterday……(Trading Netflix Using BLSH)

Netflix’s stock price broke above its higher high and down slopping trend line in January of 2012, suggesting that the decline was now over. As a result, our short position should have been covered at approximately $75 a share in January of 2012 or as soon as this confirmation was obtained.

Trade #3: Cover your short position at $75 and go long at the same time/price. Trade net realized gain $160 or 68%. Net realized gain up to date $395 or 1,480%.

Before surging higher in 2012 the stock re-tested its lows in the mid and late 2012. Setting in a lower low in the process. Investors should have been very careful at this juncture. A consideration should have been given to the fact that the decline was not over and that we might have gotten back into the stock a little too early. Luckily, the stock never broke below its critical support levels before rebounding and initiating its come back rally.

That brings us to today. As of September 2014, Netflix’s stock price trades in the $425-475 range. Yet, a bear market is brewing on the horizon. The overall stock market is selling at unsustainable valuation levels and Netflix’s stock is, once again, pushing into a bubble territory. In other words, the stock market is possibly sitting on a verge of a massive sell off and the Netflix might lead it down. As a result, investors in the stock should be watching the situation very carefully. Ready to liquidate their net long position and to go short as soon as some sort of a confirmation is obtained.

Proposed Trade #4: Liquidate your long position at $430 and go short at the same price/time. Net realized gain $355 or 473%. Net realized gain up to date $745 or 2,900%.

Compare this return to the Buy & Hold strategy ROI of 1,800% and you begin to realize just how powerful this approach is. And that is before an upcoming bear market leg develops. If Netflix’s stock price declines just 30% in a bear market, the Buy & Hold strategy ROI will slide to 1,200%. That is while Buy Low, Sell High, Go Short & Cover investment strategy ROI will zoom up to 3,480%. Proving, once again, the validity of the strategy.

Justifiably, some will argue that constant trading in and out of your position can increase capital gains taxes and therefore reduce returns. Let’s take a quick look at the numbers based on the Netflix’s trading pattern above to settle the matter once and for all. First, we have to make the following assumptions.

You fall into the 25-35% tax bracket and your long-term capital gains tax is 15%.
Your average ordinary income tax is 30%.
We liquidated our position as of today at $460. Giving us a net realized total return of 1,740% for “Buy and Hold” and 3,020% for “BLSH”.
Original investment of $100,000

To Be Continued Tomorrow…….