BK: Take profits in $NFLX without hesitation.
I couldn’t agree more with Dan about the NFLX move to all time highs on a stock split – this is the most absurd reason to invest in a stock. But hey, dumber strategies have worked.
My view on Netflix was that once HBO went over the top the NFLX business model was broken. I thought competition would stall sub growth as more choices became available. The exact opposite happened. The wave of offerings made more people switch to Netflix. As they say in Hollywood – there is no such thing as bad publicity.
All that being said, it is clear Netflix is at a crescendo of euphoria. When caught up in the hype and excitement it is almost impossible to recognize that it may be time to take profits. In order to remain calm in an exciting situation I use one of the more reliable financial market relationships… reversion to the mean.
The following chart is a regression channel with the outer channel lines set at 2 standard deviations:
This chart puts the recent move in perspective – at 2 standard deviations above the mean one would expect a move like this to occur less than 5% of the time. This means that we have probably reached a near term top – statistics would suggest that 95% of the prices should lie below NFLX current price.
Of course trading is part art and part science. But when a stock moves this far this fast, BK takes profits without hesitation.