In a few weeks, Americans will hit the road and kick off a busy five-week travel period between Thanksgiving and New Year’s Day. Many Americans are looking forward to traveling for the holidays to see family and friends, after lockdowns and COVID-19 waves hindered their plans last year.

But the airline industry is facing a new problem.

The current labor shortage could create another set of challenges for an industry in need of recovery.

Cancellations Boom

By 7:30 a.m. on Monday, American Airlines had canceled 262 flights. The numbers continued to snowball throughout the day.

Between Friday and Monday morning, the company had announced more than 2,200 cancellations. While the company cited some weather disruptions, an ongoing staff shortage has hammered it.

But American isn’t the only one. In August, Spirit Airlines canceled more than 2,800 flights in 11 days due to labor shortages and weather.

Then in October, Southwest canceled about 2,000 flights for the same reasons.

We can look back to the onset of the COVID-19 crisis for the start of this trend. Once the pandemic started, airline companies offered generous retirement packages and extended leaves of absence for their employees.

But when demand returned, the companies struggled to return enough employees. As a result, the companies have a shortage of groundworkers, mechanics, pilots, bag handlers, and crew.

Ahead of this busy travel period, airlines are struggling to bring back workers from extended leave, recruit new talent, and manage their flight schedules. With a smaller workforce, one day of bad weather can lead to many employees being stuck in different places, making it difficult to ensure that planes have a full crew to take off.

Simply put, the airline industry was too aggressive in its approach to the COVID-19 outbreak and expected demand for 2020 and 2021. However, it’s difficult to fault them. At the start of the crisis, it was challenging to predict the future.

Airlines Are Not Alone

It’s not just airlines that are struggling with staff shortages. Retail stores, restaurants, hotels, hospitals, and even schools are facing the same issue.

Even technology companies are now struggling to fill highly coveted, high-paying jobs in the engineering space. A recent survey of technology executives by CNBC showed that finding talent is now their biggest concern. The Technology Executive Council survey showed that 57% of technology executives list talent recruitment as the largest concern for their companies.

That figure is well above the 26% who listed supply chain disruptions and 20% who listed cybersecurity as their top concern.

And remember — it’s not just recruiting talent. It’s also a challenge for these companies to maintain their current workforces. With wages increasing, workers are taking their talent elsewhere for a bigger payday.

Pilot Problems

Pilots have highly specialized skills, and a shortage looms for the industry. Thousands of pilots decided to retire or were laid off as COVID-19 ravaged the sector.

But more problems face the industry as airlines try to bring pilots back. Government vaccine mandates and travel curbs have kept many pilots on the sidelines.

In addition, there are concerns among many employees about the long-term stability of their jobs. Following COVID-19, airline workers might look at the sector with new eyes.

COVID-19 produced several trends that reduced the need for business travel, such as videoconferencing. And we’ve witnessed a wave of unruly passengers on planes, raising safety concerns.

Governments around the globe are looking to curb carbon emissions, and such policies could drive up costs and reduce flight demand.

Finally, there is the obvious hiring challenge: training. It can take up to two years to train a pilot. So anyone who is thinking about making that career change to take advantage of this new demand won’t be around to fill a job until late 2023.

According to management consulting company Oliver Wyman, demand for pilots will start to aggressively outpace the available supply starting in January 2022. As a result, a global gap of 34,000 pilots could occur by 2025. This is the most likely scenario, they write; however, that figure could surpass 50,000 under more extreme circumstances.

The consultancy notes that North American carriers will see a shortage of 12,000 pilots by 2023.

Naturally, this is going to be a serious problem for airline companies moving forward. Moreover, today’s labor shortages in pilots, truckers, and other critical transportation workers could easily extend our supply chain crisis much further than officials have projected.

Tomorrow, I’ll discuss one company that will benefit from the labor shortage and showcase how to trade it using options.

As I said yesterday, COVID-19 is the “Pearl Harbor moment” of our times.

Both came as tragic and deadly surprises, despite some early warning signs.

Both events set changes in motion that shaped the economy for decades to come.

We also spoke about a few of the changes COVID-19 is bringing, such as the shift to working and living remotely and the economic consequences.

Today, let’s look deeper at another one of these trends:

The future of delivery.

I’m Looking Long Term

… All with an eye on what stocks to buy today for 2030, not for 2023.

I’m sure it’s not a surprise to hear that department stores and malls are dying.

Research firm Green Street Advisors predicts their demise is coming this year.

More than half of all department stores based in malls will close by Jan. 1, 2022, according to their research.

Those malls are likely to close with them. After all, Green Street Advisors estimates that department stores account for almost one-third of all mall real estate.

The virus is speeding up the process, of course. But there’s been a long-term trend away from malls and department stores for years.

Which is why it’s safe to say there will be no comeback after COVID-19.

There are plenty of underlying reasons.

The rise of Amazon and e-commerce tends to get most of the blame. But the fact is, changing marketing strategies and social media are probably just as guilty.

See, department stores flourished when they were a mark of quality and taste. Macy’s, Nordstrom, Bloomingdale’s — this is where we went to figure out what we wanted to buy. We trusted that the department stores would show us the best of the best.

But the rise of the internet and especially social media changed that. Companies started connecting with us directly, building brand loyalty and a following. We started hearing word-of-mouth reviews from people all over the country.

Once that happened, there was no point in having department stores anymore. Thanks to the internet, we already knew what we wanted and why and didn’t need department stores to curate it for us.

The ease of online shopping helped, of course. And that’s a piece of the puzzle that exploded during the pandemic. According to software company Adobe, the pandemic sent total online spending up to $82.5 billion in May last year.

That is 77% higher than in May 2019. Analysts hadn’t expected online shopping to be that popular until 2024 or even 2026.

I don’t bring this up to tell you that Amazon is a good investment.

For one, Amazon may be the leader in online shopping, but it’s far from the only one.

Shopify, Walmart, and Target continue to fortify themselves as strong competitors in the e-commerce space.

Why E-Commerce Matters

I bring up e-commerce so we can focus on the longer-term, underlying trends. Because by ordering everything online for delivery to our homes, we’ve made the delivery process a lot harder.

And that’s creating substantial investment opportunities.

Malls and department stores used to serve a vital function: last-mile storage. These stores would keep most of what we wanted in stock for us to buy and drive home ourselves.

Today, we want everything delivered to our doorsteps. And that’s led to a huge increase in demand for small warehouses.

We call these “last-mile” storage facilities because they are where goods get put on delivery trucks. Those tend to drive only a few miles before delivering goods to your home.

That means these last-mile facilities have to be local, close to where people live. Especially as we start demanding more and more things be delivered in just one or two days.

COVID-19 has supercharged the growth in this area, which includes more than just the companies building last-mile warehouses.

We want to focus on the companies working to make last-mile delivery vehicles more efficient or automated.

Some companies are even looking at having drones fly your packages to your home.

There are plenty of opportunities for companies to win market share here. For example, logistics company Storage Solutions claims that 53% of delivery costs come from that last mile.

So, we want to dig deeper into the companies poised to succeed in this area. And we will very soon.

All in all, research company Technavio expects the last-mile delivery market to grow at a compound growth rate of 16% a year through 2025. That will mean a $59.81 billion increase in the market’s value.

That makes this a great area to invest in for the long term.

Even the malls and stores that survive will have to adapt. Last May, the value of goods purchased online and picked up in stores almost tripled compared to the year before.

That means stores have to devote more and more of their square footage to last-mile storage.

This could be another boon for the real estate companies investing in this space. I will dig into the REITs that dominate the last-mile market on Monday.

On Dec. 7, 1941, the Empire of Japan launched a surprise attack on Pearl Harbor.

The losses were tragic: 2,335 Americans died, four U.S. battleships sank, and the financial costs were astronomical.

It’s a date that, as President Franklin D. Roosevelt told Congress the next day, “will live in infamy.”

Today, many of us already think of the COVID-19 pandemic as another tragedy that “will live in infamy.”

And while the two events are very different in many ways, one thing is clear.

Historians will look back at both as the beginning of considerable changes to our society and economy. After all, Congress declared war on the Empire of Japan less than an hour after Roosevelt’s speech.

The next four years brought untold pain and suffering.

But tragedies like these also tend to foster change and innovation.

After all, necessity is the mother of invention. And so the war effort set wheels turning that eventually brought us radar, jet engines, and MRIs.

Even nuclear power and better, cheaper cars can be traced back to the war.

Changes Are Coming

The COVID-19 pandemic is already leaving a significant mark on our future. Now, I don’t mean short-term changes.

COVID-19 put a dent in Walt Disney World profits, for example. But the resort will probably still be here in 2030.

Department stores might not be.

That’s the kind of trend I’m thinking of. Trends that determine what stocks we should buy today with an eye not on 2023 but 2030.

The most important trend like this that COVID-19 set in motion is our shift to “remote everything.” Here’s what I mean.

When COVID-19 came to our shores in the early spring of 2020, millions of businesses closed down their offices. Americans across the country were sent home, many to work remotely.

About 40 million Americans took part in this work-from-home experiment. And many of us liked it.

Freelancing platform Upwork now estimates that more than one in four Americans will work remotely through 2021.

And by 2025, it expects that to be permanent for more than 36 million Americans, or 22% of the workforce.

That’s going to have enormous consequences for the economy. For one, real estate will change forever. The value of office space in downtown areas will fall. On the other hand, less cramped, more comfortable housing will grow in value.

And being close to work will be less and less important to home buyers.

Last year’s crazy housing boom is just the first sign of what’s to come here.

The need for affordable housing will continue to accelerate. Congress is looking to provide more subsidies and more affordable options to revolutionize housing around the nation. This is positive for companies like Meritage Homes Corp. (MTH). The company maintains a strong balance sheet, has little debt, and sits in the Green Zone on TradeSmith Finance. As a result, the homebuilder continues to climb higher.

More Than Housing

But making work remote is only one of the changes COVID-19 has brought us. After all, millions of us were stuck at home last year, even outside of work hours.

We weren’t just working remotely. We were living remotely.

When it came to buying or selling our homes or cars, for example, old rituals were suddenly upended. Gone are the days of getting sellers, buyers, and agents together in one room to sign stacks of paper.

Because of COVID-19, that’s now all done remotely.

Depending on where you are and what you’re buying, you might be able to do it all online. Elsewhere, a mobile notary can come to you with all the paperwork.

According to airSlate, an e-signature company, the use of online signing services jumped 50% last year.

And 69% of Americans want to keep signing documents online rather than in person.

DocuSign (DOCU) is another company to watch. The Green Zone stock is in a sideways momentum trend. It’s on our radar for the long term. It’s another company that had a strong year and helped eliminate its debt and fortify its balance sheet.

As for picking out the homes or cars to buy, we’ve also turned to doing it online. And we’re showing no signs of stopping after COVID-19.

Online house-buying website Zillow (Z), for example, reported a 41% increase in web traffic last fall. Its competitors Redfin (RDFN) and Realtor.com are seeing similar trends. 63% of house buyers in November and December made offers on houses they hadn’t even seen in person, according to Redfin.

But we’re still in the early days of this trend.

A house listing online may be good if it has decent pictures, for example.

But it can’t compare to seeing it in person. We’re still in the stage of compromise here. New technology could change this.

Imagine this: You find a house you like online.

You take a look at the photos the agent has posted. Maybe you even use the wonky feature that splices together panoramic photos to make it look like you’re inside the home.

But that doesn’t give you a feel for the place.

So instead, you don your virtual reality (VR) goggles and explore a complete 3D model of the house. Maybe you even control a drone as it flies through the house in real time.

This may sound far-fetched, but some housebuilders are already experimenting with virtual reality. It helps them make sure they are building exactly what their clients want to buy.

Doing the same for existing houses is the natural next step.

I expect other aspects of working and living remotely to change in similar ways. Expect remote work meetings, document signings, even virtual hangouts with friends to change. By a lot, and faster than you might expect.

This is why we’re watching the companies behind VR. Semiconductor stocks have been in focus due to the ongoing shortage of chips around the globe. However, we want to look to the long term as these chips grow stronger and more powerful and help revolutionize the post-COVID-19 world.

The stock I want to add to our Watch List is Intel Corp. (INTC). Yes, the stock is currently in the Yellow Zone and in a side-trend for momentum. However, after the company lost a major contract with Apple, it set its sights on reclaiming global market share. The company recently claimed that it would have the most powerful semiconductor chips on the market within the next three years.

And given that the stock has fallen a little out of favor, we will look to INTC as a potential buy when we see a return of buying momentum into the stock.

Looking Forward

The post-COVID-19 economy is going to be very different from what it was before the pandemic. I know that there will be a lot of change, which can be a bit scary. But, if you’re an investor, embrace the change and the innovation. This is a chance to make real money from the biggest shift of the world’s top economy since World War II.

We’ll discuss more opportunities in the coming days.

This week, Elon Musk announced that Tesla was building an android to complete repetitive and dangerous work tasks. Musk did not say how much it would cost, but the robot quickly fueled reminders of the film “Blade Runner”at best or nightmares at worst, depending on how you handled this image.

It’s another engineering marvel that Tesla has added to its arsenal. In recent years, Musk — best known for his company’s electric automobiles — has unveiled a tunnel construction company, cybertrucks, advancements in solar energy, and, of course, flamethrowers.

But there’s another massive project that has investors quite optimistic about the company’s future: battery technology.

Today, I want to highlight a few advancements in its battery storage business and explain why Tesla is quickly maturing into more than just a car company.

Tesla Versus Volkswagen

One of the great puzzles for Tesla bears in recent years has centered around the automotive business.

Tesla has been the world’s largest producer of electric vehicles (EVs) for years. However, the German automotive powerhouse Volkswagen is expected to surpass Tesla in EV production in the next few years. According to a Volkswagen executive, this move by the German firm could come as soon as 2023.

So, how does Tesla trade at a P/E ratio above 369, while Volkswagen’s is just 7.77?

How does Volkswagen trade at a price-to-tangible book value under 1, while Tesla’s price-to-tangible book value is 28.58?

Seriously, Volkswagen is worth less than the sum of its parts, but Tesla is worth more than 28 times its tangible assets’ value?

This suggests that either investors have made an egregious error in judgment, or they anticipate an incredible wave of growth and expansion by Tesla. Volkswagen is a great company, but it does remain a one-trick pony in the automotive sector.

Why are Tesla investors willing to pay more than $700 per share?

It’s not the automobiles, it’s…

Tesla’s Grid Power

When Musk unveiled his android last week, he argued that it would profoundly impact the economy.

Most of Tesla’s innovations feel fantastical. But with enough brainpower and advancements in technology, the company continues to bring forward staggering innovation.

The company has been well ahead of almost everyone on climate technology. Right now, venture capital companies are pouring more and more money into technology to reduce carbon emissions, mitigate climate events, and alter the way that energy is produced and stored.

Over the first six months of 2021, venture capital companies invested $14.2 billion in climate technologies. According to PitchBook, that figure is on pace to shatter the annual record set in 2018 of $17.9 billion in climate tech investment.

One of the hottest investment avenues is in the energy storage space. The capacity for new energy storage systems is expected to be five times larger than what we witnessed in 2020. But it’s clear to me that all of this early-stage money is chasing Tesla.

Tesla owns a subsidiary called Gambit Energy Storage, and it has created a 100-megawatt energy storage facility that could plug directly into the Texas state energy infrastructure. The result would be enough stored energy to power 20,000 homes on a hot day if the rest of the power grid buckles.

Tesla would store energy for the grid companies and then sell the electricity when prices get high or emergencies impact regular transmission.

This couldn’t be a more timely pursuit. In the wake of the massive cold snap that took down the Texas energy grid earlier this year, and the recent storms that battered the Northeast, backup power generation will be critical in the future. And it’s not just because of potential weather events. It’s also needed to store energy produced by non-carbon-based energy systems.

Before the Texas project launched, Tesla created a battery project beside a wind farm in Southern Australia. When launched, the 100-megawatt project was the largest battery product in the world and could collect and store energy produced from nearby windmills.

This project came a year after the South Australia region experienced a near-complete blackout due to a massive weather event that produced two tornadoes and nearly 80,000 lightning strikes. Tesla’s goal was to reestablish power in the region in less than 100 days by using its Powerpack lithium-ion batteries.

It completed the project in about 60 days.

The Future of Energy

Tesla’s energy division continues to create new battery systems across the United States. For example, its 20-megawatt battery system supports grid operations in Southern California, a region that faces a reckoning for hydroelectric power due to dwindling water supplies. It also has created a 182.5-megawatt system in the San Francisco Bay region to assist the Pacific Gas and Electric Company (PG&E), which has faced incredible challenges since the wildfires ravaged the area a few years ago.

According to research firm Piper Sandler, Tesla’s energy business represents 6% of its revenue today. However, it projects that the energy division may account for up to 30% of revenue by 2030.

Tesla is one of the most-watched stocks on Wall Street. At TradeSmith Finance, we’re always watching Tesla stock. It’s very volatile.

Right now, TradeSmith Finance shows that Tesla is a Buy in the Green Zone. However, investors should be cautious given that the stock is in a side-trend and has a VQ of 52.17%, which indicates sky-high risk.

Tesla offers immense upside thanks to its innovation and engineering prowess. If you’re going to buy into the stock, be sure to follow our signals to protect your profits and your principal.

I’ll be back tomorrow to talk more about other innovative companies.

The Federal Reserve has canceled its in-person meeting this week in Jackson Hole, Wyoming.

The ongoing spread of the coronavirus delta variant not only threatens the U.S. economy and schools heading into the fall, it is now preventing our central bankers from getting together in ritzy resorts.

The central bank is poised to start the process of tapering its balance sheet. This means it will start to reduce the amount of purchases it makes each month in bonds and mortgage-backed securities.

The central bank has been purchasing $120 billion in these assets since it launched its plan to support the U.S. economy in the wake of COVID-19.

However, the market doesn’t seem to be reacting negatively to the news.

But I want to highlight yet another warning sign flashing red for the market.

Let’s talk about the Fed, and then highlight this “alternative” signal for investors.

Economic Weakness In Sight

The Fed’s decision to move its event to a virtual session is a sign of how seriously the Fed is taking the delta variant. The recent surge of delta cases has been stunning. In early July, the seven-day average of cases hit 13,000.

Last week, that average was 132,000 — and rising.

So one must ask: Is the Fed taking delta’s impact on the economy seriously?

After all, cutting its bond purchasing program would signal it believes that the economy will eventually be healthy enough to stand on its own. Right now, however, there are numbers that suggest concerns not only about the market but the strength of the economic recovery.

Remember that we were going to have a big summer for travel. But an uptick in COVID-19 cases has impacted air travel. The number of people who have gone through Transportation Security Administration checkpoints has fallen by nearly 500,000 daily travelers since early July.

Meanwhile, large financial institutions have slashed their GDP estimates over the last few weeks. Goldman Sachs slashed its Q3 GDP forecast to 5.5%. The bank said that spending on travel, dining, and other sectors that were expected to recover has weakened in August.

Goldman Sachs isn’t alone. Citigroup came in at 4.5% for Q3, with annual GDP projected at 5.9%.

But the Federal Reserve Bank of New York is even more bearish. The N.Y. Fed projects Q3 numbers to come in at 3.5%. That is a cut of about 0.3 percentage points from its previous forecast.

Now, keep in mind that the stock market is not the economy, and the economy is not the stock market. But when the Federal Reserve starts taking action and reducing its balance sheet, many investors are nervous that a reduction in support will be bad for the market.

The expectation is that if the Fed cuts its support, stocks will more closely reflect the state of the economy and rely more on fundamental  analysis.

We’ll continue to monitor that sentiment.

A Warning Sign from the “Alternative Space”

I have shown you various warning signs of a stretched market in recent weeks.

But there’s another one that our team recognized last week.

You’ll recall that I’ve written about closed-end funds in TradeSmith Daily. At the time, I showed a way to buy Warren Buffett’s favorite stocks for 85 cents on the dollar.

I noted that closed-end funds resemble a forgotten relative of mutual funds or traditional exchange-traded funds (ETFs). They have a unique quality that you’ll find in very few places in the public market.

Unlike mutual funds, closed-end funds do not mark to their net asset value (NAV) at the end of the trading day. The net asset value is effectively the true financial value of the fund’s total assets.

So, if there are 100,000 shares and the net asset value is $1,000,000, a fund that does mark to the NAV would be worth $10.

But closed-end funds don’t mark to the true value of the assets. That same fund with 100,000 shares and a NAV of $1,000,000 could trade at $11 per share.

If shares traded at $11, it would mean that the shares traded at a 10% premium to the net asset value.

This phenomenon exists because the shares traded on true behavioral psychology of the market.

Sometimes, closed-end funds trade at a premium, while others trade at a discount. I already pointed out the Buffett stocks trading at a 15% discount.

But let’s point out why a closed-end fund might trade at a premium — and more importantly, what that means for the broader market.

Turning to the Utility Space

In this case, I want to point out three different funds in the utilities space.

Two of the largest utility-focused closed-end funds are trading at a premium to their net asset value.

The Cohen & Steers Infrastructure Fund (UTF) is a portfolio of utility companies in the energy, infrastructure, and water space. It owns shares of big firms like NextEra Energy, American Tower Corp., and Enbridge. Right now, the fund is trading at a 3.77% premium to its NAV.

Source: CEFConnect

UTF is in the TradeSmith Finance Green Zone and is in an uptrend with a medium risk VQ of 20.07%. Our Ratings system shows it as a solid bullish opportunity.

The Reaves Utility Income Fund (UTG) is a utility closed-end fund that owns big stakes in companies like Charter Communications, American Water Works, Verizon Communications, and BCE Inc. This utility fund trades at a 1.14% premium to its NAV.

Source: CEFConnect

UTG is also in the TradeSmith Finance Green Zone, but is currently in a side-trend with a medium risk VQ of 16.94%. It is also solidly bullish within our Ratings system.

The fact that these assets trade at a premium to their net asset value is based on the belief among their investors that the underlying assets will rise in value in the near term.

And what would be a reason why those assets would increase?

Because in times of economic turmoil and stock market turmoil, we see a lot of money shift from blue chip giants and growth stocks to safer sectors like utilities. As we know, everyone needs water, electricity, and now telecommunications in any economy.

The investors who are piling into these funds seem to suggest that they anticipate these moves in the near future.

This could be another important signal to monitor in the markets. I’ll be back tomorrow to talk more about earnings and a few potential rebounds this quarter.

Last night, I watched the first season of the Showtime series “Billions” for the first time in years.

For those who don’t recall, the show — co-produced by CNBC journalist Andrew Ross Sorkin — pits a wealthy hedge fund manager and his web of unethical trading strategies against an ambitious federal prosecutor in Manhattan.

It’s loosely based on former U.S. Attorney for the Southern District of New York Preet Bharara’s pursuit of former hedge fund manager Steven A. Cohen, who now owns the New York Mets and a family office called Point72 Asset Management (converted from S.A.C. Capital Advisors).

The show will kick off its fifth season next month. Though it’s a tad over the top at times, it’s an intriguing drama about a fund manager’s desire to cut corners to make incredible wealth, and the determination of prosecutors to stop insider trading.

There’s also an occasional great lesson about trading itself.

I wanted to share this lesson with you today and why it matters.

This market has been sideways for several months. And this one rule will help you better manage your money.

Ride the Lightning

In the first season, fictional hedge fund manager Bobby Axelrod takes three of his friends on a private jet to Quebec to see the band Metallica.

While they are departing, one of his friends overhears that Axelrod is shorting a transportation company (betting that the stock will go down), and decides to call his broker and short the stock himself.

The decision doesn’t end well for the friend.

As part of the heightened drama of the episode, a rival of the hedge fund manager discovers that Axelrod is shorting.

This rival manipulates the market, creates a false narrative about a potential buyout of the transportation company, and initiates a short squeeze on the stock. When a short squeeze occurs, it can typically force the people shorting a stock to repurchase it at a higher price to cover their positions.

Here’s how that works. Let’s say you want to short a stock that is trading at $50 per share. In this situation, you would borrow the stock from a brokerage or dealer and pay a commission for the right to borrow the stock. At that point, you would sell the borrowed shares on the market. Then, if the stock falls to $40, you could repurchase the stock and give the shares back to the dealer.

In this situation, you borrowed the stock and sold it for $50 on the open market.

Then, you repurchased it for $40 to close the trade.

You have made $10 for every share that you shorted.

But let’s say that you borrowed the stock for $50 and sold it. Then, the stock rallies to $100 because of an unpredictable short squeeze. While everyone else is repurchasing the stock, you might need to do the same. You will lose $50 for every share if you are covering the position.

If you lack the margin in your account to pay that $50, your broker may call margin on you and force you to liquidate other positions or put cash into the account to ensure you can cover the loss.

In the case of Axelrod’s friend, he ended up underwater on this short trade by $210,000. And his broker was calling margin on him.

Now, Axelrod — spoiler alert — acts as a good friend and helps cover the margin (and makes a significant gain in the process).

But right after he helps his friend, he offers a lesson. He explains that he doesn’t hold a position that can cause him to lose more than he can afford.

“I don’t lie to myself, and I don’t hold on to a loser,” Axelrod says. “The moment it doesn’t feel right, I let it go, get away from it.”

This sentiment is brutal to learn when you’re a new investor. But, unfortunately, you might make a very simple mistake that can hurt you in two different ways.

Just Walk Away

I’ve warned before about falling in love with a company and how that can cost you money.

If you buy into a stock and it falls 30%, one of the most common mistakes is believing that it will come back. Playing the waiting game is the failure to recognize a loss.

The failure to sell a big loser is an error — mainly if you’re talking about stocks that have hit their trailing stops, have moved into negative momentum, and can continue to plunge. You might find yourself in such a position, as I noted with the ETFMG Alternative Harvest ETF.

The ETF hit $34.58 in February and stopped out on TradeSmith Finance in March. However, if you were invested in this ETF and stuck in the belief that it would bounce back, you wouldn’t be making the best use of your money. You’ve seen this fund fall by more than 50%. With little institutional buying and continued selling, it’s unclear when and if this will bottom out.

This brings me to the second error: Waiting and waiting and waiting for a bounce back creates an opportunity cost. How long are you willing to wait for a stock or asset to get back to even? For example, if you bought gold at the 2011 highs, you would have waited nearly a decade for the asset to bounce back above that $1,900 level.

Imagine tying up your money hoping for that bounce back while we experienced a decade-long bull market up to 2020.

Learning when to cut your losers is a difficult lesson. That’s why we always encourage our readers to use behavioral tools like trailing stops to help them manage their positions. Remember, every stock has a different historical level of volatility, which means that every stock has a unique trailing stop. I’ll talk more about the TradeSmith VQ Score later next week and how to use it the right way.

Right now, there is a lot of chatter about a potential market downturn in the wake of the Federal Reserve’s decision to taper its assets later this year.

But investors in certain sectors have already witnessed an extensive sell-off in the markets. Right now, more than 69% of all publicly traded stocks are trading below their 50-day moving average. This suggests that even though the S&P 500 is sitting near all-time highs, there has been an onslaught of selling in nano-cap, small-cap, and micro-cap stocks.

If you’re looking for an industry that has been hammered in recent months by a sell-off, look no further than the cannabis industry.  

Cannabis stocks have plunged since February highs, and there doesn’t appear to be any support among buyers in sight.

If you’re a buyer and holder of cannabis stocks in recent months, you need to read what’s happening in this industry.

The Excitement Has Faded… For Now

In July, the U.S. Senate released the draft of a bill that would federally legalize cannabis. The Cannabis Administration and Opportunity Act was supposed to be a massive catalyst for broad legalization in a nation of nearly 330 million people. Most enthusiasts expected that this bill would be the key catalyst that would transform the cannabis industry and make investors rich.

What went wrong for cannabis stocks?

Buried under the headlines was the truth about this sector. Sen. Charles Schumer (D-NY) noted that, despite the all-out approach for this revolutionary bill, Congress might not have enough votes to pass a deal.

Sen. Cory Booker (D-NJ) opposed separate banking reform for cannabis companies, a sticking point for many other politicians.

In addition, the law would have heavily regulated interstate trade and would have included a 25% federal sales tax on cannabis. Finally, President Biden hasn’t endorsed the deal and reportedly prefers slow-but-steady decriminalization instead of a blanket reform.

This was a classic case of “selling the news” by professional traders.

Cronos Group (CRON) shares have fallen from north of $8 to $6.40 over the last 30 days.

Shares of Trulieve Cannabis Corp. (TCNNF) have slumped from above $36 to roughly $28 since the Senate introduced the bill. The pain looks much worse when you see that Trulieve stock traded as high as $53.73 in March 2021.

And Tilray (TLRY)? Hold your nose.

The Canadian cannabis producer’s stock experienced a remarkable short squeeze in February. Shares climbed as high as $67 that month. Today, they’re trading around $13.25. That’s an 80% drop from the 52-week high.

As we always note, it’s critical that you use trailing stops if you’re actively trading and investing in these stocks.

The Breakdown in Cannabis Stocks

The cannabis industry can be an incredible place for investors to make money in the future. After all, the U.S. cannabis industry alone is expected to be worth $100 billion by 2030. This would be a massive surge from the industry’s value of $13.76 billion in 2019, when it was illegal.

Americans are more tolerant and supportive of legalization than ever before. Roughly 67% of U.S. citizens supported legalization last year. That is up from 31% in 2000, according to Pew Research.

But it’s important to note that any new industry — particularly one that is expected to grow at such a breakneck pace — will experience volatility.

Not every cannabis stock had a decline as significant as Tilray.

But if you want to know the health of cannabis investments, look no further than the ETFMG Alternative Harvest ETF (MJ).

This ETF holds shares of 31 companies that would benefit from the ongoing expansion of cannabis consumption in the United States. These include cannabis growers, tobacco producers, greenhouse companies, and many more. Here’s the breakdown of the fund and its exposure to nations with increasingly more liberal policies around cannabis.

And — of course — you’ll see the usual suspects of growers like Tilray, Canopy Growth, Aurora Cannabis, and Cronos Group.

Now, as you know, there has been a significant amount of excitement around cannabis stocks over the last year. Investors continue to celebrate the ongoing legalization of marijuana across the United States.

However, the MJ ETF hasn’t exactly been a source of growth in recent months.

Shares of the ETF are off more than 50% from their 52-week high of $34.58 on Feb. 10. We witnessed a lot of people chase this ETF higher that month, only to be left holding the bag today at lower prices.

And the ETF hit its stop loss in TradeSmith Finance on March 4, 2021.

This is a reminder, as always, that TradeSmith Finance can act as your guide on when to buy and sell stocks.

The cannabis sector will be a high-growth industry over the decade. But we have to be rational and protect our principal in places where speculation is rampant.

As I noted with Alibaba, many people think that cannabis stocks might be very cheap. But the MJ ETF, like Alibaba, is in the Red Zone of TradeSmith Finance and squarely in a side-trend for momentum.

We would want to see shares rise, institutional investors pour into the space, and stronger momentum before buying into cannabis stocks again. I’ll continue to monitor this trend and write more about any opportunities as they emerge.

When it comes to buying and owning stocks, there is one rule you must follow:

Don’t fall in love with the companies you buy.

They won’t love you back.

Stocks move up and down based on fundamentals, technicals, and broader sentiment among investors. They don’t go up forever just because you want them to.

And — if stocks fall — they won’t rebound simply because you believe they will.

Today, I want to talk about a company that I fell in love with at one point. But more importantly, I know that I will have to let it go if and when it falls to $110.50.

It’s Common

It’s easy to fall in love with a company. It’s really hard to break up with one.

I don’t just mean this because you like what the company does or makes or produces.

When you put your hard-earned money into a company, you’re more than just financially invested. You’re a stakeholder in the future success of the business. And in the event that consumers turn to a competitor or stop buying your company’s products or services, you’re naturally going to question why.

It’s easy to blame someone else. Emotions can control us and blind us.

When we buy a stock and it falls 20% to 30%, our immediate thought is that the stock is going to bounce back. We fail to understand the opportunity cost that comes with waiting months or even years before a stock rebounds. And that rebound will only come if we are lucky.

Warren Buffett has said that investors should always be prepared to lose 50% of their money in the stock market. And if you think this is an exaggeration, pay very close attention to what happened last March when stocks plunged into the fastest bear market on record in a matter of weeks.

Falling In Love

One of the companies that I “fell in love with” in my career was Apple Inc. (AAPL). And there’s good reason to love this company. It is one of the most innovative organizations on the planet. Its iPhone dramatically changed the way that people communicate, listen to music, shop online, and engage with content. At a split-adjusted price, the stock traded at roughly $4 back in 2007. Today, it is north of $150, thanks to its robust sales and incredible market share. The company sold nearly 200 million phones in 2020.

It is owned by roughly 240 exchange-traded funds and represents more than 6% of the weight of the S&P 500 and more than 13% of the NASDAQ 100. Investors love this company.

But I have to be rational about this stock. If we look back at its history, the stock has had several sharp downturns due to bad quarters or broader market turbulence. Shares naturally pulled back during the dramatic sell-off during the onset of the COVID-19 crisis. Shares also tanked during the 2008 financial crisis, and in 2012 and 2015.

But we also saw a sharp downturn at the end of 2018, when the stock pulled back from the split-adjusted price north of $56 to the mid $30s.  I remember each downturn, especially that last one, very well. Because if the stock does push through the trailing stops that I follow on TradeSmith Finance, I follow the rules and sell.

On Nov. 12, 2018, AAPL’s health indicator within TradeSmith Finance turned red for the first time in more than two years when the stock dropped to $47.04. It was hard, but I sold all my shares the following day and watched as AAPL continued to fall to a bottom of $36.03. Following my exit plan and the TradeSmith indicators saved me a lot of pain.

Buying Back In

If you’re like me, you’re a buy-and-hold investor. But sometimes, there is a deep downturn in a stock, ETF, or broader market index. Given the stretched valuations in the market and concerns about a downturn, I’m always playing defense.

Trailing stops remove the emotion tied to a company. I might be in love with a company like Apple, but a trailing stop is like a good friend who is willing to do the dirty work and break up with the company on my behalf.

So I can tell you today with certainty, if AAPL falls below $110.50, I will sell the stock. That is the stock’s current trailing stop in TradeSmith Finance, based on the company’s custom volatility measurement within our system. Remember, every stock has different levels of historical volatility, so every company deserves a unique trailing stop based on its own data. I’m not just setting a hard 25% stop on a stock without understanding its history. Through TradeSmith Finance, I have various stops that have different ranges.

If the stock stops out, I will exit my position and wait for the signal to turn green again, which usually requires more institutional buying and broader support for the stock. This system  doesn’t try to pick the bottom. I let the tools offer a signal, and then I follow, in keeping with the strategy I’ve already determined is right for me.

I don’t like to be emotional about companies. I’ve learned my lesson the hard way. Instead, I just follow the signals and ride the wave. It helps me sleep better at night knowing that I’m protecting myself and my family’s money.

I’ll talk more about this concept tomorrow.

Every now and then, institutional investors really sell a big hype.

Over the last five years, there may be no bigger hype than investment in China.

Yes, bigger than cannabis. Bigger than gambling. Bigger than cryptocurrency.

And there was a good thesis for this rampant speculation around China.

The nation has an estimated population of 1.44 billion people — about four times the size of the U.S. population. It has a rising middle class. It is the world’s second-largest economy, and it’s poised to overtake the United States economy in scope and scale by the end of the decade.

And — if you squint hard enough — there is a massive tech company comparable to the biggest and baddest members of the Silicon Valley elite.

None stands bigger than Alibaba Group Holding (BABA), an e-commerce and technology titan that rivals Amazon in its mission and stands as the largest Chinese company listed on the U.S. stock markets.

But recently… things have gone sideways. If this is a stock in your portfolio, you need to read the cold, hard truth that I’m about to tell you. And if analysts are trying to convince you that now is the time to buy Alibaba… you also need to read this.

It’s not time to touch this stock yet. Here’s why.

The Slump

At the start of January 2020, Alibaba was the largest company on the New York Stock Exchange by market capitalization at $591.59 billion. That figure surpassed the size of Warren Buffett’s Berkshire Hathaway, JPMorgan Chase, Visa, and Johnson & Johnson.

At one point last year, the stock traded at a market cap of $868.11 billion. But Alibaba has been in retreat since last October.

Today, the market capitalization sits at roughly $496.64 billion, and the stock remains in a free fall.

What happened?

The Chinese government began a significant crackdown of its technology sector over the last nine months. The government has released statements that it is concerned about consumer privacy and monopolies.

Let’s be honest about this. The Chinese government is worried about competition. At a time that the communist government is expanding its influence across the world, it remains very worried about companies that rival its power and influence.

It looks at the strength of Amazon, Apple, Facebook, and other Silicon Valley giants in the United States, and it worries about the influence of their leaders on society.

Last year, Alibaba founder Jack Ma mysteriously disappeared from public view for three months.

Ma is a member of the Chinese Communist Party. He is worth billions. But he dared to revolutionize banking through a company called Ant Group. In October 2020, Ant Group — an offshoot of Alibaba — had prepared to introduce an IPO. Ma, eager to bring change to the financial system in China, gave a speech that criticized the nation’s banking system. The comments reportedly reached President Xi Jinping’s desk.

It didn’t go over well with leadership. Ma didn’t appear in public again until January 2021. Some people wondered if he was even alive. The Ant Group IPO was canceled by the government.

Worries About China

The ongoing issue with Chinese companies is fascinating.

Is the government really interested in consumer privacy? Or is it just paranoid?

The soft adoption of “capitalism” — or at least the permission to let businesses exist — has been a driver of the Chinese economy over the last few decades. But the Communist Party risks killing the golden goose. The government’s ongoing crackdown of technology companies is a massive geopolitical risk that doesn’t inspire much confidence.

The government has issued reports suggesting that the concerns about this crackdown are overblown.

But if we follow the institutional investors, we’re seeing massive outflows from the market. If this continues, it will be very difficult for the Chinese government to attract investment.

Alibaba appears to be the biggest victim of this crackdown. And despite the company’s huge potential and massive consumer base, investors have chosen to stand on the sideline.

When to Buy Alibaba?

Will there come a point when Alibaba is a buy?

Most likely.

But you shouldn’t rely on guesswork to try to time the buying point or call a bottom on the stock. That’s what TradeSmith Finance is for.

We’ll be looking for some institutional buying pressure to help lift the stock. We’ll be looking for insight into the insiders and whether the CEO and other executives are purchasing their own stock. And we’ll be looking for BABA to enter the Green Zone and carry upward momentum.

This might take a lot longer than expected. But, as I’ve promised, I will revisit this stock once again and tell you the moment that it enters the Green Zone. For now, let’s avoid this company and focus more on the best-of-breed stocks that our signals have offered.

A lot of investors fell in love with Alibaba when the stock was trading at $300.

They were convinced that the company would achieve a $1 trillion valuation and continue to climb from there. However, the stock has lost nearly half its value since its peak, and these investors are holding on — hoping and praying that it will one day get back to those historic levels.

Tomorrow and Thursday, I’m going to explain why this mentality is a huge mistake.

In 2016, a company you don’t associate with alcohol generated $1 billion in booze sales.

The sales stretched across 8,200 stores and hit that 10-figure mark on just 235 unique alcohol products.

You might speculate that this juggernaut for alcohol sales would be a grocery store chain like Kroger Co. (KR) or even a gas station operator like Valero (VLO).

And both would be great guesses. But this company — raking in more than $1 billion five years ago on alcohol sales — is one of America’s most important “health” companies.

I’m talking about Walgreens Boots Alliance, the second-largest drugstore chain in the United States.

Why am I pointing this out?

Because this random fact drew my attention to a real buying opportunity.

Let’s dig in.

Walgreens Looks Like a Great Play

Walgreens’ stock has been under pressure over the last few months due to ongoing concerns about Amazon’s potential expansion into the pharmaceutical space.

While Washington is cracking down on Amazon for its competitive practices, one should think a bit more about the popularity of mail-order medications. Simply put: Americans prefer to see their pharmacists.

A February survey by Public Policy Polling shows that Americans don’t want to substitute their health care and access to drugs for personal convenience.

The survey of 1,390 adults found that 85% preferred to receive their prescriptions from a local pharmacist instead of mail-in orders. This is an overwhelming sentiment. In addition, respondents said their pharmacists are better at answering questions, know them better, and don’t offer the threat of medications getting lost in the mail.

For now, the Amazon threat seems overblown.

So, let’s dig deeper into the opportunity here.

A Dividend King of Kings

When a stock has a pullback like Walgreens has in recent months, I think it’s essential to look at one crucial measurement: How does the company manage its cash flow?

To answer this question, would-be investors should examine the company’s history of dividend growth. The ability to generate cash flow and return it to investors is a critical measurement of stock and executive performance.

And Walgreens is great at it. The company has hiked its dividend for 46 straight years. On July 14, the company again increased its annual payout from $1.87 to $1.91.

Despite the threat of online competition, it has shown an ability to generate large amounts of income over the previous years.

Of course, Walgreens’ impressive alcohol sales are an extension of its success. But remember that its successful pharmacy operations will remain the leader of its business strategy in the future.

Risk Versus Reward

The company does have a few risks outside of potential competition from Amazon.

Walgreens has a rather large debt load, and it faces challenges in expanding into new business lines. However, at its core, it will remain a pharmacy chain that is always trying to make up ground on its largest competitor: CVS Health (CVS).

Yet CVS faces the same pressures: Amazon, debt, and challenges to the business model. Despite these factors, CVS stock is up 20% over the last six months.

Walgreens, however, has been effectively flat over that period. Moreover, when digging into the numbers, I found that Walgreens’ profit margins could increase in the future.

Over the last 20 years, Walgreens’ profit margins have averaged north of 3.3%. This year, net margins are at 1.51%.

If the company can get back to those levels, it would be positive for the company’s cash flow and its ability to keep raising its dividend. It might take a bit of time, but patience could pay off on a stock that looks a bit undervalued.

The Next Catalyst

One of the most important catalysts for Walgreens moving forward is the big announcement from this past weekend. Dr. Scott Gottlieb, a former FDA commissioner, said that COVID-19 would no longer be a “pandemic” in the wake of the delta variant’s surge.

He said that it would become an “endemic” for the United States. This means that the virus will remain confined to smaller swaths of the country — and potentially experience mutations and small surges on a seasonal basis. This matters because it changes the future of COVID-19 vaccine deployments.

Since the rollout of the Moderna, Pfizer, and Johnson & Johnson vaccines, CVS and Walgreens have been on the front lines.

The FDA’s recent approval of booster shots for individuals with autoimmune deficiencies looks like the first step in another round of vaccinations heading into the fall. In the wake of delta, vaccinated Americans will likely require another dose as well.

And as some parts of the country play catch-up on their first rounds of vaccinations, the traffic into CVS and Walgreens could surge.

Wall Street has been increasingly bullish on Walgreens Boots Alliance (WBA) stock over the last month. As a result, the stock currently has an average price target of $55 among 10 analysts. 

As always, we’re paying close attention to what TradeSmith Finance tells us about the company. Six days ago, WBA pushed back into the Green Zone, signaling that it is a Buy. 

It is also sitting in positive momentum conditions. The 20-day moving average looks like it is getting ready to cross back over the 50-day moving average, which would be a positive technical shift for the stock.

We’re always looking for buying opportunities on the dip, especially when a stock has positive momentum. Walgreens appears to have found solid support as a potential rebound play in the months ahead.

I’ll be back on Wednesday to talk about another stock that remains on our radar.