SPACs Will Be a Major Investing and Trading Theme in 2021

It looks like many of the ‘end-of-the-year portfolio moves’ were completed yesterday and now much of the market is treading water as investors close the books on 2020.

The S&P 500 is in an extremely tight range intraday but small-caps (IWM) have managed to bounce back from a nasty bout of profit-taking on Tuesday. Breadth is good with 5475 gainers to 1875 decliners and there are over 400 new 12-month highs.

My list of big movers is better than yesterday but it is looking a bit more sedate than a few days ago. The SPAC group continues to attract much attention but volatility is running high.

One position I’ve been trading today is Net Element (NETE) . Technically this is not a SPAC but it is trading like one. Net Element is in the payment processing business but that isn’t the appeal here. In August, the company announced a reverse merger deal with Mullen Technologies which is a Southern California-based electric vehicle company. Once the deal is consummated NETE’s existing business will be spun off. This is similar to what AYRO  (AYRO) did last December.

It was expected that the Mullen deal would close by the fourth quarter but that obviously is not going to happen. The stock had been basing well and jumped today on a news report that Mullen received a Letter of Intent to buy up to 10,000 of its MX-05 electric vehicles from a major electrical contractor. I’m long and looking for entry points.

SPACs have been great trading vehicles for traders recently and there are dozens more that are likely to be filed in the weeks ahead. Some market pundits believe that this is a setup for a major disaster and that they are going to suddenly collapse. I think they are wrong.

The nature of the market is to always go too far and then correct but the correction process is when the winners will be separated from the pretenders. The bad SPACs will fade away and the good ones will continue. There is some real trash among SPACs, but there are also some excellent ones that will eventually have the financials to attract more conservative investors.

The SPAC mechanism is gaining favor as an alternative to the traditional IPO because it is a more democratic way to not only distribute shares but to price them. Traders and investors like that they don’t have to curry favor with underwriters to get an allocation and the companies are able to more accurately price their shares as the SPAC process plays out.

Traditional Wall Street doesn’t like SPACs because they lose their insider advantage with them. Sponsors love the fees and their low risk and they will keep rolling out new ones. They are competing with private equity and the target companies have to be loving it as well.

I look for SPACs to continue to be a major trading theme in 2021.