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Social Media's Valuation Creates Rush for Exits

Is it possible to make money buying stocks with earnings multiples of 60? Sure, but history has demonstrated that stocks with a multiple above 20 underperform the overall market. Facebook will have to triple its earnings, while still demonstrating growth potential, to reach a multiple of 20 and enable investors to expect a further rise.

Facebook continues to keep the checkbook out. One of Facebook's latest buys isn't exactly a company, but rather the staff of Spool, a developer of mobile bookmarking applications. As part of Facebook buying the startup, Spool will close its doors, not totally unlike the recent purchase of Caffeinated Mind.

One of Facebook's biggest sources of revenue comes from Zynga, and it doesn't take much more than a look at the price chart of Zynga to know how well that the company is performing. The chart travels from the upper left to the bottom right without so much as a bump on the way down.

I sold Facebook put options when the price was near $26 a share and will look to sell $25 August put options if the price breaches under $25. Facebook has now traded lower for five days in a row, setting up a short-term technical "bounce" buy, based on historical price changes over a one-week period. For longer-term investors (basically anyone who is not a trader) it doesn't matter much.

For Zynga investors, the worst of the storm has likely passed, or at least they are in the eye of the storm. After falling under $5 a share, nearly a 75% drop from trading highs as recently as March, Zynga appears to be nearing a bottom.

ZNGA Chart ZNGA data by YCharts

Technically, Zynga appears poised to demonstrate a TDCombo 13 oversold indication this week. For those that don't study market timing techniques, TDCombo was developed by the legendary chart analyst Tom DeMark.

TDCombo isn't a signal to buy, but does strongly suggest sellers may soon reach an exhaustion level in their liquidation of shares. I will look to sell August expiration date put options the end of this week. The nose-bleed-level premium at the $4 and $4.50 strike prices is increasingly looking attractive.
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