My Sense of Risk is Heightened, Yet, We Could Run Much Higher for Longer. What To Do?
I was hoping that this geopolitical brouhaha would moderate the rally to extend its life. A little reminder that stocks can go down as well as up is a very healthy lesson to reinforce. We need some weak hands to let go of some positions. Selling creates new fuel to sustain the rally. The reason I’m saying this is that over the last 25 years I have seen this movie many times before, and like those made for TV movies, we know the ending. At some point, probably when everyone has been lulled into thinking that it’s their right that the market goes up every day, that it does the opposite, and goes down every day, and sharply. No, I’m not saying that you do anything drastic as yet, but start thinking about the risk along with the reward. Fight the urge to only think about gains. It’s a problem though because humans don’t think this way. If you flip a coin 5 times and it comes up “heads,” the expectation is that the next flip will give you a “head.” That’s mathematically untrue, but who isn’t disappointed when the flip gives you “tails?”
The Problem Is, This is the Best Time to Create Alpha
It’s almost as if skating on thin ice lets you skate much faster, the thinner the ice gets the better. Unfortunately, you don’t get to know how thin that ice is until you are in the drink. So as a trader, you can’t ignore times like this. Trade fast, and keep those trades tight. If a position doesn’t work after a day or two, you may want to cut your losses. Look at Tesla (TSLA) today, it was rocketing yesterday, but fell a bit today. It still might start over to the upside tomorrow. I bet some of you decided to try and buy today’s dip. I have no idea whether that’s going to work out for you. Just realize that any kind of support level is easily 100 points below where TSLA is at right now. Here is a chart with the 200 DMA. A 200 Day Moving Average is a well-established way to look at a support level here.
I would have drawn the support level at the 350 level. The point is that’s a lot of points to the downside. Don’t get me wrong, whoever got in today, they have better than 50/50 shot that tomorrow TSLA shoots right back up to the old high and perhaps goes higher. Hey, better than 50/50 is better odds than you get in Vegas. Look, I’m not saying that isn’t a bad trade. What I’m saying is, that at SOME point in the next several weeks this will turn out to be a VERY bad trade. Just keeping this notion in the back of your mind may moderate your urge to swing for the fences. Now is not the time to swing for the fences.
Once Again, It Is Time for me to Remind You to Generate Some Cash.
Cash is the cheapest hedge. Last week I suggested dipping into your cash reserve for ⅓ to use to go long and generate alpha as the market swooned. On Tuesday, I asked you to slowly take profits of a few shares off of every position that is profitable. Another technique is to “charge” yourself a broker fee of $100 or so of each trade. If you are a frequent trader both of these techniques add up. Now I’m just going to say, put the money back, especially if you ignored the suggestion from early in the week. Do it in chunks, do ¼ tomorrow, another ¼ Monday, etc. Move the cash to the checking account that every discount broker gives you. Let it sit there until such a time when the market is on sale again.
If you don’t know what I’m talking about, I advocate using cash management to manage risk. I advocate keeping 25% to 35% of your trading account in cash. This is not a static level. Just like on Friday, when I suggested dipping into that reserve to take on risk, now is the time to de-risk.
We Are Skating Towards that Thin Ice
To paraphrase Dickens “now is the best of times, but soon it might be the worst of times.” I know I have to also say now, that I’m a rip-snorting bull, I’m not saying we are headed to a bear market. If you have a longer time horizon, and especially if you are a long-term investor, please ignore this sell-off. It isn’t going to be more than a blip on the chart. But if you are a trader, and you want to keep your money working for you, start thinking about hedging again. It’s going to be sharp and it’s going to be short. Until that happens, the chances are that TSLA trade will probably turn out OK. That’s the thing about this phase of the bull, the more you risk the more you make, actually, that’s true all the time. The thing is, right now, almost any risk is working. So some traders are buying the breakouts, some are buying the catchup trades, some are just buying anything and that is working too. Everyone feels like a genius. Newsflash, anyone thinking to themselves, boy I am really good at this, maybe I should quit my job and trade. Think again, please.
Did You See Where the VIX Closed Today? 12.54, Breaking 13 is a Significant Signal to Me.
On Monday it was over 15, 15.09 to be exact. That’s down 17% in three days. This is a significant turn in complacency. Market participants are not hedging, that’s a contrary indicator. I asked you to keep an eye on this number. I expect the VIX to even break under 12, that’s when I want you to do some real hedging. I will suggest that you go long on the VIX. Also, you should be buying some Put contracts on the major indexes like the QQQ and the SPY, and do some research on writing calls on your long positions.
Now That I’ve Tried You Patience, What Do I Think Can Still Be Traded?
You may have guessed that I’m in the “catch-up” trade camp. Going for the breakouts are great in a flat market or a rebound, but I just think we are too extended to be playing that game now. So a “catch-Up” trade for me is not bottom of the barrel type names that are so bad they are good. I’m talking about high beta names that are at least 10% below their highs. Here they are:
Novacure (NVCR) currently 81 high 98. Presenting at the JPMorgan Healthcare Conference
Exact Sciences (EXAS) 103.50 High 124 Also presenting at the HEalthcare Conference
Tandem Diabetes (TNDM) 65 High just under 75
Alteryx (AYX) currently 119 Hign 174 Data Presentation Application
Hubspot (HUBS) 177 High 207 CRM & Marketing application for SMB
Zoom Video (ZM) 72 High 107 Video Conferencing
MongDB (MDB) 150 High 185
Twilio (TWLO) 113 High 151
Match (MTCH) 85 high 95
Boeing (BA) 336 High 446 This is a controversial name but it’s a catch-up trade.
GE 11.91 High 12.24 But of course GE was way higher years ago, and I think it’s going to run higher. The downside is just above 11. Obviously, GE has been way higher in the past, and I think it’s going to be a solid teenager in the next several months even with this looming sell-off. Let’s take a look at the chart here.
This is a one-year chart. Clearly, the resistance that GE was contending with for the bulk of last year has been well breached. If GE does fall back it will likely be a bit above 11 even. I would buy more if that happens. So take a half position.
I probably can surface other good names that have not yet broken out and are well below their highs for the year. GE is breaking out if you consider this the 52-week high, but GE was once a $60 stock. I consider this a catch-up trade.
How can I tell you to sell a chunk of your portfolio, while at the same time give you stocks to buy? Well, I know how you all think. You’ll set aside 10% maybe if your lucky and then think about hedging something maybe later. Also, you never would have read this piece at all, if all there was, was me exclaiming “the end is nigh, repent all ye sinners!” No, I’ll just nag you, until you half-heartedly prepare for it, somewhat. I will call that a win. The truth is, this could happen this week or next month, so maybe starting a little bit now, is actually the prudent thing to do.
My Trades: I added to my Boeing (BA) Calls, I closed out my Splunk (SPLK), this was a breakout name, and I cut it today to de-risk. That’s what got me thinking about this piece, and moving away from breakout names. I closed out Hubspot (HUBS), I rolled it up several times, so at this point, I just closed it out. It felt like I was being too cute. Not a rational reason and I might just get back into it tomorrow. I closed out half my Crowdstrike (CRWD), and I bought back Roku (ROKU), another catch-up name, but it gave up all its gains, so being that I’m keeping the trade on a short leash if it doesn’t get back in the green tomorrow, I’m going to cut it. If you are a fast trader now is not the time to hold on.
Disclosure: I am/we are long BA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I added to my BA, I am still long CRWD, ZM, and I bought back ROKU