What a week.
I thought about how to write this. Whether to discuss how to know when to reduce risk or to post standard charts with lines and no other real data as most sites do.
What I came up with is a mix of why the sell-off could have transpired and what we ended up doing Friday.
Risk-Off
On February 19 (last week) we were net long in the directional portfolio and net long in the premium selling book. What we decided to do was reduce the longest holdings because we feared a slight sell-off.
Read that post with notes here.
Risk-On, Sort Of
GDP in China will contract because of this and in turn affect the global economy. This not only spills over from reduced imports, but also from Chinese tourists as well.
Now, these are assumptions, not certainties, but we must take them into consideration as you can be sure larger institutions are as well for their 2020 outlook.
Goldman has already stated that US Companies will generate no earnings growth in 2020.
From a PM standpoint, stocks with a low beta to the economy should be alright. It's the high beta stocks that are subject to low liquidity and larger price moves such as Amazon and Chipotle the last week.
It's likely that low-interest rates are here to stay, especially with this forecast for 2020 is adjusted. That being said, real estate and utilities should have good dividend offerings and that sector might be brought up the list a bit to watch as Q1 ends.
Themes
Investors are going to, if not already, minimize portfolio risk in the markets with this current virus. I would expect larger volatility swings in the month (maybe two) ahead. This volatility should be great for short-term trading which most (I assume) reading this site do as opposed to Portfolio Management.
Why the Large Move?
The SPX futures on Thursday declined heavily, in fact, to its lowest level since December 2018. This supports the idea that the sell off accelerated due to lack of liquidity rather than investors selling.
You can look to the XLV ETF as well and see that it began selling off a bit prior to this news, fearing Super Tuesday: all healthcare stocks have been affected.
So when you pair a headline like Coronavirus with fear we may have caused a larger move than needed. In fact, It broke many large technical levels (where liquidity dried up).
Current holdings:
- Short VIX Futures
- Long VXX puts (multiple strikes and expiry)
- Short VXX call spreads (wide and front-month)
- Long MA (dated in the money calls)
- Long XLV (front month 94 calls)
- Long FB (small front-month spec position)
- Long SPY shares (small spec position)
- Long ROKU shares (small spec position)
- Long AAPL calls (September calls)
The positions were added Friday morning as we believe a short term bottom can be found. I am not going to throw up the charts with moving averages and lines because that's what 99% of retail traders do and you won't back it up with other data or views. In fact, if we can have all the cards on the table: It's why most retail traders lose money. Simply no understanding of portfolio or risk management.
What I will say is that the lack of liquidity on Thursday was due to other reasons and that should shore up a bit heading into next week.
Targets? No idea. I am not playing the game of price targets, but $305 is probably where I want to be out of net longs - but, for this current portfolio structure I am trading it based on % return on the current holdings, not a technical price target.
Buy the dip for new highs? No clue. That is always a generic, surface-level, question that lacks any real depth. What does it even mean? When I hear most say that they mean buying 5 calls and what that means is they sell it the next day.
Vol at these levels has to come in a bit, hence the concentration on being short it with different products and different ways.
Futures Trading
Last week I switched on futures trading for the first time all year. During times where volatility picks up, it tends to be easier to trade the markets with futures. Not only for P&L purposes, but to hedge out of equity/option book losses.
I'd imagine that this range that the indices will remain wide which means futures trading should be great for the next two months.
The rest of the ideas will be posted in the premium directional chat. For more information about what that entails and cost, please email below.
You can access it by emailing: tradewithx@gmail.com
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