When we broke down in February we were at the highest RSI reading in history.
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Finance
The exception to the bright green market today was the financial sector (-0.5%).
2018 was a “difficult” year for most investors.
Since 1950, there had never been a down year for the market when the S&P 500 has gained at least 4.0% in January until this one.
Some of the most powerful setups and the quickest moves in the markets come from when sentiment just goes from really terribly bad to just bad.
The internet, specifically FinTwit, is full of charlatans and snake oil salesmen telling you that their magical tricks will get you to your wildest dreams. The reality is most are average at best and don't espouse any real tangible knowledge or give you an edge. So it is because of this, and because when markets get rocky my inbox blows up, that I wanted to take a moment and give my personal insight on the most common question I get asked.
As someone who has been trading transparently for three years now I often hear the same questions. No question is more prevalent however than "How do I know how much to put on a trade?"
As a part of my "service" we offer individuals a spreadsheet that gives them an idea of what their overall risk tolerance should be dependent on their trade size. The spreadsheet also works in reverse. This is predominantly "basic math" but let's just go over it quickly. For example, if I am okay with losing $250 on a position and the options price is going for $1.00 my position sizing/risk tolerance will be the following according to my parameters set above:
5 Calls 50%
10 Calls 25%
20 Calls 12.5%
25 Calls 10%
50 Calls 5%
Obviously, the larger the position size the more you have to "thread the needle" for that position.
The second most common question I get:
"How do you know how far out your options should be?"
Absent of allegations of fraud or takeover noise, there is no "sure fire" way to tell just how far a stock can go both up or down. There are however tools/edges at your disposal to give you a sense of when you can/should leverage or when you can expect the potential for an outsized move. Notice I said "potential" in the above sentence. At the end of the day regardless of expectations or rationale, the market is irrational, and more often than not that is costly to your bottom line.
In simple terms, your options should be how far you perceive the move in question will in fact travel. Take into account that you want to be reasonable with your assessment and try keep your price objective within the measured move of the stock.
With the above diatribe over with, I want to share an example the above in action. Specifically how you can leverage father out of the money on major breaks (up or down) to get outsized returns on your capital. For the purposes of this exercise I want to highlight Facebook (FB).
SEND IT
There are particular times when it is prudent to take stabs at exaggerative moves in the market. Though every trend book will tell you buy the breakouts and sell the breakdowns and you'll make money easily, that is not always the case. There are some key factors that can help you with your decision making process. Specifically I've found the following three items to consider prior to taking a potential trade.
The Overall Market
Catalyst
Stock's Trend
Overall Market
The first item I consider when taking a trade is the overall market. The questions being, what is the stock market currently doing? How is it preforming relative to the position I want to enter?
Put in layman's terms; do I want to short or go long? Is the overall market suggesting I should short or go long?
If you think of stocks as boats and the overall market as the river they flow on, you predominantly want to be in a boat attempting to go with the tide.
Since 70% of stocks tend to move with the overall market trying to move in the opposite direction is not prudent for your overall success. If I can put this scenario in a blunt image for you, don't be the stray gazelle in the Serengeti. We all know how that ends.
Don't Get Slaughtered
Catalyst
When taking a position, it is important to take note of if there is a catalyst at play for your move. Though not always necessary, if there is a catalyst, it does bolster the chances of our thesis coming to fruition. If we're using the boat analogy from above, a little wind in the direction you're going definitely gets your sailboat moving more quickly. Conversely, if there is an opposing catalyst, your chances for may be impeded.
TREND
This one is quite simple. Is there a particular trend for your stock? Or is it just dead money? It is more likely for your position to be accurate if you are trading either with the trend or when the trend breaks.
If you are trying to go long a stock, more often than not, staying with the uptrend for that stock will be beneficial for your overall success. That is of course unless the overall trend breaks. In that particular case trying for the opposite could prove to provide more bang for your buck.
As a general rule, the longer a trend the harder it is to break. Secondly, most trends don't break on their first attempt, but rather after multiple attempts at breaking.
In Action
I want to give an overall picture of the above in action. For this I will focus my attention on this week's FB trade. Going into the week FB had not traded particularly well as it finished August below its major MA's without the ability of breaking out.
FB Daily
As the above shows, Facebook was unable to break above a downtrend set prior to its blowoff top prior to earnings.
This next image shows how FB had been holding 170 as support after it's earnings report.
FB 170 support
With the above in consideration, let's zoom out and consider any long term trends for FB.
FB Weekly
Taking a look at the above, we notice that FB has been in a 4 year channel from April 2014. Like clockwork, the buys have come in on the bottom and the sells on the top. This channel was defended recently as well following a disastrous earnings report. That being said, FB had been acting weak and they were slated to present in front of congress again. The overall market wasn't helping either, as buyers abandoned ship yesterday seemingly being topped out by the AMZN $1T rejection one day prior.
Let's Highlight:
The overall market was weak
FB was in front of congress again
The recent trend was downward and reaching a critical point on the overall long term trend
In Action:
As the above was taking place we began stalking FB in the chat yesterday. I first highlighted it around 10am EST and gave the chart for the wedge it had formed and the long term trend. I then followed it up with an alert, taking the out of the money weekly 165P's as the stock hung precariously on the edge. Since the trend line in question is a four year trend line, I found it appropriate to leverage with farther out of the money puts in this case. Though this is how I chose to take my first attempt at this trade, this is not a practice that I encourage typically. More often than not, being too far out of the money will result in you wasting your money.
This position ended up working out for us immediately once the 170 level broke as the stock careened into 167.5 before finding some floor with the overall market. Unfortunately however, the stock did in fact find a floor and I was stopped out of a majority of my original position as it started to rebound. The stock started to form a new range between 167.5 and 169. It was important to make not of the breakdown level from that point on to decide whether or not to re-enter a position into the close. Secondly, it was important to note as a break of the lows would create further selling pressure. As the stock broke the intraday lows it was prudent to reapply my short of the stock; and thats exactly what we did.
With the stock selling into the close and breaking a multiyear trend, I found it prudent to put on an overnight position for the hopes of further selling and I'd make note of the previous days lows to get more aggressive with the stock should those lows continue to break. (highlighted below)
FB would be back on the top of my watch list yet again today. Within minutes, the overnight put position was in my favor and I could rest easy and raise my stops. From that point on, I made note of the previous day's close and the opening range lows as another catalyst point for selling as shown below.
The stock attempted to find a floor in the first half hour and subsequently attempted a run at the days opening price. A failure of that price suggested that any break below the opening range would result ini further downside. This was a safe bet as the stock had already broken a multiyear trend and closed on the lows just one day prior. With that in mind, and with a breakdown of the ORB I found it prudent to get more aggressive. I raised my stops on the overnight position again and added more puts (highlighted by the arrow below).
As you'll notice, once the position was on, the stock never recovered. It continued its escalator down until it came close to the 160 round number. By that time, we were all out of our puts and had rolled down our winners.
As a rule of thumb, I like to sell ~50% my winners once I see a 2x return. This allows me to avoid micromanaging the position and allows me to let it run its course to completion. All in all this trade worked out and was quite lucrative.
Some of the FB profits
CLOSING
I opted to write this post primarily for two reasons: first, because I thought I'd finally put some of the "rules" I follow in writing to help answer some of the recurring questions I see/hear. Secondly, as I stated above, during times of market volatility my inbox blows up. This is an easy way to address all the common concerns and questions in one swoop. If you found this post helpful, please like and share it. If you'd like to learn more about how we trade feel free to reach out to me using the contact link on my website. As I stated, more and more people contact me during volatility. It is important to state, not all markets behave the same and this is not some cookie cutter method.
SHAMLESS PLUG
If you'd like to follow my trades in real time click the "Join Now" button at the bottom of the page. For those that will and have asked, in honor of my birthday I am giving anyone who signs up a discount to start. Just use the code GUEST on checkout.
Match (MTCH) will report first quarter results this afternoon and host a call at 8:30 tomorrow morning.
“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”
This will be part one of a two part write up.
I made a comment during the midst of all this recent market "madness" that if your favorite "Market Guru"/"Trader" was something like a personal trainer 15 months ago, you should probably reevaluate who you are following. Though, in part, I did it for the joke the underlying theme remains.
As the cliche goes, "a rising tide lifts all boats." For the last 16 months we've all been "privileged" to see all sorts of rafts get lifted. Between the stock market and crypto nerds everyone everywhere has become an "overnight success" and more importantly a "guru."
I want to start this post by emphasizing that I in no way shape or form consider myself a "guru." In fact, I abhor the term. I find it to be lazy, self-congratulatory, and most importantly just plain ignorant. During my 13 year trading career, I've found the most effective way to trade any market condition is to approach trading with a "risk management" point of view. If you know what you are willing to lose before you enter a trade along with the most you're willing to lose in a day/week/month/quarter/year, you can survive in this game. Secondarily, I want to stress, it's okay to be wrong. It's also okay to not know what's going on. The sidelines are your friend and cash is in fact a position. If you are able to avoid large drawdowns (for the most part) you will survive.
Alpha Break
During the last 16 months traders, investors, and pretenders alike have been rewarded handsomely for buying nearly any dip in nearly any asset class. The recent narrative will tell you that investors have been making a killing by selling the VXX/VIX and puts while buying dips in assets. This compression has suppressed volatility and has kept the steady stair step higher going. During that same time, a resurgence of "Andy Zaky's" has emerged. Dudes that were once driving for Uber, working as personal trainers, school teachers, and even police officers were minted into "experts" over night.
If you are not familiar, Andy Zaky is a "former AAPL wonder-kid" with no formal training of any kind. The quick back story goes something like this; Zaky was an AAPL fan boy during it's original meteoric rise who started writing about the issue who lost nearly $10,000,000 for investors around 2012.
Zaky grew his notoriety as he AAPL's stock rose early on. As he ramped up his price targets his "genius" inflated along with the stock price. However, like most "gurus", as the stock eventually waned and broke trend, so did his genius. Sadly, he cost investors millions as he pumped more and more money into more and more calls that subsequently ended up worthless.
That's usually how it goes for most people, and specifically, most "gurus". As markets are in bull mode, 70% of all stocks are tied directly to the overall index. When individuals are able to identify the leaders in this bull market scenario, they are able to enhance their reputation simply by consistently announcing "BTFD" at any major support trend. As the rally continues, they are made to look like superstars.
Unfortunately for them however, this sheepish behavior destroys winnings significantly faster as markets start to turn. As evidenced by this week, more often than not, the decays happen suddenly and without warning. "Traders" that have been conditioned to buy dips get buried quickly as support levels crumble while large institutional investors look to lock in their profits. These "traders" they find themselves struggling to get a grip of the madness that is about to bestow upon them.
We saw this dynamic play out during the last year. Dips were swallowed by dip buyers as the VIX was choked down. Every dip was bought and every Tom, Dick, and Harry was a newly found "expert" in trend analysis and stock trading. This phenomenon was on display in full effect during the Bitcoin mania. Every other idiot I encountered was quitting their day job to "trade cryptos" while they told me how THIS is going to be how they make a fortune. Fewer than 10% of them however (yes I fact checked my sample) even knew a damn thing about the crypto market (outside of the term bitcoin) before things already went into parabolic mode.
As reality came crashing back down, so did those profits. Every "boy genius" that was telling you "Bitcoin to $13000!" on the way up was getting awfully quiet, or worse, louder. Now they're coming to terms that they can't pay their bills in cryptos and the catch 22 that we were telling them about as things were going up is still very real:
"You're making claims that this new 'currency' will replace the currency you need to actually use in reality. You need to cash out to be able to realize your gains. You also need cash to drive the price of cryptos higher."
Unfortunately for most who got into the game late, they're f'd. Cryptos are hanging by a thread and in a downtrend. This is still without the downward momentum kicking in.
I dont bring this up to bash anyone who loves cryptos. In fact I think their utility will in fact change the world. I only bring this up to draw on a more important point.
EXPERTS IN UP MARKETS ARE BULLSHIT.
If we use the Bitcoin phenomenon as a primary example, everyone, and I mean everyone, was making boatloads of cash on the way up. Everyone was telling you how great they were at picking "the next hot crypto" and everyone was reminding you that "This is the new paradigm that will change your life." The sad reality however, it's very easy to look very smart in a bull market. It's incredibly hard to do it in a bearish one.
De Ja Vu
The above This isn't the first example of this that I've seen. When I first started trading in the early 2000's I saw this same phenomenon with the housing market. I went to Uni in Florida and saw first hand how insane it really was. I remember trying to be "the guy that warned others" about the soon to come downfall and being hated. The sobering reality came quick and unlike when you're right about a stock, being right didn't feel good. I noticed that the same pundits that were on CNBC telling people "It will be okay!" were still manning their posts. They were able to be a talking head, be fraudulently wrong, and still be the "voice of reason" after the fact. (see video below) HOW THE FUCK IS THAT POSSIBLE?
So is the above an anomaly?
I wanted to dive a little deeper into the "guru" phenomenon and see if the Zaky thing was an "isolated event" or in fact if it's just an aggregate extreme of a larger issue. After a couple of searches I was able to find that More often than not, gurus are incorrect. Specifically, on average, the cumulative accuracy across all forecasts sits at ~47%. While thats bad in and of itself, the accuracy distribution points to even more crappy predictions. (Source: https://www.cxoadvisory.com/gurus/)
Looking at the above information, it only confirms what most people believe in the first place. "Gurus" aren't better at their job than you can be. Hell, most of them don't even bat 50%.
TAKEAWAYS
The important takeaway from all this is not to trust any one man or woman for results. Trust the homework. Secondarily, and more importantly, knowing your risk appetite is really the only way to ensure you can survive in any market condition. There are times when you should be aggressive, there are times when you should be very aggressive, and then there are times when you should be neutral. Don't be afraid to say you are wrong early and wait for conditions to work themselves out before getting back in.
Congrats on making it through a very volatile Q1!
The January effect is a seasonal increase in stock prices during the month of January.
Alphabet (GOOGL, GOOG) is set to report earnings tonight after the close with a conference call to follow at 4:30pm ET. GOOGL usually reports results shortly after the bell.
Nvidia (NVDA) is set to report Q1 earnings tonight after the close with a conference call to follow at 5pm ET. NVDA reported Q4 results at 4:20pm.
SBUX is expected to report Q2 earnings tonight after the close. This will be the last call for CEO Howard Shultz (The company typically provides guidance in the press release).
Chipotle (CMG) is set to report Q1 earnings after the close today (last quarter the co reported at 16:05). The co will host a conference call to discuss later at 16:30.
J.P. Morgan is set to report Q1 earnings tomorrow before the market opens with a conference call to follow at 8:30am ET.
Lululemon athletica (LULU) is set to report Q4 results tonight after the close with a conference call to follow at 4:30pm ET. LULU reported Q3 results at 4:05pm. Current Capital IQ consensus stands at EPS of $1.01 on Revenue of $783.3 mln.
MU is expected to report earnings tonight after the close. There is a conference call scheduled for 4:30PM.
Q2 Capital IQ consensus calls for EPS of $0.86 (versus ($0.05) last year) on revenue of $4.651 bln (+58.5% YoY).
- The current consensus is within the company's guidance range of $4.6-4.7 billion.
- Micron's EPS guidance is at $0.86 +/- a few cents. The company raised its EPS guidance at a Morgan Stanley conference on March 2nd, and raised the midpoint of its revenue guidance.
- 2015 and early 2016 proved to be a tumultuous year as a slowdown in demand, driven largely by the decline of the PC industry (Now less than 20% of MUs business), impacted the company as it was restructuring.
- Comments from MU surrounding demand in the company's newly targeted areas of server, mobile, automotive, and Industrial machine-to-machine areas bode well as does the pricing improvements seen industry wide.
DRAM and Margins
- MU says it currently expects 2017 DRAM bit supply growth in the 15% to 20% range. Its long-term bit demand growth forecast of ~20% to 25%.
- The company's overall consolidated GAAP gross margin of 25 percent for the first quarter of fiscal 2017 was 7 percentage points higher compared to the fourth quarter of fiscal 2016 primarily due to manufacturing cost reductions and increases in DRAM average selling prices.
- Margin Guidance: Looking ahead to the second quarter, the company sees Q2 gross Margin in the range of 37-38%. CO's margins guidance was raised at the Morgan Stanley conference on March 2.
Options Activity
Based on MU options, the current implied volatility stands at ~ 46%, which is 64% higher than historical volatility (over the past 30 days).The options market is currently pricing in a move of ~7% in either direction by weekly expiration (Friday).
Options activity has been aggressively bullish in the last few weeks with multiple strikes and calls bought.
MU Options Activity
Technicals:
MU shares have outperformed the S&P so far this year with MU raising by 19% vs 5% gain in the index. Resistance sits near the $26.50-26.75 area, while support hangs near $25.75-26.00.
TRADE: Buy APR 29C AND/OR WDC APR 80C
GameStop (GME) is set to report Q4 results after the bell (5:00pm ET). Cap IQ Consensus estimates Q4 EPS of $2.29 (vs. $2.40 in 4Q16), revs of $3.06 bln (-12.6% y/y), with comps declining 16.9%.
NVIDIA (NVDA) is set to report Q4 results tonight after the close with a conference call to follow at 5pm ET. NVDA is expected to report results at 4:20pm ET.Current Capital IQ consensus stands at EPS of $0.98 on Revenue of $2.10 bln.
Walt Disney Fiscal First Quarter Earnings Report (Tuesday, February 7, after the close)
CMG is expected to report Q4 earnings tonight after the close. There is a conference call scheduled for 16:30 PM.