Last week was a very profitable week even with the markets getting smashed. Obviously I was shorting the markets but I also made money on the long side as well. All of these trades and strategies were based on the market plan highlighted last weekend on the blog. This is another example of why having a definite plan with a focus on Macro is very critical especially in these market conditions.
In the past two weeks, we were watching the key 1890 resistance level on SPX. I was net long with several long swing trades in to 1890 test. The trade was to go long till we approach 1890 to see if we break or get rejected. As we approached 1890 I started loosening up a bit taking profits on many long swings trades incl CRIS OREX BMRN VTUS CYTK etc. Holding through 1890 would have given me even more profits because we gapped up after breaking 1890. But trading is all about risk management surrounding probability of events. If we rejected 1890, I would have given back all my gains.
I was also watching NDX key level of 3600 which obviously is the key for the markets as I have mentioned many times before. All of BioTechs can have blowout earnings and it will mean nothing till the market momentum favorites like GOOG, NFLX, CMG, AMZN turn bullish. The markets are bullish when these stocks are bullish and healthy. This is why I was shorting markets including IBB going in to GILD earnings because GILD and other BioTechs are a small component of the entire market let alone the Tech sector.
As NDX approached 3600 level, I started to scale in short to see if 3600 gets rejected again. Given that we had broke SPX 1870, if we broke 3600 on NDX, I was planning to cut my short trades and then go heavy long on the market. But on Tuesday we got a hard rejection. This gave us some nice exits on shorts and guidance on long exits as well. Thursday, AAPL provided NDX the much needed boost. AAPL single handedly created a huge candle stick aove taking NDX past 3600 but the pop was very briefly. By end of Thursday, it looked like another 3600 rejection was forming. I started shorting the markets again on this potential rejection theory. Friday, we confirmed the rejection with a big market #flush. As I have said many times before, NDX is the most market indicator because it contains important growth stocks.
On the fundamental front, the earnings were overall a disappointment. Many large cap “value” plays were an absolute mess as expected. Unfortunately, the Nasdaq earnings did not come in strong either. Several growth names met or slightly beat expectations but forward guidance remained a worry with guiding lower. Additionally, Ukraine-Russia news started heating up again with fresh new possibilities of Russia using military force to invade eastern Ukraine. Heavily armed pro-Russian rebels have seized buildings in towns and cities across eastern Ukraine. Ukraine is preparing and is already in the process of taking military action while Russia is building up force in Eastern border with Putin promising to protect Russian population in Ukraine. None of us know what Putin or Ukraine will do next but it is important to watch the developments on this front because any negative developments here accompanied by weak earnings fundamentals can cause the 10% SPX correction that many have been looking for since 2012. Obviously, 10% correction in SPX can be disastrous for high beta names esp in the BioTech sector. My view on the Fed monetary policies remain the same as I have highlighted in my tweets. Disclosure – I’m short treasuries via TBT (another good hedge against Fed noise).
I plan to remain overall market short in the short-term. Till the NDX really confirms a change in trend, I do not plan on going heavy on the long side. Since I am a swing trader, I will continue trading opportunistically taking profits on the short side as well as going small long periodically with tight stops. As I have highlighted in the previous post, the risk/reward to short already beaten down names such as NDX IWM/RUT or IBB is not as good as shorting undamaged charts such as SPX DIA IBM V INTC T etc.
For the next week ahead, I went in small long (including names like MKTO, WDAY, PCYC, IDRA etc) to see if we get a 50-MA SPX bounce on Monday/Tuesday on 1yr-daily. If we do get that bounce I will sell in to the bounce almost immediately still staying net short expecting the head and shoulders on NDX. If we go below that, I will exit the small longs & add more SPX and DIA/DJX short. If we approach the resistance around 1830 on SPX, I plan to start adding small long again to see if we get a small bounce at these levels. On NDX , if we approach 3400, I plan to lighten up short and start going long to see if we bounce of the 200-MA. As mentioned in my previous post, if NDX reverses the trend and go above 3600, then I plan to go heavy long till all-time market highs of 1910 on SPX where I will start shorting market again with 1830-1840 as my target (bullish channel). Unlike on the short side, I plan to go long on beaten down names including BioTech small caps, WDAY, MKTO, N, AMZN, GOOG et al because the risk/reward for going long on these names are much better than undamaged names. IMO, it is foolish to be shorting BioTechs and NDX names instead of undamaged charts at this stage – except for scalp trades – of the game because the risk/reward is not there. You can read more on a tweet where I highlighted this back in March –> http://bit.ly/1lneQx9
Another important indicator that I always watch is the “fear” indicator, VIX. IMO, VIX is still very low compared to the action that we are seeing in many names in NDX. As I have tweeted many times before, I am short market a bit heavy via VIX which I feel has a lot of upwards room. Currently, the VIX indicates no real fear in the markets. I am looking for durability in these short-lived spikes. Any durability in the VIX rise will make me lean strong towards a 10% market correction. I will tweet more details on this including key levels to watch this week.
Lastly, I wanted to briefly address biotech sector specifically with respect to these macro conditions. I have started noticing a lot of BioTech trader and investors are narrowly focused only on the sector often citing valuation and rarely peek their heads outside the sector which to me is very dangerous. In the past 10 years, BioTech sector has been in a straight bullish trend with minor correction but this correction is the first of its kind multi-year trend break correction. Even the 2007-08 crash was a minor correction compared to the correction we are going through. i.e. -35% 2-yr recession vs -25% >3-month correction !! While I still believe BioTechs will head back over the all-time highs again possibly by year end, it is important to note the impact market corrections are now starting to have on the BioTech sector. Many BioTech investors could have ignored the markets, bought every dip and profited nicely in the past decade but this is no longer true. While I don’t think we are going through anything close to a recession, I would argue that the next recession or “real” market crash can severely damage your BioTech portfolio if you are not paying attention to the macros. This is a great lesson that many of us should learn and apply to our portfolios especially when we get the next recession. On the side note, valuation-catalyst plays obviously will work in any market conditions but allocating large portions of your portfolio to such companies is risky and and is not sustainable way to generate returns.
Obviously, if you roll like Warren Buffett or Carl Icahn – who have deep pockets, big varied investments and can wait for years to collect their returns sitting on nice dividends – then you can probably ignore recessions, corrections, bear markets et al. For the smaller account investors, traders and fund managers who need to generate consistent returns/income, macro analysis should be an important part of your portfolio management. If you do not short or hedge your trades that is fine as long as you understand when to take chips of the table and go heavy cash. By doing this, when the markets turn around, you will have an opportunity to profit greatly.
DISCLAIMER: The above is my opinion intended for informational purpose only and should not be used as professional financial advice. The above is not a recommendation to buy, sell, or short stocks or options. By reading the above text, you agree that any trades or investments you make are solely your responsibility. I cannot assure you that the above information is accurate. Trading stocks or options can be risky. Any profits, losses, or break even are solely your responsibility. Please consult a certified professional before buying or selling any such stocks or options.