Just Looking at the Indexes are not telling us much

If one were a cursory observer of the stock market, the indexes haven’t changed all that much. As such, no one could fault them for assuming that not much was happening. For holders of the high beta price-to-sales rockets the last two weeks have been as red as an abattoir. It’s my conjecture that this ferocious toing and froing from the red then into black and in the red again all in one day is forcing even the most intrepid stock trader to trim positions. Writing calls against positions can only soothe the nerves so far against a backdrop of dire warnings that the end-is-nigh as election day looms. I have stated this often though not recently, that trading is akin to any high performance competition, there’s a very big component of mental toughness. Can you separate the signal from the noise? Can you hold on against the onslaught of negativity? As the indexes rapidly move around it’s as disorienting as a temblor, the ground moves underfoot, undermining the balance. So too, in times like these, what is a trader to do but trim off positions and get to some level of cash? As the long tail of traders selling a bit here causing plummeting prices of the many of the most valuable names. If you have the fortitude you can make some money.

Five days in a row with a morning rally and followed by a sell off. It’s enough to make one mad (not the angry kind)

Traders often talk about the pain trade…

Often, the hardest position to take is the one that yields the most alpha. Right now, as the indexes are vibrating mightily do we take this as a signal flashing red and just sell everything? That might be easy, but is it right? Actually it would be prudent to partially join the nervous Nellies and trim positions a bit more. I had been telling you to be trimming positions and generating cash a few weeks ago, and I hope you’ve been doing so. If you have some profit-laden names in your portfolio and you are feeling queasy, go ahead and follow your gut. You should be sitting with 25% to 35% even 40% cash before the end of the month. That still leaves 60% to 70% of your trading account in stocks.

Be long and strong, take the pain and make alpha

Again, as the weeks and days get closer to Nov. 3, I think it will get harder and harder to hold your portfolio together. Let me say that the pain trade is to stay long, and overall, after you’ve written tight calls, and perhaps even taken out hedges against the QQQ or the SPY, you should be long and strong. If we do sell off it will be sharp deep (+10%) and most of all evanescent. I suspect a replay of 2016 no matter who wins (though I tip toward Trump). The biggest part of the sell-off will be in the futures, and away from actual NY trading hours. Now that I have exposed myself as a heretic, hopefully you will judge me on my stock market assessments and not my political expertise. There’s a high correlation between a bull market and incumbent success. Let us push on from this to the denouement:

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These are the main thoughts I want to impart for this segment. The extreme volatility yet running in place is putting tremendous pressure on the psyche of traders. This causes them to trim positions of the most expensive stocks (price to sales). If you have set aside the required amount of cash and hedges I want you to stay with the “pain trade” and hold fast to equities.

Now if you have extra cash perhaps you want to play offense instead of defense. What will have the most bounce after Nov. 3? Let me put a finer point on this date. Theres a very good chance that there will be no sell off, or most likely as I said in the previous paragraph the selling will be away from trading hours, in the futures market in the early hours of Nov. 4. Either way, I think you should aggressively deploy that cash, sell off or not. I think we are going to have a relief rally that the decision of who is president will be decisive, and we can finally get on with our normal lives away from presidential politics. Either way, you should be planning your trades, This is really about the trading plan I outlined a few weeks ago.

I created a trading roadmap using charts.

Actually check out the prior article which is the basis for this whole plan.

Let me cut and paste the prior Nasdaq 100 chart and then update it for where we are now (here).

The above chart from several weeks ago shows the old trend line and the new trend line after we broke down early September. The lower line is the new trend established about a month ago now. At the time of the chart was made it looked like trading would break the new trend line. I felt that this line would hold and that in the subsequent trading would bring up the indexes until it got close to the old (upper) trend line. As I noted in previous pieces, the old trend line will form the upper limit of a new trading channel. The old saw as true as ever is prior support (trend line) becomes resistance. Here is a new updated six-month chart of then ETF (QQQ) below (here).

As you can see we made a foray toward the top of the trading channel only to be turned back. Notably the new trend line is intact. Let me give you one more index chart to illustrate the volatility going nowhere thesis with just today’s chart for the S&P 500 via the (SPY) ETF (here).

If you weren’t watching today the SPY and the QQQ, even the DIA, were red and green perhaps five to six times, finally settling in the red. It’s enough to make us all lose conviction. So let’s look at some high price-to-sales stocks and where it might be safe to start building positions.

Here’s a select list of stock heroes that are temporarily playing hurt you want on your roster.

High beta names that should be on your watch list. I’m going to just give you the support area that you should start building a position instead of pasting charts. It would take too much room. As an exercise, you can take my support number and look at the chart to pick out where I see support. Also, if any of these names break support meaningfully there’s no guarantee that they wouldn’t break down fully. So please, don’t buy all at once. Take small bites. Decide how much you will risk beforehand then break that total number into at least five pieces, and spread them out over a week of trading days. The names on this list must be down below 10%. Both Microsoft (MSFT) and Adobe (ADBE) are down about 8% so if you like these names watch and wait for them to break down -10% and play the same game.

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Let’s start with the biggest name Amazon (AMZN)

All Time High, the ATH 3552 Closing Price 3,184 percentage down: -11%

I see support starting at 3,084 to about 2,960. The truth is, if you don’t have AMZN in your portfolio it’s probably OK to buy a little right here. The best way to participate cost effectively is via a call spread. The other way is to get a brokerage account that allows fractional shares. If I were to buy shares I would wait for the possibility of seeing 2900 just to be sure.

The WFH superstar Zoom (ZM)

ATH 589 Closing Price 513 -13%

I see support at 470, the range being 465 to 480. That’s a long way down from here so I would be careful with ZM. This is especially so as we are virtually seconds away from a vaccine announcement. That doesn’t mean the bull case for ZM is over, quite the contrary. I just want you to wait for the price to come to you. Internalize this concept, understand where support is, and wait for the stock price to get there. If it never gets there, guess what? There are thousands of other stocks out there. If ZM gets momentum to the downside there’s no guarantee this 470 level will hold. ZM shot up like a rocket and there’s consequently little support underneath. The next discernable level is 410ish then 250. I’m not trying to scare you, just understand what you are getting into. Personally if ZM does get to 480 I will be sorely tempted to build a position.

The first Cloud First Enterprise Play Salesforce.com (CRM)

ATH 285 Closing price 254 -11%

Looking at the chart the support is right here at this 250 level. My thesis is that the pressure on expensive names will get stronger. So keep an eye on this name, and if the next really strong down day CRM does not go down, then this is the level. If not the next level is 15ish points lower.

Close the deal from anywhere Docusign (DOCU)

ATH 290 Closing Price 218 -25%

This is an astounding retreat from the all-time high 25 percent! Perhaps the high was an overshoot, but there’s no reason to disbelieve that price will never be re-attained again. DOCU has a permanent place in the enterprise firmament, both SME and huge companies want to use what DOCU has to offer. Perhaps there’s new competition that I’m unaware of, but DOCU had competition all along. I see support starting right here but is really firm around 200ish. I would be very excited to be able to get into this name at such a discount to its ATH. The question is why has it retreated so hard? The easy answer technically is that it was “overbought.” Simply that everyone who was going to buy, bought already. When that happens, you have a buyer’s strike and those who need the money and wanted to take a profit at that elevated level start a rush for the exit and that cause weak hands to sell further. I have one warning, a vaccine announcement, may be pressure this name further like it might with ZM. Still it’s my thesis that all the above names are being sold due the crazy vacillation of the indexes have shaken sellers loose.

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I could easily go further but this piece is getting too long. So let me give you homework. Go through your watch list and look for great names that have fallen at least 10%, then look for your entry points. This is an exercise I do all the time. Sometimes good stocks fall for random reasons, just like Brownian Motion explains random motion of molecules, the price of stocks occasionally fall for inexplicably random reasons. Once they start falling, they will cause further sales, and I find that stocks down 10% tend to fall further to a good support level.

My trades: This time it is trades I didn’t do, but I hope some of you did, did anyone buy Snap (SNAP) or the silver ETF (SLV)? I shared with you all that I was over-trading, so I decided to stop trading for a while, and just manage the positions that I have. I have put myself on a trading “diet,” only opening my portfolio to sell a few shares here and there to build cash. So I missed Snap. I also have a discipline against trading into an earnings report, and even though I was sure SNAP would shine I decided to keep my discipline. I also mentioned that I have a long term investment in Align (ALGN). I hope someone followed me into that name too. It blew away earnings and is now trading up 91 points. That doesn’t mean it opens that high tomorrow, but I’m not selling it, so who cares. It’s in my investment portfolio and I intend to hold it for an additional six months to a year when we are finally back to normal again. How far can ALGN go? Not sure, but people are going to want to show their teeth when this is all over. So ALGN is not a trade but it is what I call a speculation, which is a long-term trade in my parlance. If ALGN starts issuing a dividend I will consider making it an investment and never sell it.

Disclosure: I am/we are long ALGN. 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 may add some of the Heroes Playing Hurt I listed in the next eek or so….

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