In A Possibly Consolidating Rally, Here Are 6 Great Time-Dependent, Slower-Money Trades

Summary

How did I know that today would start in the red and end in the green? Easy, the market cares about the visibility of profits, taxes, interest rates. Not Iran.

The market selling off is not comfortable, but it was very healthy for the bull.

This sell off may signal a consolidation phase for the rally and perhaps a more sustainable level, and that's a good thing for traders.

I'm offering several time-dependent trades. Traders should add to these positions slowly and buy in small increments. I'm hoping to catch another selloff to average the price lower.

How Did I Know the Market Was Going to Start Off in the Red and End in the Green?

My last two missives were very short-term oriented, keeping trades on a tight leash, and talking about “fast-money” technique. No one likes to see a down market, especially since we’ve gotten used to a market that goes up every day. Naturally, once the market turns negative, many inexperienced market participants assume that “the sky is falling.” Once confronted by a change, a strange recency bias sets in, in that the market was down because a general got killed, and so the market crashes into bear mode. That’s not how it works. Yes, we can get bad news that can change the market’s upward bias, but it's mostly of a single kind. So what gave me the insight to assume that this situation with Iran wasn’t a big deal for the stock market?

Never Forget Rule No. 1

You all know the prime directive by now, right? Rule No. 1, the stock market hates uncertainty, uncertainty about revenue, earnings, interest rates, competitive products, taxes, etc. What it does not care about is a threat coming from some third-world country with 50-year-old fighter planes and a medieval economy and rule of law. Here the outcome is crystal clear, the US can turn Tehran into a pile of rubble. Yes, they can attack us and hurt us, but the outcome is clear, and that's what the market cares about. Also, let me say that the Persian culture is sophisticated and deep, and these are very intelligent pragmatic smart people. I'm not being jingoistic, I'm just trying to explain why the market shrugged off this kinetic action by the US. The Iranians are pragmatic, they are going to wait, they are going to think very hard before they take their revenge. It will be about optics for internal consumption, so you and I may not even care. Or maybe it will be big but then it will be against Europe, or the Gulf States or Israel, so the US won’t burn them to the ground. My final word on this, the main thing for the market is that nothing is going to happen now, and that's what the market cares about.

For about two months I have been titling many of my notes with words like ”melt-up alert” and “melt-up/meltdown.” The reason was simple -the charts foretold that we were headed to near manic levels. I know that many of you were upset with the recent unexpected drop, but I was celebrating. I was happy not because it would present an opportunity for some quick alpha, which was great too. No, it was because this price action is exactly what the rally needs. We were on our way to an unsustainable hyperbolic trend. Now, a little fear, a little reminder that stocks can go down as well as up. And a number of traders and investors getting shaken out of positions will be the fuel that drives the market higher. So, now what?

I'm Hoping That We Consolidate a Bit. I Think That It Will.

We may re-establish the same upward arc, and get more oversold, or we could now see a bit more chop to the market. That is what I'm hoping for. So, I still want you to keep your “fast money” trades on a tight leash. You should be taking profits slowly throughout the week. I want those of you who are following by my cash management discipline to add back that one-third of your cash that I said you could allocate to this sell-off. Not all at once. You could now even sell a share a day of each position if you like. Trades are free!

Looking at the VIX, I think it confirms that market participants are much warier, and I think that means that there will be more volatility. A consolidating market means that we will likely look to find a lower support level and breaking new ground only slowly. After a time, the market could return to making new highs more aggressively. That's what I mean by consolidation. What I don’t see is a bear market. Either way, you should be long. When we get another hard sell, then sure buy the green again. If you see good stocks falling to a support level, then buy that dip. If we are going to level off, a longer-term trading posture should work as well. So I have some suggestions for trades with a longer time horizon. The way you need to work these is to buy very slowly in increments. These trades should achieve their full potential five to nine months from now. So you can 10 shares, 20 shares a week of each. I'm using that level of accumulation as a suggestion based upon how big your trading account is. Please understand that I'm hoping these names fall lower over the time as you are accumulating them. So I don’t want to get commentary that I recommended a name and it’s down five points. I want it down five points so we can average the price down. Also, these are generally names I have suggested before. I think that it makes sense at this time to highlight them again.

Time-Dependent Trades. Names That Should Provide Alpha Early This Year

Diamond Equity Acquisition Corp (DEAC) Becomes Draft Kings

Now that the excitement has died down, I want to remind you that this “reverse merger” is going to be happening sometime in the first half of this year, according to the principals. You should acclimate yourselves to this acronym - SPAC. SPAC is special purpose acquisition company. It's a blind pool where investors take the word of the organizer that they will find a great company to acquire and take public. It's colloquially referred to as a “reverse merger” since the company being acquired is the actual company going public. The last famous SPAC was Virgin Galactic (SPCE). DEAC will become Draft Kings, and I think the valuation will be significantly higher over the next few years once it takes on the brand. Many states are about to approve sports betting so the visibility for revenue growth is not totally in the stock. Also, there's the scarcity value of there being a duopoly with FanDuel as the major sports only app, and Draft Kings being the only public one so far. I see this as a long-term speculation that will develop over a few years. I'm also hoping that when we do have a strong enough sell off that it will pressure DEAC and can buy at a discount. DEAC is supposed to have Draft Kings merge into it before mid year.

Alibaba (BABA) Higher Going Into the Trade Agreement Signing Jan. 15

I spoke positively about BABA for a number of reasons recently, they are:

  • I still believe that BABA trading on the Hong Kong Exchange will be connected to the Shanghai Exchange even though there has been some push back from readers on that.

  • China is off of Trump’s Twitter rages, and going into next week I think better economic news out of China will keep the stock on the up.

  • We have a big signing on China Trade next week. I think BABA runs into that.

  • Since we don’t know when the connection to the mainland let’s trade for Jan. 15 and then find another entry point if the market sells off.

Boeing (BA) Bad News Again and the Stock is Still Up

BA bulls had more bad news to contend with. BA taking on new debt, the FAA finding issues on the 737 MAX, and what’s more, it has nothing to do with MCAS. They found a faulty wiring configuration in the tail section, and finally, there's a discussion that the FAA will require more pilot training on a MAX simulator. So BA dropped 20 points, right? Wrong. It closed up. Look, the CEO was booted because he insisted that the MAX would be approved by December, and now there's no deadline. Practically speaking the MAX will be approved in the next five weeks. The training can be done in parallel, but the process is moving along. The US doesn’t want to delay the MAX to penalize BA. The “i”s are being dotted and the “t”s being crossed. The software has been written and tested. There are thousands upon thousands of high paying jobs dependent upon this plane. The December deadline was too aggressive, but there was no doubt that some form of readiness was going to be possible. Now with these two extra months, the end game is afoot. I see BA moving substantially higher in six to eight weeks on that news. That brings me to the next item on our list of “time-dependent” opportunities.

General Electric (GE) Was on Dec. 31, Today It’s Above 12

I have GE right under BA to signify that their fates are joined somewhat. GE is the exclusive provider (in a J/V with CFM) for the engines that power the MAX. They also provide engines for the popular Airbus 321NEO, though this plane also uses United Technologies (NYSE:UTX) as well. Right now, GE is building more engines for the NEO. Once the MAX is approved, GE can produce these engines flat out. I believe the jump in GE prices has to do with the impending news of the MAX visibility of approval. The other possibility is that GE will announce the spin out of GE Healthcare which I think is just chatter. That said, a name like GE jumping more than 10% in a week with no news is significant. I see this as a time-dependent trade that GE will move significantly higher in the next six to eight weeks.

Biogen files it's Alzheimer's Drug With FDA Some Time Early 2020

I'm absolutely no expert in biotech, but I do know how devastating dementia is and how strong the need is. There's currently no real treatment for Alzheimer’s. I believe that the FDA has all the incentive to get some treatment out there. Even if this treatment would only extend the quality of life a few months, would be worth it. I don’t know when the approval is coming, only that it's supposed to be early 2020. That should be before March, I guess. Also Biogen (NASDAQ:BIIB) has a patent cliff coming and that could hammer the name. Please accumulate slowly. I think this drug would be a multi million-dollar seller.

Goldman Sachs (GS) 1MDB Scandal Almost Over and Jan. 23 Analyst meeting.

A few weeks ago Barron’s had an item about the 1MDB scandal. This is about shenanigans with Malaysia’s sovereign wealth fund, the details of which are unimportant. The penalty discussed is only billion. Still quite a lot, but much less than originally floated. The deal is supposed to end in early 2020. Early 2020 is here, and whether it's this month or next month I think the analyst meeting on Jan. 23 will put some certainty on this issue. This upcoming meeting is historic, in that GS has never in its 100 years-plus of existence did it ever feel the need to have one. So why now? Well GS is not the GS of old days. GS is a Fintech powerhouse with a very strong consumer offering starting with its huge deal with Apple (AAPL) Pay and its Marcus division. I also think they will highlight their money management chops as well. GS is only trading at 9 times earnings. Check out what other Fintech names are trading at. I expect a rerating of GS once they showcase all the new stuff they are doing.

My Trades:

I Took Profits On Uber Tech (UBER), Here’s Why

The Information had what could only be characterized as an expose on UBER and its management by Dara Kosrowshahi. I felt that I could no longer rely just on the chart and the melt-up to carry UBER higher. I'm a long-term bear on Uber (NYSE:UBER), but, I saw an opportunity to trade the name from 30 to 37ish. I still think that Uber has that potential. In fact, it closed up today. Right now, the melt-up concept is under question in my mind, so I prefer having true conviction in a name that I'm taking a risk on.

I Went Long on Crowdstrike (CRWD)

I could have just taken additional funds and just added CRWD to my portfolio along with Uber. Instead, I made a qualitative choice. I want to hold back funds, just like I am advising you to do. I sold my UBER and used the funds to pay for my CRWD options

I Rolled Up My Hubspot (HUBS) Calls to harvest some cash. I am still holding my BA, SPLK, and LOVE CALLS. All these trades are expressed in CALL options. I also added to my DEAC via Warrants.

Disclosure: I am/we are long CRWD. 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 am long BA, CRWD, HUBS, LOVE, ROKU, SPLK I expressed these positions in CALL options. I am long DEAC in Warrants

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