Phase 1 Done: I See A Sell On The News Event, I'm De-Risking And Shorting

All the known threats are gone, and the incremental buyer has bought.

We can continue to run up on euphoria and momentum or we can have a healthy sell off. I'm working off of that thesis. We have a momentary sell-off.

I have been de-risking by building cash and recently hedging using the VIX and now shorting an overbought name expressed through a PUT.

You don't have to go as far as me. You should be working on setting up a pile of cash up to 25% to 35% of your trading budget to use to shop for bargains when the sell off does happen.

If you are an investor please ignore this. An investor is an owner and as such should never sell unless you absolutely must. You should be building a portfolio that generates revenue for you.

I have been warning you of the melt-down phase for a while now

I'm not sure this is it, but I do feel that at the very least the indexes need to rest at some point. I'm no longer comfortable just going long. All I can say is, trust your instincts but make sure that it isn’t just about the fact that the market has gone up so much that you need to get out. I have laid out certain signposts that I'm watching to tell me that we have gone too far. The PE has been elevated for a while, but also I have set before me the 3300 level as a top for the S&P 500 for mid-2020 and we are practically there.

So Far It Hurts.

For a trader, price is your guide. Price is truth. That said, part of a trading discipline is reacting to such milestones, all things being equal. So I have been de-risking by selling out of positions and holding cash. By selling good positions I gave up gains to get to a (perceived) safer space.

There have been opportunity costs.

• Sold Zoom Video (ZM), and it promptly shot up another 2 points.

• Sold Hubspot (HUBS) last week it is up 7-8 points.

• Sold Crowdstrike (CRWD) is up 3-4 points.

All of these names were cut just to de-risk. I believed in these names. I have to be this disciplined because I'm trading options, so if market sentiment turns I can’t let sleeping dogs lie. On the other hand, I'm glad I sold Micron (NASDAQ:MU) at a loss, but MU has gone much lower since. It looks like all the chip names are slipping. So far getting to cash has been a sea of red in opportunity cost.

My Thesis for a Bit of a Pullback

We have no issues before us. When everything is hunky dory we get to an oversold condition. This means that anyone and everyone (theoretically) that had wished to get long have already done so. Commentators have been saying the market has been oversold for weeks. Again, stocks can continue going up under oversold conditions for months longer. It can and it has historically been much more highly valued on a PE basis. In fact, while right now I believe the market top for the year is ultimately about 3400 to 3500 on the S&P, if earnings go the way I believe the ultimate high for the year could be substantially higher.

Here are some reasons why I decided to express a more bearish outlook for the next week or so:

• We have elevated PE ratios. It has been up all day. I'm monitoring the VIX very closely and even at the peak today the VIX was above yesterday’s level.

• The 10-year continues to go lower. That is concerning.

• As I have said it's widely accepted that the market is fully valued as is. I'm not predicting a bear market. In fact, as I said last week, I'm very bullish.

• Right now we need to see that higher level in earnings to justify higher prices. We are just starting the earnings season and so far so good. That said I think the market will get a “case of the yips” just before earnings reports start coming in earnest.

• Oil has been in the red, even though there was a deficit in the weekly surplus. By itself not a big deal but as part of the mosaic it’s a red flag

• Last week, I said that the chips will be the market leader. You can disagree, but the decided turn in chip stocks today got my attention

• Then you have all the high beta names like Tesla (TSLA), Beyond Meat (BYND) and Apple (AAPL) that were flat to down.

My biggest concern was the VIX, and that's why I got more aggressive in de-risking.

Aside from selling out my trading positions on the long side, such as breaking my spreads and selling half my Boeing (BA) CALLs, closing out ZM and Micron. I did not add to my VIX calls. But I went short on BYND, and I expressed that in PUTs. So far, of course, I'm in the minus column. I intend to hold it through to Friday. If I'm still in the red, I will throw in the towel and look for another entry point to the downside.

Why BYND?

Long-time readers will wonder if I just have it in for the name. Maybe I do. I think that a processed food company should not be trading at this level, no matter if they do to win the McDonald’s (NYSE:MCD) account. I already was pricing out PUT options and trying to boost my courage to pull the trigger when I heard the downgrade at Bernstein. The stock is trading at 20 times 2019 revenue. The analyst has a projected 0 million revenue for 2021 that's still more than six times next year’s earnings. This is not a tech stock and also if past behavior is a guide, with the stock at this elevated level I would not put it past this management for them to sell a convertible bond or another secondary to dilute current shareholders just as they have an opportunity to get their investment back. So yeah I have it in for these guys, for how they treat their shareholders and because the stock is just the most overbought name, even more than TSLA. That said, I will look to go to the short side against the QQQ Nasdaq. BYND behaved in a way that I think confirms that it will fall lower from here. Let’s look at the chart here.

Yesterday BYND flew up and then nearly completely reversed by the end of the day. When you have that kind of reaction it means there are a lot of previous stranded buyers that want out. It also means that traders who got long at 80 less than a week ago don’t want to stick around and lose those gains. I would say the same for a whole slew of stocks. The upper-most line is where BYND held around 107ish, and the next horizontal line is the next support level a little higher than the mid-90s. I will look to close out my position there. I will continue to short BYND if it bounces from the mid-90s, if it breaks lower I won’t try to follow it. I may look for other names to get short via PUTs.

There are other examples of this, like TSLA, many current holders may have gotten in at 350 less than a month ago, and if TSLA continues to sell 19 - 20 points a day, won’t stick around to see their gains evaporate. This is what I mean regarding overbought conditions. No one really knows when the market will ultimately be overbought, just know that when enough people run to the exits, slower players will feel like they got trampled. I don’t want to scare investors, this is not your problem. A momentary retreat only serves as an opportunity to deploy your funds for investments. I only hope that those who read my content have made their own preparations using the cash management techniques I have tried to promote here. At this point consider yourselves warned. A trader should make provisions and set aside 25% cash in reserve for trading. Consider going long on the VIX and writing CALLs against long-standing positions.

The message here is this. Think about protecting your gains. If you don’t want to hedge that's fine. Just have some cash reserves at the ready for when stocks do sell off in earnest. I have called for a sell off of as much as 10% previously. Now because we have leveled off a bit, I would say we will likely have a typical 5% to 7% sale in the best high beta stocks. Once we get that sell-off, you can go shopping.

My Trades: I am holding a smaller number of CALL spreads for BA, I am long the VIX via CALLS and expressing a short view of BYND via PUTs.

Disclosure: I am/we are short BYND. 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 expressed my short on BYND via PUT options, I am still long BA via CALL spreads I am also long VIX via options