Jan 27 AM - The Corrective Phase Has Begun, What To Do?

Summary

Did you build up your cash reserve? If you haven't, then try to trim some of your trades now. Write calls against positions, especially ones about to report earnings.

If the major financial names are a guide -- they sold off 5% to 7% even though they handily beat expectations -- I expect the same from the tech names.

The good news is, we aren't going to have that precipitous drop that we had in 2018. The euphoric build up just did not happen. Though we are overbought.

Cash is King right now. Think twice before you deploy any. Really wait for a dip as close to -10% as you can. Or wait for a name that has fallen to bounce especially in the face of an overall falling market and buy then.

If this means you don't trade this week so be it. Stick to slow money trades, buy a few shares at a time for stocks that you want to develop over months instead of flipping in a day or week. Good luck!

Dow -358.37, S&P500 -34.15, Nasdaq -74.03. The Corrective Phase Has Begun. What To Do?

Last week was the first down week this year. I think that in the face of this week’s Q4 earnings reports, and last week’s headline shock of Wuhan Fever, that last week’s dip signifies the beginning of a corrective phase of this rally. This note is about the technical aspect of the indexes selling off and not the apparent cause. In other words, my thesis is and has been that the stock market rally has reached an interim top, being overbought, and the epidemic and this upcoming earnings report is only the catalyst of what was preordained by the market's hyperbolic rise (what I have been calling a melt-up) since mid last year.

Many of you likely had gotten tired of me talking about the melt-up in the last few months. Probably in the last few weeks, my pointing out that we are vulnerable to a melt-down has once again found some of you growing tired of this new assertion. In both cases, I started pointing out these market turns somewhat early. This not an apology, it’s an explanation. Once I see the beginning of a market turn I point it out. At the same time, I hope that some of you would be moved to prepare. The last week has been the first real evidence that the market is in a topping formation. The good news is I am no longer certain that we are going to have a melt-down that corresponds to what happened in 2018. I think it will be more gradual, and give better opportunities to buy the dips once again.

While I No Longer See the Melt-Down, We Are Still Going Through a Corrective Phase

We didn’t have the euphoric phase so I don’t see a melt-down. It’s that simple. We are over-bought, but not to the extreme level that we had in January to February 2018. That doesn’t mean there are no catalysts to the downside, the newest being the surge of Bernie Sanders leading in Iowa @ 25% and New Hampshire @ 22% beating Biden in both. Of course, we have the Wuhan Fever epidemic that will continue to pressure the market to start the week, more on that below. The main thing that we have to deal with in the foreground is the big earnings reports week coming up. First, let’s quickly review the set-up: last year stocks largely went up in valuation not earnings. The PE ratio at its peak in the market approached 19 times earnings, which is near recent historic highs. Most market participants accepted that higher valuation based on the notion that interest rates will remain low, and that at some point earnings will rise justifying the dear valuation we currently have. While the average earnings are so far slightly negative, it would behoove the cause of valuation for 2020 if 2019 Q4 reports would show positive earnings. If the high tech names leading the profit parade this week do well then the notion that 2020 earnings will also outperform becomes very plausible. In fact, the major financial names beat expectations handily and we hope the rest of the market performs just as well.

Financials Had Great Earnings. What Does That Portend for Upcoming Market Behavior?

So how are J.P. Morgan (JPM), Morgan Stanley (MS), Bank of America (BAC.PK), and Citibank (C.PK) doing now? JPM -7.1%, MS -5.3%, BAC -6.2%, C -5.7% all ended last week significantly below their highs. I think this is a good guide to where I think the overall market could correct during the earnings period as well. A 5% to 7% correction is normal and overdue. Let me be clear: there are two ways that a market can correct, the most obvious is a drop in the indexes, a drop of 10% is the classic “correction” level. The other form of correcting is through time, the indexes can stay at a relatively elevated level, while underneath there is a moving correction from one sector to another. Or even more unusual, that prices just don’t move all that much, especially with the biggest capitalization holding up the indexes. All that said, I would venture that the indexes will follow the behavior of the financial names that had handily beat their earnings reports yet sold off 5% to 7%.

Amazon Thurs., Facebook Wed., Apple Tue. Report This Week and Alphabet Next Monday

I expect them to show good earnings, even beating their estimates. I even expect them to rise significantly at first, but in the end, they will behave similarly to these big financials and sell down. The way the FANG names trade will probably show the way for the rest of the market. Making this even more complicated is the scary situation in China. That said...

We Should be Reaching Peak Wuhan Fever Corona Virus Hysteria This Week

At this point you probably all have read up on what is going on in China. I am not going to regurgitate the news here. Let me just say that I am having a hard time believing the numbers out of China right now. As of this writing, the number is 56 dead with about 2,000 affected. The way they are shutting down the movement of dozens of cities that have now reached 60 million people doesn’t jibe with the mortality and infection rate. They are building two 1,000 bed “hospitals” that are really quarantined asylums in about 10 days. There is no cure for the Corona Virus. The level of action belies a greater virulence and more urgent danger than a less than 3% mortality rate. I suspect that there is a much greater number of infected people and that this virus is more infectious than they let on. I would aver that many more people are dead than they are telling us as well. All that said, the extreme actions they are taking will most likely stymie the spread, and the damage that would have happened had they not taken such measures will be lessened.

What Does That Mean for Us?

If the spread of the disease is limited to central China then the US stock market will quickly get inured to the developments there. This epidemic will certainly shave a good amount of economic growth off of China. Even though China, claims to have 6% economic growth, I believe the number is closer to half that. If as some say this epidemic - seemingly timed perfectly for the Chinese Lunar New Year, similar to our Christmas, New Year, and Thanksgiving all at once - will shave a full percentage point off of GDP for China, then if the US does have accelerated growth this year to above 2.5% it will exceed China’s growth for the first time in decades. This means nothing for stocks per se, just interesting against the backdrop of UBS prediction publicized on Friday that by 2030 China will be the leading superpower. We’ll see.

33ae1b8c.jpg

In any case, I think we will see peak Wuhan Fever’s effect on stocks this week. Again, as long as the epidemic stays in China and doesn’t jump to our shores, the market will move on to focus on earnings. Last week, I stated that now is not the time for what people call “Fast Money” trading. I would continue to cut back on taking aggressive positions right now. I have been asking you to build up about 25% cash in your trading account. If you have positions in names going into earnings, I think it would make sense to write calls against those positions. I maintain that most names are at peak valuations, of the big tech names only Amazon (AMZN) is significantly below its all-time highs. I would not want to wager on any name that is reporting this week. Take a step back, you don’t always have to be trading. The best-case scenario is Wuhan Fever gets to a steady-state, and the real numbers dribble out slowly so as not to unduly perturb the market. Earnings exceed expectations, and the market maintains its current levels. I expect much more volatility than that, and that even if the big cap techs and the smaller players do beat expectations the market will roll over and they with it.

Health- and Med-Tech Names

Last week, I featured the health-tech names and touted them as being names that should fare better than the traditional techs. Little did I know that Bernie Sanders would be taking the lead in Iowa and New Hampshire. I did say that you should slowly build positions, even buying no more than several shares every few days. If these names do sell-off, I see this as a buying opportunity. A name like Teledoc (TDOC) or a DexCom (DXCM) will end up lowering health care costs. So I think that any major change to healthcare should ultimately benefit these names. Now is the time to pick up these kinds of names in the coming weakness in stocks.

I Would Wait to Get into Any Name Once Its Price Is 10% Below Its Highs

If you want to buy the dips, wait for the name to be significantly below the highs. The only time I would not wait for -10% is if the stock starts trading up on a strongly down trading day overall. Cash is going to be king this week, so hold on to it. If you have some deep profits in some names that are a trade, consider trimming some. DO NOT SELL ANY INVESTMENTS. Also if you are building a position in a slower trade, what I call a speculation, don’t sell it out. Consider this as an opportunity to add to those positions if I am right and the market sells off. Just make sure that your cost basis is going down. In other words, if you are buying shares in ABC and the average price you have them for is 40, wait until the shares are priced below that level to buy more.

Several Weeks Ago I suggested that you buy Double Eagle (DEAC). It’s Barron’s Cover Story

I always enjoy scooping Barron’s. Its cover story is on sports betting. It features DEAC and how it is going to become Draft Kings. They don’t mention the warrants of DEAC which is how I recommended you speculate in them. I am up 100% on my first tranche of the warrants and 60% overall. I hope some of you followed me into this name. Now is not the time to buy this name. Let the hot money come in tomorrow, and it is likely that when the overall market sells off they will run out again. I intend at some point to convert the warrants into the shares and hold onto this for the long term, possibly for years. So if after you read what I wrote, and then Barron’s article, you decide you want in, take your time. I think you will get a better price next week, or the week after. That said you should start to accumulate the name BEFORE it officially becomes Draft Kings.

Good Luck Trading This Week...

Disclosure: I am/we are long DEAC. 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 DEAC Warrants

0
0
0
0
0
0
0 0 54
Submit comment
    No comments yet

Jan 30 2020 - Facebook Beats Yet Selling Off Hard - Canary Meet Coal Mine

Aug 4 2020 - Phase 3 Trials And More

Jan 31 2020 - I See A Window For Fast Money

Jan 26 2020 - Sorrento Therapeutics: Growing On Its Own Terms

Feb 9 2020 - Predictions: Amazon Rules Rally This Month

Feb 17 2020 - Caution: Coronavirus 'Dragon' May Have One Last Whip Of Its Tail

Feb 23, 2020 - Week Ahead, And Why Shopify Will Be The Next FANG Stock By 2021

May 2 2019 - Time For GameStop To Use The 'Konami Code'

Submit media
Enter your nickname

Show

Show

Enter your email address and we will send you an email explaining how to change your password or activate your account.

Back to login form

Close