Jan 31 2020 - I See A Window For Fast Money

We are at peak epidemic panic. I think we can trade that.

I have identified a pattern that a fast trader can exploit.

Be comfortable with "fast trading." Otherwise move on to another article.

Bear in mind that we were going to correct no matter the reason at this point in the rally. We actually have further to go.

This is risky.

I asked you not to “fast trade” this week, until now

I have been asking you to pull back on fast trading all week. Now that I have observed the nature of trading action this week, I see a tradable pattern. I'm still sticking with the 5% to 7% on this dip, but we are clearly not going straight down. Though the longer this drags out, the less likely we will get to being down 7%. Stock participants are really having a strong Bull to Bear debate, where each lurch to the downside is met with a nearly equal rise to the upside. So far, as I expected the downside is winning. In any case, patterns tend to propagate over a sustained period. It's this down hard then up moderately that I want to exploit. This is a risky trade, in that the Wuhan Fever epidemic might become the “Zombie Apocalypse” that the media is busy ginning up. We are now above 10,000 infected and 200 dead. While I think the number of infected is way higher, and likely the number of dead is equally higher, I believe the ratio, which is the mortality, is going down. At first, mortality was 3%, 2.5%, 2.2% and now at about 2%. I'm listing these data points because they were the results of nearly every day’s publication by the relevant authorities this week. I suspect that when all the numbers are in we will end up with a mortality rate equal to a bad Flu outbreak. We will never get the actual numbers because China would not admit to suppressing the stats. I do believe they wouldn’t fudge the mortality rate because that would interfere with the science needed to research and ultimately control this outbreak. So I believe we are going to wind this particular fearful panic over public health rather soon. The climax is here.

What’s a “fast trade?”

Very simply, it's taking a full position at the start. It’s generally a trade that's leveraged (via options) in my parlance, and it's time dependent. Meaning, it either is going to work within a day or two or it’s not. You have to be ready to take action on that trade rapidly, either taking the profit or the loss or some tactic to hedge the position to ameliorate the loss. For the purpose of the trade today, either it works or it doesn’t. If you aren’t comfortable with that, this may not be for you.

Don’t get tired of the repetition, but it’s important to restate that this sell-off isn’t really about China

I was talking about this correction weeks before it actually happened. This corrective phase is really about the behavior of the crowd. Market participants bid up the index to an unsustainable level. Whether the correction action would have been more gradual had there been no panic, or we would panic about something else. What else? Well, what happens if Bernie Sanders wins “Super Tuesday”, this Tuesday. So while the coronavirus winds down, look for the possibility that something else comes up. What else? How about we get that yield curve inversion? The 10-year is below 1.6%, it could happen again, with the two-year holding its level and the 10 gets pushed down. It can be all kinds of stuff.

Are you comfortable with trading? With options?

That said, this is a fast money trade, either it works, you buy today and sell Monday, or it doesn’t and you lose. So before anything else, you have to - in my opinion, use call options for this. I also would recommend spreading these trades. If you don’t know what a spread is, and or you never traded options before, please stop reading right here and find an item about investing. This is trading, and you have to be comfortable with the risks and when to take losses and hopefully reap profits.

First, if this doesn’t happen or you don’t agree with the following, just stand down

1. Are you comfortable with trading? Are you comfortable with options?

2. We need to see panicked climax selling into the close over the fear of further Wuhan fever news over the weekend.

3. China-related names sell hard to good support levels, even unrelated names sell hard.

4. You believe that we will see the type of continued volatility that we had this week - -sharp to the down, then equally sharp to the up (with a bias to the downside in an overall corrective phase).

5. Discipline to hold off on taking positions until the last 15 to 30 minutes of trading.

6. Do you have available cash to trade? In other words, don’t sell positions you already are in to turn around and take a shot on the long side.

7. Agree that in the face of all this ginned up fear of the epidemic that we are already in the end game. If you don’t believe that, stand down.

8. Understand that if we climax sell into the close today, you are working on the assumption that we have a near equal rally on Monday. Again if you don’t believe that this corrective phase will continue to have sharp upside rallies intermittently, this is not for you

9. You are comfortable to get on the long side right now, while there may be other unrelated China names that get caught up in the selling. You need to think flexibly on this. I may not list the best unrelated name.

Why options?

Why do I specify options for this type of tactic? Because you define your risk from the outset. You know that if the market goes against you - you will lose X. So you can say, I'm willing to lose ,000 or 0 to trade on this notion - whatever notion we are talking about. You can leverage that amount to make meaningful gains if the market agrees with you. If you were to use margin (don’t you dare) you would possibly risk more than K for the same leverage at k in options. If you use straight equity on a non-leveraged basis you may sit with losses until the market is over its corrective phase. That means you are turning your trade into an investment, which is a no-no. You can invest or even build a slower money position in a name you like, all this past week. Find names you like, and buy 10-15 shares, or three shares whatever, every few days until you get to a full position. That’s not this.

The List

I actually published a trading list this week I still think the names there are very valid. Let me add some new ideas based on the earnings reports this week.

Unrelated to China but selling off hard anyway -

Here are non-china names (except Tesla and Apple)

1. Microsoft (MSFT) had unbelievable earnings numbers this week. The high was 174, it's now trading at 170, if it falls a bit more by the end of the day, a well-constructed call spread could generate some decent alpha fairly safely.

2. Amazon (AMZN) - Last night AMZN was trading at 2113, and I think that AMZN is headed even higher. That said if the stock market really sells down hard, and AMZN gets close to 2000 or even breaks it, I think you can get some nice alpha in a call spread.

3. Apple (AAPL) is in the process of giving up all its gains prior to its earnings report, it's down right now at it’s low so far today 215, I would want to see AAPL down to 210 or below looking for a bounce on Monday.

4. Facebook (FB) already is trading at that first support level I charted out for you earlier yesterday at 203. The next level is in the mid to high 90s. The question is do you believe FB will hold and bounce on Monday? For this trade, you should consider giving it a bit more time via the expiry to work out. Or just skip it and look for something you are confident will bounce.

5. Tesla (TSLA) - Right now TSLA is not budging all to much. It’s down only 1%. If at the close you get a stronger sell-off, 2%-3, would be a great risk for a bounce on Monday.

6. Mastercard (MA) beat its earnings and it has hardly fallen in this sell-off. It’s at 320 and the high is 327. If within the last 15-30 minutes of trading and you can get six to eight more points below the recent high it could be worth trying to shave some points. MA is not currently very active in China.

7. Alphabet (NASDAQ:GOOG) (GOOGL) - This one is very tricky. It reports on Monday after the market closes. The recent high is 1500 and it's now trading below 1435, down fairly hard. The question is, does it trade down more on Monday going into earnings or does it bounce? It all depends on how panicked the selling is going into the close. If GOOGL is down harder, getting close to 1400, this might create the most alpha than all.

China-related - gonna keep this simple

1. Alibaba (BABA) - The low this week for BABA was 199, it's trading at 205, If you can get it at 200 that's close enough. To me BABA is actually going to benefit from Wuhan Fever because if I was a Chinese citizen I would order everything in and not go outside unless I absolutely must. I do find it interesting that BABA is holding a higher level than its lowest low. Just from a technical standpoint, this is very interesting. If you want to make a bet that we are at peak epidemic mania, this might be the best bet. Obviously, this is a trade. In my opinion, no Chinese equity is an investment.

2. Luckin Coffee (LK) - There's a lot of hot money in this one. It's the Starbucks (SBUX) of China. It's expanding very rapidly. The key is that it isn’t a “sit down” cafe, it's a take out, and I expect a delivery model. Therefore I expect LK to recover faster than SBUX. I would again wait for the close and see it as close to 32 as possible to take a risk. I know I listed more in the note I wrote this week. You may find better China plays, great. Just use call options to limit your risk.

In summary, I'm listing these as ideas. You may have better non-China names to work with. Just pick a name that already blew away earnings results, and is selling down hard today.

I made no trades today. I will follow my own advice and try to make a trade as close to the closing bell as possible.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LK over the next 72 hours. 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 going to stick with my plan. If the market behaves like I think it will I will put on a trade or two. Otherwise, I will welcome the weekend unencumbered by risk. I picked LK almost randomly to satisfy the requirement. Don't decide on LK just because I listed it. The decision is yours please be confident and understand the risk. Otherwise, stay in cash.