In this report, we cover our Coronavirus Custom Index which is comprised of stocks we believe benefit from the coronavirus as well as a playbook to profit from these strong performers.
To be clear, we didn’t find these stocks looking for coronavirus plays, we found these through our ordinary process of scanning for relative strength. We were simply looking for stocks that have been bucking the trend during the recent selloff. With that said, it was hard to ignore the results when we thought about what these companies do.
Here is our All Star Charts Coronavirus Custom Index making higher highs and higher lows recently while the broader market squanders near bear market territory.
There's been an ag-gravating pattern of behavior torturing bulls in the Agricultural Commodity space, so this educational piece will highlight the conditions that got us here and also outline a new trade idea.
This is the big question going through the minds of market participants all over the world right now. What's next? Have we seen the worst of it? Or is this just the eye of the storm?
I remember as a kid I was 10 years old when a huge storm hit Miami. Hurricane Andrew was a massive category 5 storm that was supposed to hit Orlando but in the middle of the night changed directions and decided to make a beeline towards my house. So the eye of the storm actually went over our heads:
Things are whippy out there. And volatility is elevated to levels we haven't seen in quite a while. This is no time to be a hero. This is the time to focus on edges and putting them to your advantage.
I know it's sexy to be a buyer of calls if you want to be the hero bottom caller. Similarly, it's equally sexy to be a holder of long puts into a market crash. But this is not the time to be initiating new long calls or puts positions. The premiums you'd pay are so high right now that you could totally nail the direction, but you'd be swimming upstream against an eventual mean-version in volatility pricing.
But this does not mean we pick up our ball and go home. We options traders have options!
In this environment, we're looking for plays where we are net sellers of premium. With premiums this juicy, it would be irresponsible to do anything else.
My apologies if this one was a bit of a layup, but that was the point. You were all buyers and so are we. Since we're all in agreement let’s dive right in and talk about why we’re bullish on this chart but more importantly, why it matters.
We want to be buying stocks that are in the strongest uptrends. One way we identify them is by looking at momentum which we use the 14-day RSI for. The strongest uptrends do not get oversold, or fall to RSI levels below 30. In fact, the strongest uptrends often stay above the 40-50 level and constantly print overbought readings above 70.
The S&P 500 registered an extreme oversold reading below 20 during the violent correction that began in late February. Here's a look.
Are you noticing the relative strength in Emerging Markets? That is NOT something we would expect to see if the world was actually coming to an end.
I can't stress this enough, stay away from the glorified gossip columns. They know less than nothing. You know who knows? The market. So that's where we'll get our data.
Think about it like this, there are more people and firms with more money and better intelligence than any of these governments, communist or otherwise. Are you actually going to trust the propaganda being put out in the "news"?
Or do you trust the people putting actual money behind the information they're spending a fortune to get? When we want to know what's really going on, we turn to the markets. The rest is pure junk.
For now, we're in an environment where we want to be buying stocks. We want to be incredibly disciplined with our risk levels, probably more than usual, but buying stocks nonetheless.
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
We're buying a few Chinese Internet Stocks. If the world isn't ending after all, this could be an interesting place to look for huge winners. I'm already seeing relative strength there.
As March gets under way, it’s time to review positions with March options that remain open (haven’t already hit profit targets or been stopped out).
Wild couple of weeks, but that doesn't mean we deviate from our plans!
Most trades I put on for All Star Options tend to have a minimum duration of 30 days (short premium plays) and often as long as 6-8 months (for long premium plays). As options approach expiration, greeks like theta and gamma start to become my enemy and whipsaw my P/L. Therefore, as options and spreads get into the expiration month, my best practice is to put each position on notice — it’s time to take action.
Today JC discussed our March playbook for Members and outlined some areas we'd be looking for a bounce with well-defined risk and others that we want to be completely avoiding.
I wanted to share a few breadth measures to provide context around the recent decline and see if they offer any clues around what's next.
