lindsay_imagery
Rogue wave? What is this?
According to the National Oceanic and Atmospheric Administration (NOAA), rogue waves are waves larger than twice the size of the surrounding waves, are completely unpredictable, and often come unexpectedly from directions other than the prevailing winds and waves. I think the last part of the definition is a very apt description of what happened last Thursday. Many reasons have been put forward.
This strange sale prompted commentators to search for an explanation
Some commentators said the manufacturing PMI of 50.9 for April showed more growth, rising above 50; Expected level. Manufacturing was lean, and input prices for manufacturers were the highest in a year and a half. A PMI below 50 is contraction, and 50.9 cannot be considered sharp growth. The sudden rise in manufacturing input prices seems ominous. However, to put it differently, “input prices have been flat or lower for manufactured goods for 1.5 years” sounds like good inflation news. Increase in prices After 1.5 years it was inevitable.
Another reason that was brought up was that interest rates rose, especially for the 2Y bonds on Thursday, as the 2Y bond approached 5%, but on Friday the market rose while the 2Y bond rose even higher. So higher rates can’t be the reason. Also, some said the Fed minutes from the last FOMC meeting were released and were too hawkish, but that was before the CPI.
I think the market is trading irrationally, if it was a macro issue, would Nvidia (NVDA) break its 52 week high with such precision? This was the only stock to rise that day, along with Dell Technologies (DELL) which is now closely linked to NVDA. Even Super Micro (SMCI) closed in the red that day. There was a time when SMCI was neck and neck with NVDA when it was breaking new highs. I’m not making light of SMCI, I’m just trying to point out that the involvement with NVDA was minimal and this was unexpected. Amazon (AMZN) shares fell, as did Microsoft (MSFT) and Alphabet (GOOGL). These three trade off with NVDA because most enterprises, tech startups, and startups consume AI computing through these three. Finally, if the macroeconomic numbers are so dire, why didn’t the selling continue until Friday? Also, on Thursday, the VIX was as low as 11.79, and even at the lows of the indices it did not exceed 13.25. This is not panic. On Friday, it closed again below 12. In my opinion, this was not about anything fundamental.
My answer is not as satisfactory as the concepts suggested above
The answer is more about internal factors in the market. Firstly, this weekend was the first weekend of the summer season. On Thursday afternoon, all the top institutional traders and hedge funds were out the door. The guys were under instructions not to spoil anything, so we went on a buyer’s strike.
The next part is less satisfactory. If you’ve been reading my articles for a while, you know that I never mention the Dow Jones Industrial Average. If so, this is probably a message to ignore. No one seriously in the market cares that the Dow Jones hits 40,000 points. The DJIA is a price-weighted index, so stocks with higher prices have an impact, and it’s only 30 stocks and most of them are not what we consider industrials. It does not represent the stock market like the Nasdaq 100 or S&P 500. The latter two are “value weighted” which means the more valuable a stock is, the larger it is in the index. On Thursday, the Dow Jones Industrial Average fell 600 points, mostly due to Boeing ( BA ) falling 14 points. The Dow Jones Industrial Average fell to its largest level in more than a year. I think this sparked the selling, if there is an institutional buyer strike, the retail investor takes the lead. Some retail investors take the DJIA seriously, then sell the Dow Jones and then other indices. Everyone who takes the S&P 500 and Nasdaq 100 seriously sees them falling sharply, reacting and selling snowballs.
I made sure Thursday’s dive was a ‘rogue wave’, now to ‘stay long and fluid’
Going long means holding on to your bullish positions, and creating new positions if a stock catches your attention. Being liquid means keeping cash in reserve, or if you wish, taking some profits before the end of the day on Wednesday because there is a chance of getting more sell-offs on Thursday or Friday. This could be a solid style for summer. Also, Friday is PCE and if anything goes wrong with PCE, we may have another break for the bears.
We might have a nice summer walk, so stay long enough, and be mindful of your money
I must remind you now that I am talking about trading, not investing. In terms of investing, when the market sold off, I bought a whole bunch of stocks to invest, Workday (WDAY), United Rentals (URI), Synopsys (SNPS), Live Nation (LYV), and Lam Research (LRCX). So when I say stay liquid, I’m referring to your trading, keep a large amount of cash, so when you have one of those odd sell-offs, don’t sell, buy! Yes, I know this sounds corny, but now is a good time to buy the dips. Why? Because second quarter profits will be better than the last quarter. Also, although we will see some fluctuations in inflation data, inflation is declining. Eventually, the Fed Chairman will cut interest rates, but current Fed funds rates are not that restrictive. Market commentators attached all sorts of scary things to Thursday’s sell-off, but Friday’s commentary was devoid of pessimism. People naturally want to interpret everything the market does as rational, but sometimes that is not the case. Thursday’s sell-off was one of those times.
So, what did you do in trading when the market sold off? Nothing fun
I couldn’t decide which tech stocks to buy for the long haul, so I bought a bunch of TQQQ dollar calls that came out in August. I’m going to go to August now because the further you get away from that, the less the decay (theta) of your premium will be. I will look to close this position by Wednesday and wait for Friday. Once I close those calls, I will have about 30% cash. Also, if the VIX stays below 12, I will likely get some call options at the 12.5 strike. Oh yeah, I had 12.5 strike calls through Thursday and when we got to 13.10 I closed them. I didn’t get rich with this move, but I was sure this sale was a scam from the beginning. I’m still dealing with long call options at the Morgan Stanley (MS) 100 strike and the Project King 42 strike, both of which go into August. If DKNG stays at this 40 level on Tuesday morning, I will likely lower my strike to 40.
Well, friends, I hope you have a meaningful Memorial Day. Remember I hold cash, ready to buy dips…
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.
