Switching Back to Tactical

Enough is enough. I tried to be like you, normal. I wanted to buy and hold and not feel anxious after every red candle, thinking to myself “this too shall pass.” But the I got to thinking “what if it doesn’t? What if this is THE ONE and I am here holding a bag of dicks?”

In all of my years experiencing the market I an certain about only 1 thing: I am better than almost everyone I come across when trading stocks. Now if that’s true and I think I’ve proven my bonafides on here over the years, why the fuck am I dicking around with 38 positions?

While it’s true, it’s hard to manage a fluid portfolio. My advisors buddies lament over the idea of doing any trades at all. They prefer to sleep in and have the management outsourced. But if I ever did that, I’d rather blow out my brains.

I am here for the fires and the tumult, the jovial laughter and the tears. I am not a fucking victim and won’t be treated as such by the God forsaken market. Sure, there are lots of great companies out there and over the long term, I am sure many of them will do great. I will most certainly be paying attention to the details. But this market we have right now sucks and it isn’t getting any better. So until things start to turn up and volatility eases up a bit, I am switching to a tactical portfolio, if only for my own peace of mind.

The rationale for this change was to “trade around” a cadre of well meaning stocks, which is something I still intend to do; but not right now.

It’s a nice bounce day, albeit a volatile one with lots of fucking bumps along the road. If markets splashed into the close and ravaged longs, would you be surprised? I didn’t think so.

Look at this technical patterns the past 5 days, not exactly one that instills a modicum of confidence.

I am gong with a bullish bounce, not because I am super bullish per se but out of reflex. The market has been oversold and usually those conditions warrant some mean reversion. Now if I continue on a cautious or bearish scheme and markets rip higher, I will quite literally want to toss myself into a vat of acid and call it a day. But if markets trade lower and I lose some money, I could at least say to myself “Fly, you’re an idiot, but at least you followed a plan.”

I entered today beta neutral via $SQQQ, so I have very few gains to boast about. In an ideal world, I’d be up 5% today and making fun of all of you for being up less than 0.2%; but alas, this is the journey I’ve chosen and I’ll just have to dream about those sort of sordid returns, for the time being.

Here is what we do know about today’s tape:

Most stocks are up, especially high growth oversold sectors
$NVDA is up, the all important oracle of today’s market
Yields are flat and the dollar is up marginally against the Yen

The Yen Carry trade continues to unravel and has been a source of concern for plebeians trading to and fro. Due to the tenuous condition of the market, I am 33% cash with several short term positions in place that can be sold to get me over 40%. The reason why I am so cash heavy is due to the technical breakdown in the Nasdaq and the $SPY.

Even still, high beta stocks are up and SAAS stocks are up and we should enjoy a respite from the selling soon. Although I just closed out an $SQQQ trade and still feel there is a chance this entire rally unravels to plunges into the abyss, I am willing to give it a shot on the upside, only because recent history says that’s the most likely course of action.

During down periods in the market it’s normal to feel a sense of helplessness, as former winners turn to losers and the world view you thought made sense no longer applies. From a psychological level, this is extremely disjointing and if you’re an anxious person, it could lead to either over trading or missing out on the eventual turn.

It’s also important during these periods to understand how rotations work and the sort of stocks considered to be “secular”, better typified as “low beta”, tend to do very well whilst all of the high grow stuff gets taken to the woodshed.

Here are some outperformers that were up both over the past week and two weeks in the market, while the broader indices suffered.

Broader metrics

Total stocks +2% over 1 week and +2% over two weeks: 117
Average beta: 0.65
Median rev growth: +3.89%
Gross margins: +56%
Median market cap: $6.9b

By sector:

BM: BAK, MP
CG: PG, PM, MDLZ, BTI, MNST, GIS, CHD, TSN, MKC, CLX, CAG, CPB
FIN: CME, WELL, TRV, SUI, WPC, MKTX, NNN, BMA, SKT
HEATH: SNY, ZTS, KVUE, ARGX, BAX, PODD
INDUST: SRCL, AGX
SERVICE: LUV, UAL, GME, LBTYA, ALK, JWN, DNUT
TECH: T, AMT, CCI, BCE, ORAN, VOD, TEF, SBAC,TU
UTES: SO, DUK, PCG, XEL

That’s narrow. Consider that amongst thousands of publicly traded stocks, only 117 were up in both the last week and two. Also consider that the stocks that traded up were either consumer staples or REITs, telecom or airlines. And what do they all have in common: heavily indebted, likely to see an improvement in their balance sheets because of lower borrowing costs. This is a play off lower rates.

When markets turn, these stocks will not participate on the upside, so be careful about entering the defensive trade too late.

Inside Stocklabs we have mean reversion algorithms that measures greed and fear across all asset classes and stocks and measures the returns of them after achieving extreme levels. We are presently OVERSOLD on the 12 month algorithms; but the data is mixed.

First I want you to see the level of the OS at 1.56. The oversold levels change with markets. For example, during a bad bear market, the OS will be deep, as low as 0.9; but during great bull runs it could be shallow, above 1.6.

If you look back to 2022, during the down 32% year for markets, the OS was at 1.35.

Here is the backtest data for this signal over 5 years. Although the returns are all positive, you can clearly see it starts to pick up in earnest after the 5th trading day.

This dreary technical pattern screams danger and because of that, caution should be exercised. By that I mean raising some cash, hedging via puts or inverse ETFs, waiting it out until some green candles appear.

Yes markets ultimately trade higher and yes this rout isn’t rooted in anything substantial; but it is happening and the seasonality of it happening is worthy of note.

For example: the $SMH is already down 11.7% for September. How does that compare to previous bad Septembers? Lucky for you, I have the data.

Note that all of the other years when the $SMH lost double digits it was in bear market years: 2022, 2008, 2000, 2001, 2002.

Clearly, this sell off is extreme in the context of historical declines and we all know the semis were very overvalued. But overvalued or not, these sort of declines are normally not sustainable lest paired with bad news. Well, where is that bad news? My sense is, this squall will end soon and markets will jump sharply, so try to stay in the game and manage your risk until we get the turn.

Quick thoughts since I am super busy right now and won’t be able to pen a closing blog.

Today’s rout should not be taken with a grain of salt and you should not believe just because we knifed lower this week we’ll rally next.

The $SMH is off nearly 12% for September, and the month just got started. As such, I liquidated many so called “long term” positions to raise cash.

Because of the technical breakdown, any substantive rally will be sold or there will be sellers present to make it difficult without news.

The range of losses for the $SMH during September has gone up to down 32% on several occasions and it is not atypical to see it lower by 13%. That said, we are either at the early stages of a market rout or the mean reversion will kick in sometime soon.

Gun to head feeling: we trade lower early next week and bounce around Wednesday.

At first glance it looked like the perfect jobs report, not too hot or cold, suggestive of a Fed 25bps cut. And then the downward revisions came in and then the breakdown of migrant v native employment and boy is that something to look at.

To be honest, I don’t even know how to react to numbers like that. A loss of 1.3m jobs for Americans in August and not a peep? Who is warning? We haven’t seen anything out there to make these numbers make sense.

It looked like markets wanted to rally, with futures climbing over 150 off the lows. But now we are steaming lower, amidst a frozen bond market and bullish commodity tape. Make it make sense.

At the present, I’m 105% long, taking some hits, down 65bps.

The weakness is once again centered in semis and small caps. You can toss away the smalls because who really cares. And then we are left with one: $NVDA. Markets do this all the time: using a nation like China or a stock like $AAPL or in this case $NVDA has lynchpins to the overall health of the economy. If you remember back in 2015 when Trump was discussing tariffs on China, that seemed like the very worst idea in the world, for traders.

And then he did it and nothing happened.

We are now in the era of $NVDA, and this too shall pass. There will be a new era in the future based around the cult of a leader or a concept or a company and markets will jostle between the great many changes that are both real and perceived.

Ultimately, the S&P is +16% for the year and if the year ended now, that would be viewed as a fine year. It isn’t all good and it isn’t all bad, like most things. The market is nuanced and manifests itself across asset classes based on assumptions

Right now we are assuming the semis are cooked. Are they?

Let me preface this blog by stating I am 100% long and bullish. I am bullish for various reasons, in spite of the recent technical carnage that has caused traders so much anguish in this little squall. It might seem like a significant moment but this too shall pass and become nothing but a faint memory in the grande scheme of things.

Reasons to be bullish:

1. Election year
2. Nothing bearish has actually occurred recently
3. Earnings have been good.

Reasons to be bearish:

1. Seasonality
2. Valuations on tech is at historically high levels
3.Technical patterns might indicate a worsening is looming

What do I mean by the last statement? I mean a head and shoulders formation on the $QQQ now.

It’s not the cleanest pattern but it’s there. But it’s not the pattern of the head and shoulders that is important but the psychology. It goes something like this: Oh gee isn’t this great. The dip was bought and we are heading to new highs. We are at new highs and we hope to go higher. We have cracked lower, quite sharply, and I hope we bounce, else all is lost, apparently. We V shaped higher and might be barreling towards new highs again.

Lastly, oh no we are cracking lower again. Maybe I should take some recent gains off the table in the event we “retest recent lows”.

Price action is always driven by core fundamentals in the long term. But there are peaks and valleys along the way and those are dictated by greed and fear, the relationship between people and their money.

We measure the fear and greed in Stocklabs using algorithms and they’re called mean reversion signals. When technical levels reach a certain point there is a catalog of history to reference to see how that relationship held up in the past. We track the performance in what is called “back testing. ” Presently we have oversold signals in the $SMH and $QQQ and the data is strong, suggestive that in previous occasions at these technical levels, people bought stocks. Naturally, every time is different and past results are not indicative of the future. But like the saying goes “history often rhymes” or something akin to that.

Let’s see how this plays out.

I know the market looks terrible and futures are sharply lower this morning; but isn’t this a little maudlin? Are we so predictable that we’d crash September again only to recover in October and then sail into 2025?

Boring.

This is an election year and although Harris is talking about taxing unrealized gains; that’s never going to happen. The way I see it, $NVDA just posted great numbers. People panicked about OPEC increasing supply but that’s going to get delayed, according to today’s report. We have some mean reversion signals flagging inside Stocklabs and frankly I see no reason to all of a sudden believe that it’s over.

It’s been over for some time now yet market continue to make new highs. Don’t get me wrong: I’m receptive to a bear raid and might even end up shorting today. But if we’re talking beginning of a long protracted move lower, I’d have to argue against it, even though my heart and soul would really prefer it.

One last thing: I’m malleable to the market winds and I say that not to couch my current feeeeelings but to state a reality about me.