Lessons From A Flash Crash

The last time the stock market flash crashed, I was way over extended with my call options.  I was not paying attention or did not have sufficient alerts set up.  Like many, I was riding the wave of complacency.  The market was in an uptrend and despite minor warning signs, like low volatility, investor over-confidence, and many extended stocks, I was enjoying the relaxing ride.

I lost a ton of money in one day.

This time, with the market in yet another uptrend and a rising peak tide of good sentiment, low volatility, I was mostly in cash.  I had very limited long positions with tight trailing stops and only one call option in play (NVDA}.  Purely a hype play and I sold both call options shortly after the open Friday morning for nearly a 300% gain.

My stops took care of the rest.

I made a nice little profit and managed to protect most of it too.

IBD had a very interesting and timely article regarding the VIX, you can read about it here.

Basically the VIX was at all-time lows and despite a less than favorable UK vote and the ever depressing saga of Trumpolitics, there seemed to be little to no fear in the markets.

That was when it happened.

The VIX  “flashed” an extremely bullish signal (hitting historic lows) shortly before the selloff began.

By the time it was all over the market was down a lot!  It seemed everything lost value Friday.  But then I started looking at some of my watch lists and reading daily recaps and low and behold, the financial sector was up.

With republicans pushing through the repeal of Dodd-Frank and the up-coming Fed meeting where analysts believe rates will go up, Is the tide shifting?

Again, some other timely recap articles mentioned that the financials were bucking the trend and actually showing signs of recovery.  But much of their gains were on low volume.  Other articles talked about how during a correction, certain stocks and certain sectors will hold up better than others.  When the market does recover, and start another uptrend, the new leaders of the rally are rarely the same as the old leaders.

Selected stocks from the sectors which hold up better than the rest during a correction are more likely to be the new leaders.

So the questions are . . .

Is today the beginning of the end for the bull market and the start of the bear?

Or, is it yet another flash crash to bring the high flying market back down to support trend lines?  After all, we have had three of these within the past six months and each time the market recovers.

At least 3 flash crashes in the past 6 months

It certainly looks like a ton of money left the market Friday.  Just look at the formally high flying tech sector.  Interestingly, visually it looks like each crash is progressively more dramatic with more volume.  IF the money left the high flying tech sector, where did it go?

During a correction or consolidation, money basically goes one of three places.

  1. Cash.
  2. Defensive Stocks (like gold or consumer goods, food products and tobacco).
  3. New Sectors.

So to try and answer this I took a look at some screeners.  One is FINVIZ top gainers.  Believe it or not, there were 153 stocks earning over 5% Friday.  That is a lot for such a bad day on the street.

Here is how the 153 broke down sector wise.

Sector Industry Sub-Total
Basic Materials Independent Oil & Gas 20
Basic Materials Oil & Gas Equipment & Services 12
Basic Materials Oil & Gas Drilling & Exploration 6
Basic Materials Oil & Gas Refining & Marketing 4
Basic Materials Gold 1
Basic Materials Industrial Metals & Minerals 1
Basic Materials Major Integrated Oil & Gas 1
Basic Materials Nonmetallic Mineral Mining 1
Basic Materials Oil & Gas Pipelines 1
Basic Materials Steel & Iron 1
48
Consumer Goods Personal Products 3
Consumer Goods Sporting Goods 2
Consumer Goods Textile – Apparel Clothing 2
Consumer Goods Beverages – Soft Drinks 1
Consumer Goods Cleaning Products 1
Consumer Goods Electronic Equipment 1
Consumer Goods Home Furnishings & Fixtures 1
Consumer Goods Textile – Apparel Footwear & Accessories 1
12
Financial Regional – Mid-Atlantic Banks 7
Financial Money Center Banks 2
Financial Regional – Midwest Banks 2
Financial Regional – Northeast Banks 2
Financial Savings & Loans 2
Financial Asset Management 1
Financial Credit Services 1
Financial Investment Brokerage – National 1
Financial Regional – Pacific Banks 1
Financial Regional – Southeast Banks 1
Financial REIT – Diversified 1
Financial REIT – Hotel/Motel 1
Financial REIT – Office 1
23
Healthcare Biotechnology 12
Healthcare Medical Appliances & Equipment 4
Healthcare Medical Instruments & Supplies 3
Healthcare Medical Laboratories & Research 3
Healthcare Drug Delivery 1
23
Industrial Goods Heavy Construction 4
Industrial Goods Industrial Electrical Equipment 2
Industrial Goods General Building Materials 1
7
Services Shipping 8
Services Apparel Stores 6
Services Specialty Retail, Other 5
Services Department Stores 3
Services Home Furnishing Stores 2
Services Air Services, Other 1
Services Business Services 1
Services Education & Training Services 1
Services Gaming Activities 1
Services Publishing – Books 1
Services Restaurants 1
Services Security & Protection Services 1
31
Technology Communication Equipment 2
Technology Semiconductor – Integrated Circuits 2
Technology Application Software 1
Technology Diversified Communication Services 1
Technology Networking & Communication Devices 1
Technology Wireless Communications 1
8
Utilities Diversified Utilities 1
Total                            153

 

Of course, one day does not a trend or correction make but it might be interesting to keep an eye on what the market does, and if it does correct, which sectors hold up better than the rest.

Will it be Basic Materials?  Financials?  Healthcare? Or some yet to be determined sector?

What do you think?

Flash crash, beginning of the end, or market rotation?

Advertisements

Tracking The IBD 50

I love looking at data, discovering new trends, and finding hidden cause and effect relationships.  That is probably why I like spending hours analyzing computer event and security logs.   I also tend to do the same thing researching the stock market, especially when I notice a dramatic change.  In this case, I noticed a lot of new stocks listed on the weekly IBD 50 list.  So, I started something that I have been meaning to do for quite some time but never really got around to it.  Until now.

Tracking the IBD 50 list.

We all know the only state the market stays in is a constant state of change.  Prices fluctuate every day, every minute.  And it stands to reason that any watch list will do the same, though not necessarily on a daily basis.  My “gut” was telling me that the IBD50 list had been fairly stable and now quite a few new members had joined the list.  Conversely, this meant quite a few had fallen off of the list.  Of course I wanted to see the evidence for myself.  So I sat down and started plotting out the last two months or so of reports.

This is what I came up with.

Listed below is the stock symbol, IBD’s Group Classification, and the week the stock appeared / or not on the list.  If it appeared on the list the number is the ranking IBD gave it from 1 – 50 with 1 being the best of the best.  If it did not appear on the list then that week is left blank.

Now I have not had a chance, nor enough back testing evidence, to find out if these changes are due to quarterly reports, market conditions, changes in market cycles, investor/consumer sentiment, hype, fear, or some combination of all of the above.   But at least I seem to have enough proof that my gut was right.

Breaking it down into adds, drops, returns (on,off,back on again), and stay(remains on the list each and every week) and by sectors we get the following.  This was an attempt to see which sectors are strong and remain on the list, weak and dropping off, and gaining by being added to the list.

I’ll be tracking this further as time goes by and reposting any additional insights but I thought I would get it out there for those of you who might be interested.

I Can’t Complain

. . . but sometimes I still do.

–   Joe Walsh

Why do people complain even when things are going well?  Is it because of what could have been?   Is it because they feel that they have missed out on something even better.

“What could have been?”

In regards to investing, most people have rules by which we use to govern when to buy and when to sell.

Sometimes these rules, designed to protect us, or rather our capital / profits, can be seen as preventing us from earning even greater returns.

Some personal examples from the past month or so for me are . . .

OLED:

  • Bought 200 shares in April at $81.90.
  • Soon after OLED went on a nice 10% run (~$1800) but leveled off the week before earnings.
  • Happy with my quick profit, I sold 100 shares.  Still up ~ $900.00
  • But then I started thinking about all the “what if” scenarios around earnings.
  • Long story short, I bought a May 19 $95 call for $2.70 and sold an $85 put to finance it.
  • The stock reported record blow-out earnings and revisions and jumped 22%.
  • My remaining equity position made an additional $1900.
  • My out of the money call ~$900. Oh and the premium for the put brought that up to ~ $1200.
  • Yes, there was that voice saying I should have just kept my original investment.  Even though I was up a good $3000.

Greed is a terrible emotion.

EA:

  • I actually liked both EA and ATVI but EA was reporting after ATVI and had really good (cheap) options.  So I bought 3 May 12 $96 calls of EA before ATVI reported for $1.8 each.
  • Basically nothing happened.  The stock didn’t move much at all as a result of ATVI’s earnings.
  • So I sold 2 of the 3 for a very, very measly profit right before EA earnings report.
  • The next day those calls were worth somewhat north of $1100 each.
  • Who knew EA was going to pop 12% on earnings.
  • Certainly not the market.  They had options priced in for less than half that amount of a move.
  • Again, that little voice in the back of my head gave a very vocal 2200 cough.
  • Even though I was in the money by nearly another $1000 or so.

This week presents another “alternative” like minded play on earnings.  Similar to EA and ATVI.

Not that I am predicting a double digit return but the price is right.  IMHO.

Home Depot (HD) reports on the 16th.

Lowes (LOW) reports on the 24th.

The retail sector has taken a beating lately thanks to the likes of Macy’s and other big name brick and mortar retailers.  As a result LOW stock has fallen along with the sector.  HD has actually held up quite well.

One could very easily be tempted to buy HD before earnings because they are more directly related to the housing industry which has experienced remarkable strength lately.  LOW falls into this same category.

So even though they are “retail” companies.  They both play to a fairly strong housing sector.

Why am I looking at LOW instead of HD.  Because their weekly option premiums and volatility are significantly lower than that of HD because HD reports this week and LOW does not.  If HD has a really strong quarterly report and forward looking estimate, the market could very easily drive up the price of LOW before they report a week later.

Indeed, if one looks at the numbers, the market is already pricing in the moves for each companies reports.

HD reports on the 16th and options are reasonably priced with the market pricing in approximately a 3.3% price move based on May 19th expiration date.

LOW reports a week later on the 24th and options are even more reasonably priced with an approximate 2.3% price move for this weeks May  19th expiration.

But all those numbers for LOW’s more than double for the “after” report expiration date for May 26th.

What do you think?

Would you invest in both or play one off of the other?

No Love For The Bear

The stock market is nearing all-time highs.  In fact, it seems to keep reaching new ones on a regular basis.

Advancers are leading decliners.

Percentage of stocks above their 20/50/200 DMA is higher than stocks which are not.

The only thing that the bears can take some comfort in with these charts is that some of the volume and oscillators are indicating a possible downward trend.

Yes, there has not been a whole lot of love for the bears lately and they are feeling left out.

The contrarian would say, this means we are due for a correction.

The conformists or anti-contrarians say lets keep the party going.

The realists say, perhaps we should look for stocks or sectors holding up well enough but not yet joining the party.  Perhaps stocks with some “safe” characteristics such as dividends would be nice to include too.  Perhaps these are just waiting for the right invite.

The chartists say the overall market is doing well.  SPY and DIA charts look strong . . .

Though, the QQQ is perhaps looking a bit extended.

So where do we look for stocks and or sectors holding up well just waiting to rally?

Mr. Bull, I’d like you to meet Mr. Financial Sector.  He’d like to join the party.  He’s just waiting for the right conditions.   Like . . .

–          Financial Reform

–          Tax Reform

–          Inflation and Rate increases

Those are the tickets that will get him out on the dance floor dancing the happy dance.

The technical charts for the financial sector look promising.  They look like they are poised for a breakout.

Of course, bulls are hoping for an upward breakout, and the bears are hoping for a breakdown.

Unfortunately for the bears, there are the three catalysts, previously mentioned, just waiting to kick in.  And they are pretty strong catalysts.

Unfortunately for the bulls, the current administration and congress is painfully dysfunctional.  When and if all this is going to happen is anybody’s guess.

So until then, we wait and hopefully enjoy the ride.

What Would You Tell Trump To Do?

Today marks the 100th day in office for POTUS Trump.  Depending on who you ask, and which news agency you follow, you will get different answers on how successful he and his administration has been.

One thing is clear.  It is not anything like anybody would have imagined.

Trump himself admits “I thought it would be easier” and that he “missed his old life”.

So, on this 100th day of judgement and reflection, what would you like to tell Trump?

IBD recently asked this very question to a bunch financial experts.  Their answers might be a little bit surprising.

“The biggest problem we face is not saving enough money for retirement”.

“Social Security needs to be reformed”

The president and congress could start by looking at increasing not only the age limits but mandatory contributions.  Yes this is a political hot potato and good luck getting Americans to be mandated to be told what to do with their money or allowing the government to take even more of it away, but the problem exists and the system needs to be fixed.

“People need to be financially educated and make wise investment decisions”.

Addressing financial literacy early and often throughout the educational system is key.  A standardized curriculum, similar to math, science and history, which focuses on the basics of balancing budgets, how saving plans work, compounded interest, mortgages, loans, managing debt, what different investment vehicles are available and what banks and other financial institutions have to offer.

“A Lifetime Plan”

Instead of the voluntary approach to learning, saving and investing, there should be a mechanism in place which contributions are required.  To a certain extent, some companies are already doing this.  I for one have seen mandatory 1% 401K contribution and AD&D and Life insurance policies put into place.

And yes, I have heard many an objection to this.  But anybody who has worked in HR or a leadership position in a company and has the “experience” of an unexpected death or disabling injury occur to a co-worker or their family knows how valuable these contributions and plans can be.

“Tweak Deductibles for everyone”

An example of this is Health Care Costs.  Corporations can deduct it as a business expense.  Why not make all health costs deductible for everyone?

So, what would you add to the list?