Trade Alert: Markets update and doing some hedging/trimming

I sat down to write up a market overview to send out along with these Trade Alerts, and thought that doing an update on the “Five things that could end The Relentless Rally of 2019” by seeing if any of the five bullet points have changed. To review, here’s what I’d written on February 15:

“Will the relentless rally of 2019 ever relent? Certainly it will, but perhaps not until the bulls start feeling fully invested and the bears have capitulated. I’m not sure we’re quite at either point yet but I also wouldn’t jump all in and leverage up on the long side either.

What can end the relentless rally of 2019?

1. A sell-the-news reaction: to a China trade deal.
2. Black Swan event like a major company being exposed for fraud ala Enron 2001, Nortel 2003 or Lehman 2007.
3. A break out of war.
4. Sentiment gets extreme levels, perhaps as stocks get so extended that the bulls and day traders get wildly cocky and the bears/shorts finally give up (as noted above).
5. Macro/algo systems decide something in the economic/market data don’t look so rosy any more and they push the markets down for “no apparent reason” all of a sudden, just one day out of the blue.

Perhaps #1 and #5 are the most likely near-term catalysts to end the relentless rally of 2019. Wouldn’t take another 3-5% in the stock markets to get sentiment pushing extreme levels too, methinks.

But the path of least resistance for the stock market for now remains higher, I suppose.”

Cody back in real-time now March 14, 2019.  We saw some capitulation from the bears and shorts into the end of February and some even waited until the markets had cracked in March before covering. The bulls have certainly gotten more invested but I’m not sure most bulls would say they are as long as they’d like to be quite yet. As for the bullet points:

1. A sell-the-news reaction to a China trade deal. (Update March 14: No China deal yet means that we haven’t seen the potential for a true sell-the-news reaction yet either. Stay tuned and stay vigilant. I’d rather be a trimmer/seller and add some shorts for the first week after any China Trade Deal.)
2. Black Swan event like a major company being exposed for fraud ala Enron 2001, Nortel 2003 or Lehman 2007. (Update March 14: Kraft Heinz getting SEC investigated and GE’s endless problems aren’t quite outright fraud or impactful enough. Who knows when the next great mega-cap stock gets exposed as a fraud? Maybe there aren’t any great mega-cap frauds out there right now? Then again, given that Aunt Becky got arrested for fraud this week, I’d bet there are some mega-cap frauds out there that we just don’t know about yet.)
3. A break out of war. (Update March 14:Venezuela’s tragic and heartbreaking. And the potential for it to become a flash point of military tensions between the US, China and Russia, etc is real if not large.)
4. Sentiment gets extreme levels, perhaps as stocks get so extended that the bulls and day traders get wildly cocky and the bears/shorts finally give up (as noted above). (Update March 14: I’m not sure the bulls and day traders are wildly cocky but there are certainly more emboldened now than they were a month ago. The bears/shorts are certainly less aggressive than they were a month ago.)
5. Macro/algo systems decide something in the economic/market data don’t look so rosy any more and they push the markets down for “no apparent reason” all of a sudden, just one day out of the blue. (Could happen today, could happen in two weeks, could happen in a month. Something, at some point, will get a pullback going and maybe the macro/algo guys will just exacerbate the move’s magnitude and speed.)

So in sum, I’d say we should be more cautious today about the overall market direction than we were back in mid-February. Path of least resistance might be sideways to slightly up for now. Chances of a 3-5% pullback are slightly higher right now than they were in February.

Now for a few trades to tell you about:

I’m trimming some SNAP call options and locking in profits on the move to nearly $11 today. Here’s what an analyst who upgraded the stock had to say about it this morning (you’ll notice it sounds like he might be reading Trading With Cody as I outlined most of his bullet points back when the stock was at $6-8):

“Shares of Snapchat parent Snap Inc. SNAP, +10.77% shot up 9.7% toward a 6 1/2-month high in active morning trade Thursday, after BTIG analyst Richard Greenfield surprised his followers by turning bullish on the social media company, citing among other reasons a surge in advertising spend and user stickiness. Greenfield raised his rating to buy, after being at neutral for three months, which followed a 3-month stretch at a sell rating. He set a $15 stock price target, which is 25% above current levels. “Your initial reaction is likely why now and what changed, as virtually everything that could go wrong for Snapchat over the past couple years since going public as gone wrong,” Greenfield wrote in a note to clients. He gave 5 reasons for the upgrade: performance advertising growth, discover sector feels less seedy, user stickiness, out mushroom rebuild testing is positive and new management/morale.”

I also sold the UBNT. I just can’t get comfortable with the stock.

I trimmed a few more DELL call options. I’ve still got about 50-60% of the call options and all of the common stock I’d bought in DELL back a few weeks ago.

I covered the AVGO short. I still have a couple puts on it but I’m not going to ride the short common into the earnings report tonight.

I shorted a little more SMH and IBB today (just a little bit of hedging in the hedge fund, see?).

PS. It’s so great to have my family all at home and Amaris is doing great and she and I have even been getting to do our version of wrestling and rough housing (it’s not very rough!).

Disclosure: At the time of publication, the firm in which Mr. Willard is a partner and/or Mr. Willard had positions in some of the positions mentioned above although positions can change at any time and without notice.