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In my recent post “What do you do when the market is insane and you’re not?” I argued that one of the dangers in a very volatile market with strong–and temporarily profitable–short-term trends is that we’ll give in to the pressure to do something–and do something that will cost us money since we’ll be late to the trend because we’ve tried so hard to sit and wait.
Better I suggested to do something small that fits in with our larger view of the long-term trends in the market. So I wrote a post on the topic of “It’s so hard to do nothing, so let’s do something” that listed “5 smart, short-term moves while we wait for longer-term trends to resolve.”
Those moves included Buy gold on any retreat in gold; Dollar cost average into one or two stocks that you absolutely want to own for the long term; Buy one or two long positions–shares or call options–on companies that look likely–on the performance of the last week–to gain in the re-opening of the economy rally; Short an oil stock or two, even after this horrible plunge because as bad as March and April (so far) have been, May is going to be even worse; and Pick up long-dated Treasuries on any pull back in Treasury prices in a re-opening rally.
Today, I’m adding “5 MORE smart, short-term moves while we wait for longer-term trends to resolve.”
6. Buy Big China on anticipation of stimulus by Beijing. Today we got a report that China’s gross domestic product contracted by 6.8% from a year ago in the first quarter. Economists had projected a 6.0% drop. Other numbers in today’s data dump were equally grim. Retail sales fell 15.8%. Investment in fixed assets was down 16.1% for the first three months of the year compared with last year. Industrial production was the brightest spot. So far China’s government has held off on the kind of large scale stimulus employed to restore economic growth after the global financial crisis. But markets are beginning to anticipate an end to that restraint. Today, on this bad news, the Shanghai Composite was up 0.66%. The index is now up 2.12% in the last month although it is still down 13.01% over the last year. My choice for how to trade this trend is the iShares China Large-Cap ETF (FXI.) By going big I think you get exposure to the companies most likely to benefit from any stimulus as well as the big banks that will get the bulk of any liquidity increase from the People’s Bank. The ETF closed at $38.42 today, up 1.75%. That’s a pretty good indication of market speculation of stimulus to come. The 52-week range on this ETF is $33.10 to $45.43. The shares are poised to break above the 50-day moving average at $8.88 and recently moved above the 20-day Moving average at $37.24. There’s likely resistance at the 200-day moving average at $40.77. The ETF is down 13.45% year to date. I see this as a trade on stimulus sentiment and I don’t expect to be around for worries of a second wave of coronavirus infection in the fall. On Monday I will add this ETF to both my Jubak Picks and Perfect 5 ETF portfolio. In the later portfolio I’m looking to get some diversification from the portfolio’s U.S. holdings.
7. Buy Meituan Dianping (MPNGF) on China rally and on gradual return of consumer confidence in China. The company, backed by Tencent Holdings (TCEHY), said that it food delivery business began to recover in March, when shuttered restaurants re-opened and as Chinese consumers slowly got over fears that delivery workers might carry coronavirus. The course for Meituan, one of the dominant food delivery companies in China, certainly isn’t easy in 2020. “Although we have seen gradual recovery from March especially for food delivery business, the active merchants of our in-store service category remain at a very low level as of late March,” Chief Financial Officer Chen Shaohui said on the the company’s conference call. “We expect consumers will need more time to build their consumption confidence for local consumption especially those discretionary consumption scenarios in our in-store business.” But Meituan is one of the flagship stocks in this market for a recovery in China’s domestic economy. (I’m also intrigued by the company’s effort to use its delivery infrastructure to deliver other things besides food–such as smartphones from Huawei. “Buy on Meituan and get it to your door in 30 minutes,” said the ad sent to Meituan users in three major cities.) The shares, which closed at $12.88 today, have recently cleared the 200-day moving average at $11.37, the 50-day moving average at $12.20, and the 20-day moving average at $11.97. They are down 2.79% for 2020 to date. This again is a trade for the next few months. I think it might well be possible to pick up Meituan at a lower price in a final bottom to this bear in the fall and the shares remain on my Dip-O-Meter list. But for the short-term I will be buying Meituan for my Volatility Portfolio on Monday.
8. Take profits in Netflix (NFLX). The longer the re-opening rally runs, the more Netflix is likely to slide. This has nothing to do with some potential bad news in the company’s April 21 earnings report. But the stock has become the go-to buy on days when coronavirus fears stalk the market. And with fears in a temporary retreat and with traders looking for re-opening bets, the Netflix story as the one company everybody “knows” will make more money because of the pandemic loses some of it’s value. (The numbers never really backed up that story since subscribers don’t pay Netflix more if they use the service more–but never mind since the story made so much sense.) I’m looking for a slip rather than a plunge here. But I’d take my profits while keeping an eye on re-buying Netflix the next time coronavirus fears run wild in the market. The shares were off 3.69% today on a strong up day for the market.
9. Use the short-covering rally in oil stocks to lighten up further on the sector. From the way energy stocks were soaring today, you’d think the supply/demand crisis in oil was over and that the Saudis had agreed to another big production cut. Oil service companies, who are just getting killed by the collapse in oil company exploration and drilling were up: Schlumberger (SLB) gained 8.75% on the day and Patterson-UTI (PTEN) was ahead 11.96%. Producers like EOG Resources (EOG) climbed 14.57% and Pioneer Natural Resources (PXD) rose 7.76%. All this, I believe, was short-covering as the “re-open the economy” story and the possibility of another round of productions cuts told shorts that this was the time to buy shares to cover and to exit with maximum profits. I’ll bet you that those shorts will go back on the next time you see a story repeating the good possibility of bankruptcies in the oil fields. U.S. benchmark West Texas Intermediate close down another 7.70% today to $18.34 a barrel. Clean up long positions now, because I think the next move in oil stocks is to buy Put Options for the continued bad news in oil prices over the next few weeks as whatever storage remains disappears.
10. Start building a position in West Pharmaceuticals ((WST). I think this stock, which I added to my long-term 50 Stocks Portfolio on January 21, 2020, could be the “story stock” (like Netflix has been) in the fall when we start to get news on progress with a coronavirus vaccine. West Pharmaceuticals makes the little parts and pieces that go to make a vaccine injection possible. The company specializes in selling small stuff–lots of it in lots of different configurations–for the pharmaceutical, biotechnology, and generic drug industries. West Pharmaceutical develops, manufactures, and distributes elastomer-based supplies for the containment and administration of injectable drugs, including basic equipment such as syringes, stoppers, and plungers, along with somewhat more complicated devices including auto-injectors and other self-injection platforms. Proprietary products made up 76% of sales in 2018 with contract-manufactured products making up the other 24%. Now it might seem unlikely that a company could wrest a five-year or longer competitive advantage (which is what I look for in my 50 Stocks Portfolio) from making syringes, plungers, vials, and rubber components. But West Pharmaceutical’s customers operate in the highly regulated drug industry where changing the manufacturer of a relatively low cost injectable system component requires regulatory approval. (Any component that comes in direct contact with the drug agent must be written into each new drug application sent to the U.S. Food & Drug Administration and remains on file for the life of the product.) Which creates huge switching costs for West Pharmaceutical’s customers over a component that on average sells for 4 cents. Before coronavirus with this stock were getting exposure to growth in both the drug industry as a whole and to the faster growth in the injectables segment. After coronavirus…. The shares closed at $169.98 today, up 1.43%.
