I cited factors such as the Fed’s September 22 monetary policy meeting, a potential stalemate over raising the debt ceiling, and the economic uncertainty created by the Delta Variant (see last month’s weak jobs report as evidence on that front) as reasons for thinking that we could see a repeat of the historical weakness and volatility this September and October–but with a bit of supercharging. I don’t want to revisit all the reasons I gave in that video–Hey, just watch it, ya know?–but let me add a couple of points that I didn’t mention in the video. Like the effects of the continued shortage of chips on car manufacturers and hence car sales. Like the run-off in federal Pandemic economic help that’s now scheduled for this fall. Like signs of weakness in consumer sentiment and business confidence.
Instead of more on “the problem” lets talk about potential solutions- the “What should I do stuff.”
Let’s start with the observation that the next two months aren’t a single “uncertainty” event but several potential events that are independent of but related to each other.
For example, the uncertainty over economic trends in September and the worry over the historical pattern of October add up to an atmosphere of heightened volatility–even without the certainty of a negative resolution of any of those economic worries. Think of it this way: the possibility of negative economic news in September plus a knowledge that past Octobers have included big crashes is enough to keep markets and investors on edge. Investors and traders are likely to over-react to negative (and positive news) in the short-term even if the net change over a longer time period is insignificant. So the five-day skid that stocks have experienced recently seems a bigger deal because of that context.
The first thing–the first of my 5 Moves–to do for this two-month period is to put on bets that will profit from trading this increased volatility.
Move #1: Use Call Options on the CBOE S&P 500 Volatility Index (VIX) to trade (and profit from) swings in overall market fears and volatility. For months I’ve advocated trading VIX Call Options by buying whenever they fell to 16 or so (on excessive market complacency) and selling when they climbed to 20 or so on an increase in market worry. (The VIX tracks prices for short-term options on the S&P 500. The VIX goes up the traders and investors worried about downside buy options on the S&P 500 to hedge against a downward move in the index. In my Volatility Portfolio I currently own November 17 Call Options with a strike of 18 (VIX211117C00018000) and the December 22 Call Options with a strike to 17 VIX211222C00017000. The VIX climbed 10.54% on September 7 to 18.14. That put the November 17 Call Option (strike of 18) I bought for this portfolio on June 25 at $5.60 slightly in the red at a September 7 close at $5.29 and the December 22 Call Option (strike of 17) I bought on August 12 at $6.20 slightly in the black at a September 7 close of $6.24
Move #2: I’d hold some of my Call Options on the VIX for a chance of big market nerves in October. In the current market I’d modify my trade advice slightly to say “Hold some VIX Call Options beyond a strike of 20.” I think October will give us more volatility than we’ve seen in recent months and I’d look to put off selling until 24 or higher. I also prefer the December to the November Call Option because they have longer to expiration and therefore are less exposed to the time decay in an option price as the expiration date approaches
Move #3: Sell some “decaying winners” to raise some cash just in case we do get an October “event” and so you’ll have money to put into any buying opportunities that might present themselves in the next couple of months. This will have the effect of protecting some profits as well as giving you cash to put into new buys. What’s a “decaying winner”? It’s a stock that has done quite well by your portfolio in the rally of 2021 (and before) but is now starting to show signs of fundamental weakness. That weakness wouldn’t be a big issue except that the prices of these winners are near all time highs. In these cases it’s hard for me to imagine the shares moving higher without some period of consolidation that reflects the increased uncertainty about the stocks. Let me give you a couple of examples from my Jubak Picks Portfolio. Biotech Incyte (INCY) has been a solid performer for this portfolio with a gain of 63% since my pick on April 17, 2014. But not lately. The stock is down 12.27% in the last three months. Part of that is pressure on the entire biotech sector resulting from delays on trial enrollment due to the pandemic. But some of the weakness is Incyte and its JAK inhibitor franchise specific. The U.S. Food and Drug Administration has directed that the labels of three JAK inhibitors should include warnings about an increased risk of serious heart-related events, cancer, blood clots, and even death. These three drugs are Pfizer’s (PFE) Xeljanz/Xeljanz XR, Abbvie’s (ABBV) Rinvoq, and Lilly LLY/Incyte’s Olumiant. In addition, the FDA is limiting all approved uses of these three medicines to patients who have not responded or cannot tolerate one or more tumor necrosis factor blockers. This isn’t the kiss of death for Incyte or JAK inhibitors (the FDA has left the labels for two other JAKk inhibitor drugs–Jakafi (from Novartis (NVS) and Incyte) and Inrebic from Bristol-Myers (BMY) alone since they are used to treat a different set of problems. But this label is likely to slow the growth of these drugs. And that’s not something investors need in this current pricy (and seasonally uncertain market.). I’ll be selling Incyte out of my Jubak Picks Portfolio tomorrow September 14. Or take the case of Alibaba (BABA). The shares are up 97% since I added them to my Jubak Picks Portfolio back on October 26, 2015. But lately, because the Chinese government has cracked down on its big Internet companies, the stock has gone into retreat with a drop of 21% in the last three months. I don’t see any indication that Beijing is done with the campaign that has targeted Tencent Holdings (TCEHY), Meituan (MPNGF), and Alibaba, among others. On September 13, the Financial Times reported that the government will force Alipay, the payment app owned by Alibaba founder Jack Ma’s Ant Group, to create a separate app for its loan business. The new app would have to turn over its user data to a new credit-scoring entity partly controlled by the state, the Times reported. I think that eventually, the Chinese government, these Internet giants, and the stock market will reach a compromise that will allow these companies to continue to do business and will permit investors to calculate that these stocks are worth. When that happens, I’d be willing to invest again, but this isn’t the kind of uncertainty that I need in my portfolio in the current market. So on September 13 I’m selling Alibaba out of my 12-18 month Jubak Picks Portfolio to protect my profit and to raise cash. (The call is harder for me in my long-term 50 Stocks Portfolio, but I still think a sell is in order for my position in that portfolio in Alibaba (up 171.65% since February 8, 2016) and Tencent Holdings (up 49% since October 2, 2018.)
Move #4: Sell some “Well that isn’t working out” stocks to raise cash. And to clean up your portfolio. It’s hard to admit that a “great idea” for a stock pick has turned out to be not so great. Besides, therefore, a time to sell to raise cash, this seasonal weakness is an OPPORTUNITY to face up to the music and sell some of the stocks you own that haven’t really worked out as you had hoped. I’d look in a couple of places for these sell candidates. One place I’d look is at laggards in hot sectors. There’s a good possibility that a stock that trails its peers in a hot sector because there’s something company specific holding down the stock. For example, stocks of lithium producers have been hot this year. Albemarle (ALB), for example, is up 56% for 2021 through the close on September 13 and up 35% over the past three months. Sociedad Quimica y Minera de Chile (SQM), on the other hand is up only 12.8% for 2021 through September 13 and ahead 14% in the last three months. Why the lag? It seems to be a result of the company’s close connection with the Chilean government and the power of government agencies to intervene in the company’s plans to expand production. In contrast to Albemarle, which has convinced investors with its plans to expand, every time investors turn around SQM seems to be announcing a new threat to production. For example, on September 13 indigenous communities living around Chile’s Atacama salt flat asked authorities to suspend SQM’s operating permits or to sharply reduce its operations until the company submits an environmental compliance plan acceptable to regulators. Given the company’s recent history on the environmental front, I don’t think investors should take this latest news lightly. In 2016 Chile’s environmental regulator charged SQM with overdrawing lithium-rich brine from the Salar de Atacama salt flat, prompting the company to develop a $25 million plan to bring its operations back into compliance. Authorities approved that plan in 2019 but reversed their decision in 2020, leaving the company to start again from scratch. I think this (plus the stock’s recent gains) makes SQM a good candidate for a September sell out of my 50 Stocks Portfolio. (The shares are up 3.59% since I added them to this portfolio on November 30, 2017.) Don’t ignore actual portfolio mistakes either when you’re looking for sells this month. For one thing, you can reap a tax loss to use to offset profits from selling a recent gainer. And a sell here will eliminate a drag on your portfolio and give you a chance to put your money to work in a position with a better opportunity for gains–especially if September and/or October gives us a buying opportunity. Pay close attention to timing of any potential big big positive news ahead for the stock–you might be able to sell now and pick the shares up at a lower price in October/November with the company closer the release of positive news. For example, I’ll be selling shares off Acadia Pharmaceuticals (ACAD) out of my Jubak’s Picks Portfolio on September 14. Acadia recently reported disappointing quarterly Nuplazid sales revenue of $115 million (compared to consensus estimates of $125 million) because the pandemic continues to reduce the number of new patient starts in contrast to the company’s projections for an acceleration of new patient starts. In addition the Food & Drug Administration continues to ask for new data on the company’s request to have Nuplazid approved for the treatment of dementia-related psychosis. The request for new data–and it’s not clear at this point if the company would have to conduct any additional clinical trials–at the least delays approval of the drug for this indication. The company has said that the existing patent on Nuplazid is sufficient to support an additional clinical trial but the fact that the company has had to issue this assurance is itself likely to have worried some investors. So I’m selling now with my 65% loss on this position since June 3, 2020 but I’ll be keeping my eye on the stock for signs of momentum if the FDA clarifies the data it wants or as a schedule for potential approval gets established.
Move #5. Position yourself for a potential big October volatility event. Here’s where it gets really, really tricky. Even with October’s historical track record, a big move down in stocks is a low probability event. You certain don’t want to buy insurance against that event or go long on the possibility of that event and then have nothing big happen. (Something smaller happening should be covered by Moves #1 and #2.) That can get expensive as my big loss on my Put Options on the Russell 2000 indicates. I bought the $215 strike September 17 expiration Put Options as insurance against a big market drop back on March 24, 2020 when it looked like the Pandemic Recession would have a big effect on stock prices. The price for that protection was $1306 a contract. The options closed at $55 on September 13. Given the demonstrated sensitivity to the economic news of the small cap Russell 2000 stocks, I’d be inclined to use a put on the Russell 2000 again–say the November 19 expiration with a strike at $224 that sold at $979 a contract on September 13 (the index closed at $222.88 on September 13). But I’d like to see more decay in sentiment and fundamentals in this market before signing up for another expensive insurance policy. Of course, if the danger in the market gets too apparent to too many people, then the price of the Put Option, which gives you the right to sell at the strike price (and which right gets more valuable as the price of the index falls) will rise. As I said, very tricky timing. I’ll wait snd see how conditions develop.
Those are my thoughts on trading the seasonal patterns in September and October so far. I’m sure I’ll have a few more as we move further into the months.
Meanwhile that’s five sells to execute tomorrow.
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