During this past week – and some of the weeks prior – we saw a lot of selling that just clobbered many high beta names – the same names that were huge winners in 2013. It seems that rotation is now on even though the indices continue to flirt with new all-time highs. Some indices have tagged those highs, like the Dow Industrials and the SPX 500, which hit their marks early Friday before some nasty selling ensued. (For its part, the Nasdaq is well below its all-time high from 2000; it will require some more time and effort to get there.)
All of this selling should have come as no surprise. Markets had reached overbought levels on some metrics, so it definitely made sense to see some selling. If you’re long, a big drop like Friday can be unnerving – unless you are prepared.
Let’s get back to those high beta names, because that’s what the recent chatter has been focused on. High beta stocks include those in social media, biotech, finance, consumer, retail and restaurants. They were the big stars of last year, but that trend seems to have turned quickly – for now. (Remember that sentiment changes very quickly as money moves from sector to sector. Just when you think about throwing in the towel on a name or two – voila! It becomes hot again.) Is this current selling just garden variety selling? From where I stand, it certainly doesn’t look that way.
I base my trend/swing trading on 3 things: liquidity, the Fed and sentiment. As long as money flows into markets, it will find its way into stocks. If the Fed continues in accommodation-mode, sentiment will generally be bullish. Big money is flowing when the conditions are ripe. However, nothing lasts forever, and the current ripe conditions may change at a moment’s notice. In that case, taking something off the table when you can is the right thing to do.
I have always said there are a million reasons to sell but only one reason to buy. Do we worry about the recent selling? I don’t want to paint a rosy picture here, because some of the damage under the hood is quite bad. Markets need leaders to step up, perform, and pull others up. Selling is the great liberator, freeing your mind from anguish, pain, hope and desire. Markets are difficult to manage – nobody rings a bell signaling you’ve hit the top. Therefore, taking the initiative and selling when YOU want to sell is what I always recommend. That strategy and mindset certainly helps on days when plays are not working in your favor.
Case in point: This past Thursday we had a position on APC with a May 85 call; we purchased it a month ago at 4.25. The position was mildly lower, but then some news hit on Thursday and it soared so high that we cashed out at $13 – a 205% winner! I didn’t really care where it went after that, but we still wanted to stay on the trade so we rolled into another higher strike. Note that we sold when WE wanted to do it – we were not forced out by the market. It felt good, especially since some other plays were not doing well. I’ll never apologize to anyone for taking a profit.
When momentum and liquidity are in play, markets can run, but it’s a double-edged sword as well. When buyers are absent, we find that stocks are suddenly heavy and pull back to areas of previous support (reversion). Some have said that having the SPX 500 sit above the 200 MA for 15 straight months is an astonishing anomaly that has to end, and some day it will. But we’re not going to even attempt to time those moments. What for? We’ll just play the game within the parameters we set.
When I talk with traders, I often find there is a hesitancy to sell a winner or a loser. Many are looking for guidance (sometimes a swift kick in the pants from me!) because they don’t know what to do or don’t want responsibility for the decision. I have yet to find a good reason why so many struggle with this. If your first instinct is to sell, then it is probably right thing to do. Liberate your mind, move onto the next idea, and you’ll find yourself in a much better place.