There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market. — Paul Tudor Jones
No Other Way to Play It...
The legendary trader’s comments are of particular significance after what we saw last week in the market. I’ve been warning about the overheating Nasdaq while being long some of the stocks … there’s really no other way to play it.
I lightened our exposure to tech and have avoided the Invesco QQQ Trust Series (Nasdaq: QQQ) for swing trades for weeks now, as I was fearful of this type of snapback.
The fall is historically a turbulent season. And though I’m not convinced in the complete market meltdown scenario, though there exists a small possibility, I expect 2% down and up days littered throughout September.
That’s why I suspended stops, as violent whipsaw action will leave us with the losing side of a Money Link after getting stopped out and the market snaps back the other way.
Key Market Movers
These are assets that are moving the broader markets and affecting everything. It’s always changing, but part of the art of trading is reading the texture of the market. Though I don’t necessarily have a trade or position in these assets, I’m always watching them as indicators.
Those of you who have been watching all my videos know I’ve been using the CBOE Volatility Index (VIX) as an indicator when sell-offs occur.
As you can see on the chart above, last week the market (white/blue line) sold off, while the VIX (green line) spiked above 30. A VIX above 30 is high and indicates big swings. I think we could get back to 50 on the VIX sometime in the next two months, which would be bad for stocks worldwide.
Core Portfolio Long/Shorts
These are longer-term holdings I recommend that you have positions in. I’m not a long-term investor — so by long term I’m not talking years, per se, but weeks to a few months. There is of course still a healthy positive skew and risk-reward embedded in all of the trades. And I’ll be providing stop/upside guidance and updates. These will typically be single stock names.
Current Link Trades:
NFLX/CMCSA, MS/HSBC, JPM/DB, AMD/INTC, NEM/VALE
NFLX/CMCSA
Netflix Inc. (Nasdaq: NFLX) has sold off with the tech smash, though I expect it to be one of the first to bounce back. Comcast Corp. (Nasdaq: CMCSA) will fade as the reality of real economic weakness persists.
MS/HSBC
The Hong Kong story has taken a back seat with pandemic recovery and civil unrest in the U.S stealing the show. However, it’s plain to see that U.S investment banks have been some of the best financial bets around.
JPM/DB
JPMorgan Chase & Co. (NYSE: JPM) has seen a solid buying community of institutions of late. The strength of the euro has kept Deutsche Bank’s (NYSE: DB) stock steady, and I expect that to be nearing its end. I expect this Money Link to be a big winner.
AMD/INTC
The sell-off in big winners has impacted our AMD/INTC Money Link. The same way people panic out of these names, they will panic back into Advanced Micro Devices Inc. (Nasdaq: AMD).
NEM/VALE
Our newest Money Link, Newmont Corp. (NYSE: NEM), is a play on a divergence between gold and base metals. The past few months have seen a weak dollar pump the price of all commodities. I expect gold to outperform by a wide margin to close out 2020.
I also have a bearish view on Brazil. And if that plays out as expected, it will put huge pressure on the price of Vale SA (NYSE: VALE) and lead to a nice payout on our shorts and puts.
Current Swing Trades
The bread and butter of my strategy. These are weekly swing trades, sometimes intra week — long short spreads. These will mostly be international exchange-traded funds (ETFs). I will also have sector ETFs from time to time as the action warrants it. These trades are meant to be done together, and I’ll be tracking the performance of each long/short pair for the return. I’ll be sending a weekly trading summary dealing with the swing trading pairs, and I’ll give updates as events arise to take advantage of.
Current Swing Trades:
IWM/EWG, SPY/EWZ
IWM/EWG
Germany is a manufacturing-centric economy that has an overreliance on China. I expect the global economic resurgence to trip up — and for the iShares MSCI Germany ETF (NYSE: EWG) to be one the casualties. I see the iShares Russell 2000 ETF (NYSE: IWM) benefit-ing from a rotation into finance and certain industries overrepresented in the IWM.
SPY/EWZ
This latest sell-off in U.S. tech will spill over to all riskier assets in the near term. The iShares MSCI Brazil ETF (NYSE: EWZ) fits that profile to the T. A sell-off in Brazilian real and a flight to safety would surely ensue in real panic, paying us handsomely on our short and put positions.
In Conclusion
September started with serious fireworks after the lull of summer, if you will, begins to fade. This fall, all the issues that the market has ignored while away at the beach will rock the tape.
We will need to use these moves to enter and exit trades. I have suspended our stops because, with wild swings, it’s common to get stopped out of one leg of the Money Link only to watch the mar-ket rip back the other way, leaving us with only losing trades.
If the size of the moves is too much, I recommend using smaller trading sizes until the volatility subsides a bit.
LFG!