The last several weeks the red flags warning of a stock market decline have been popping up everywhere. And because of those red flags I have recommended virtually no new buying for my Cabot Options Trader subscribers and tightened stops on existing positions.
Also, because of my concerns, and the very cheap price of protection/puts, I recommended buying Nasdaq (QQQ) puts three weeks ago. Here is a small sample of my trade alert:
My QQQ Trade
Buy the Nasdaq ETF (QQQ) December 170 Puts (exp. 12/21/2018) for $6.70 or less.
With the VIX trading below 12, the time is right to add a hedge to spread off some of our risk. The price is just too good to pass up.
To execute this trade, you need to:
Buy to Open the QQQ December 170 Puts
And last Monday, as the market was taking an ugly dive, we sold half of our puts for a quick profit of 36%.
After that sale I sent my readers a market update in which I highlighted some cracks under the surface of the stock market.
Yesterday was an ugly day for the market as the S&P 500 fell 1.37% and the Nasdaq lost 2.32%. Following the declines I got an email from a reader yesterday essentially saying “thanks for keeping us out of the way, but how did you know the market was ready to fall?” Let me clear, I didn’t know. However, there were plenty of warning signs in the last two weeks, which had me pump the brakes on new buying. Here is what had me concerned about the market:
- My best read on the direction of the market for years has been bullish and bearish option order flow. And in the last two weeks order flow had turned mixed to bearish. And that was keeping me from adding new positions
- While I typically don’t pay much attention to the Dow, when it fell for 8 straight days it was clearly sending a message.
- Sectors such as Industrials (XLI), Financials (XLF) and Transports (IYT) had been weakening. And conversely a “risk off” sector such as Utilities (XLU) was strengthening.
- Earnings blow-ups from Oracle (ORCL), Starbucks (SBUX) and Red Hat (RHT) last week were concerning.
- The explosive move higher in IPOs seemed a bit excessive.
Luckily, or perhaps because of good position management, our portfolio had turned somewhat defensive in the last several weeks. Axon Enterprise (AAXN) and Intel (INTC) sales were based on a mental stop that I had set. And the sale of iQIYI (IQ) calls and purchase of Nasdaq ETF (QQQ) puts was purely trader intuition (experience) and risk management.
What Our Analysts Are Saying About the Stock Market
And while I’m not bullish, I am also open to a market rebound, so I also read the analysis of fellow Cabot analysts, to get their opinions on the state of the market. Here is a small sample of what a few Cabot editors have written lately:
Tyler Laundon, Chief Analyst, Cabot Small-Cap Confidential
“The positives that have helped small caps outperform through the first half of the year, including exposure to the U.S. economy, outsized benefits from tax cuts, rapid revenue and earnings growth, etc., should continue to keep big investors coming back, barring an all-out trade war (which would probably be bad for all stocks).
“As far as what to do about all the trade war talk, let’s not make any major moves based on speculation about what may or may not happen. This administration is too unpredictable. Our strategy is to make gradual moves and take our cues from the market. Right now, we’re getting mixed signals, so we’ll continue to stick with our strongest stocks and pull back on those with faltering performance.”
Tim Lutts, CEO and Chief Investment Strategist, Cabot Wealth Network
“I am no more an expert in tariffs than most of my readers, but after more than 30 years in this business, I do know this. First, that once enough attention is focused on a problem it tends to be resolved (that’s the history of civilization). And second, the charts of the market reflect all the knowledge and all the hopes and fears of the participants (in proportion to their weight), and thus are a far better guide to successful investing than any one person, whether he be in media, politics or economic.”
You can get even more stock market analysis from myself, Tyler and Tim, as well as fellow Cabot analysts Mike Cintolo, Chloe Lutts Jensen, Crista Huff, Nancy Zambell and Paul Goodwin, at our annual Cabot Wealth Summit in Salem, Massachusetts, Wednesday, August 15 through Friday, August 17.