Archive for November, 2015
On his latest Varney & Co. interview, Shah talks holiday mayhem, good and bad stocks, and the real meaning of the year-end rally.
Shah explains why the rally is misleading, why he still expects a 20% drop, and what has to happen before the market drops. Then he gives you an insider’s look at top stocks – find out why he loves Amazon, why he couldn’t care less about Tesla, and why you really shouldn’t buy Walmart right now. Bonus: Shah’s pick for a great Christmas play.
While there’s no really bad time to kick underperforming stock positions out of your portfolio, some times are actually better than others.
The good news is, if you’re sitting on losing positions, now may be a great time to exit them.
It’s great because stocks are near all-time highs. That makes it easier to see which stocks in your portfolio haven’t participated in the long run-up we’ve had.
It’s also a good time because some investing themes that saw big gains are fading, some are dead in the water, and others are just starting to take shape.
So let’s get to work…
Why You Shouldn’t Be Afraid to Get Rid of Losing Stocks
The length of time you hold a position doesn’t matter, as long as it’s working for you. That is, if the price of the stock you own has been rising steadily, or if it pays a good, secure dividend.
Hold onto those positions.
But if your investments are not working for you after giving them a reasonable period of time to do what you expect them to do, chances are they’re not all of a sudden going to explode higher and prove you right.
Too many investors fall in love with their positions. They think the stocks in their portfolio that were once expected to be the next big thing, or that were once high-fliers, will eventually start moving up or will come back after they fall out of favor.
Because there’s no way of knowing whether a “dead in the water” stock will all of a sudden take off, or whether a fallen angel will ever rise again, you’re almost always better off getting rid of those stocks and replacing them with more promising prospects.
But hold on right there.
I know what you’re thinking. In fact, I know why most investors don’t sell those positions that they think will come back to life. They’re afraid to sell them because they’re afraid they’ll take losses on the positions and then watch them skyrocket to all-time highs.
I say, good luck with that. It could happen. But if it doesn’t, you’re left with a big loser. Not only will you not make money on those positions, you won’t have a chance to make money in other opportunities because you didn’t “take the risk.”
That’s how most investors look at selling loser positions – they actually think that selling them is taking a risk!
You can break that bad habit by telling yourself losers hold onto losing positions and winners buy winning positions. So sell your losing position and if it starts to act like a winner again, buy it back.
I don’t like to sit on losers too long. I hate the feeling of being wrong, but I hate losing money more. So I’ll sell my losers, cry for a second, and move on.
After I sell them, I look at them as if they’re new positions I’m interested in. If they act like I want and expect them to start acting, I’ll buy them back.
That’s how you deal emotionally with losers you’re afraid to sell. You look at them like new positions after you sell them. That way you can tell yourself you won’t miss out on them bouncing back to the moon because you’ll get back in when they start moving.
You have to sell losers because that’s the only way to free your mind… and your capital.
Sometimes you’ll want to sell because the stock isn’t performing, sometimes because the investment theme you bought into isn’t working, and sometimes you’ll want to sell because there are better opportunities right in front of you.
Here’s what I mean…
A Few Ways to Handle a Bad Position
Recently, we were sitting on a few underperforming positions in my Capital Wave Forecast service.
One position was a gold stock. We got into gold because we saw geopolitical risks all around us, and because central banks have been printing money like crazy, which devalues currencies and over time is a positive for gold prices.
But gold hasn’t performed as we expected it to. So I had my subscribers put down a stop-loss to sell our gold position if the stock made a new low. Our stop was hit and we’re out of the position.
That’s an example of playing a theme. If it doesn’t work, take your loss and get out. Could we continue to hold the position under the belief that gold will eventually rise? Sure we could. But I was wrong about gold. It hasn’t been acting like it should. So it was time to move on.
If gold firms up and its prospects look good, there are plenty of beaten-down gold positions we’ll get into to ride back up. But that isn’t happening, so why tie up capital?
We also bought a big drug manufacturer. The play there was to ride the coattails of a lot of big hedge funds that were taking massive positions and were agitating to get the company to sell itself for a nice fat premium. But that hasn’t happened, and the stock has slipped a little from where we bought it.
This is a different example of taking a position that may not pan out. So what if it doesn’t? We’ll get out with a small loss and jump on another trade, or put that capital to work in a fat dividend-yielding stock.
On this position, however, we didn’t just sell out and move on. We’re still in it, but I don’t want to own it if it keeps going down.
Bottom Line: Getting Out on Your Terms
Here’s how to exit a position when you don’t want to just pull the plug immediately.
We picked a spot where we wanted to get out with a loss that wouldn’t kill us but still give us a chance to see if the company could be put into play to be sold. We have a stop-loss order down to sell out stock at that “we’re done” price.
In the meantime, if the stock starts to rise, which it has been slowly doing, we’ll raise our stop and lessen our loss as the position goes our way. If it turns into a winner, great. If it doesn’t and we get taken out, so what? It’s a small loss and was worth the risk based on what the reward might be.
That’s how you should get out of all your losers now.
Because we’re coming into the end of the year and we might get a rally into the New Year, it’s a great time to go through your losers and put down a stop to sell them a buck or two below where they are now. If you get stopped out, say goodbye and get ready to get into better positions.
If we rally higher from here, keep moving your stop-loss orders higher as the stock goes higher. Don’t stick your stop-loss order right under the stock – give it a little room to wiggle. You never know, maybe it will get back to breakeven or even turn into a winner.
But because it hasn’t happened so far, it’s not too likely it will turn out that way.
In the meantime, you’re cleaning house, getting rid of losers, and making way for winners.
About those winners… I’ve got a bunch of hot new positions teed-up for my newsletter subscribers. I’ll tell you about some of them after we get into them.
Stay tuned. And don’t be afraid to dump the losers.
On Varney & Co. today, Shah takes on current events, turmoil overseas, and what he’s not buying right now.
Get Shah’s perspective on whether the U.S. is still the safest place to put your money, plus an update on his prediction that the market is set to go down 20%. Find out where he thinks the price of oil is headed, and how that number will affect the Dow… How the turmoil in Europe might affect the Fed’s next move…. What he thinks about the potential “retail ice age,” and how he really feels about Target.
The U.S. Securities and Exchange Commission proposes, enacts, and enforces America’s securities laws and regulates the nation’s stock and options exchanges.
Or… that’s what it’s supposed to do.
In practice, the SEC proposes and enacts overly complicated rules with loopholes big enough to drive dump trucks through, then selectively enforces those rules and regulations. It fosters competition among exchanges and “dark pools” and lets their private operators manipulate customers.
But right now, the SEC has a big opportunity to level the playing field for investors like you. One firm has proposed a “tiny” solution to the huge problem that high-frequency trading (HFT) poses to individual investors, challenging the way every other stock exchange does business.
But Wall Street’s heavy hitters – especially the “Flash Boys” – are lining up to voice their opposition, demanding that the SEC continue to allow them to profit by front-running millions of trades per day.
Will the SEC allow this company to revolutionize how stock exchanges are run… or will it once again side with the big banks, hedge funds, and HFT companies?
We’re about to find out…
A New Exchange Could Be the SEC’s Worst Nightmare
As if eleven SEC regulated stock exchanges in the U.S. weren’t enough (and that doesn’t include dozens of privately-run dark pools) yet another company has filed an application with the SEC for registration as a National Securities Exchange.
The company is Investors Exchange LLC (IEX)… and it’s the SEC’s worst nightmare.
That’s because IEX is challenging the way the SEC has allowed every other stock exchange to conduct business.
Which is the wrong way (I’ll tell you why) – but an incredibly profitable way for the exchanges, for discount brokerage houses, and for the mega profitable HFT desks at big banks, hedge funds, and listed HFT companies.
(Yep, you got that right. High-frequency trading is so profitable stand-alone HFT trading companies have listed their shares for trading on national exchanges. Kind of ironic.)
IEX, which as a private company started executing customer orders in 2013, was prominently featured in Michael Lewis’ bestselling 2014 book “Flash Boys: A Wall Street Revolt.”
In the book, Brad Katsuyama, who founded IEX, is David going against the Goliaths of the HFT universe, all of whom have been coddled (I’m holding back the words I really want to use) by the SEC.
Katsuyama says HFT shops have an unfair advantage over everyone else because they have faster access to all related trading data.
He’s absolutely right.
This Tiny “Speed Bump” Is a Huge Threat to the “Flash Boys”
IEX doesn’t use high-speed access to trade on behalf of its customers or itself. In fact, its business model does the opposite – it actually slows down orders coming into the IEX platform, as well as the data going out.
By slowing down orders by 350 microseconds (a microsecond is one millionth of a second), IEX levels the playing field on its exchange platform so that super-fast HFT machines can’t front-run everyone else’s orders on its platform.
This causes a huge problem for HFT players, who are able to game the system because of their ability to read data and act on it faster than everyone else.
If IEX can level the playing field, it will draw a lot of business away from other exchanges and dark pools that let HFT shops read all their incoming data and trade against it.
Now, the SEC has to decide whether to “sanctify” IEX by letting it become a National Securities Exchange, and in so doing threaten the profitability of high-frequency trading.
David vs. HFT Goliath
Of course all the big HFT shops have lined up against IEX with its annoying little “speed bump.”
Citadel LLC is a huge alternative asset manager (or hedge fund complex), a big HFT player, and the firm that executes trading orders coming from Charles Schwab and TD Ameritrade, to name just two of its discount brokerages clients.
The company wrote a 12-page “comment” letter to the SEC challenging IEX’s application.
While the Citadel letter makes several good points, every negative they point to can easily be overcome, and probably will have to be. While that’s more of a reflection of IEX’s less-than-thoroughly fleshed-out application, most of what’s in the Citadel letter is just plain nonsense.
The main premise of Citadel’s letter is this: IEX’s application should be denied because by intentionally delaying the flow of orders and trading data via its “IEX access delay” (its “speed bump”), IEX is breaking the SEC’s NMS (National Market System) rules 600, 610, and 611.
And Citadel is right.
But here’s the thing…
The SEC allows all kinds of wolves into the henhouses it’s supposed to protect because it makes everyone a lot of money, even if it disadvantages a lot of big investors and technically undermines capital markets, trading platforms, and the entire system.
On account of the fact that there are so many competing venues where trading orders can be executed, exchanges and other platform providers began to offer rebates on execution charges and pay to have orders directed to them, in order to win business.
All of which the SEC allows.
That works out well for discount brokerages, which don’t have their own execution desks and ship their orders out to be executed. Middlemen pay discount brokerages for their order flow (which lowers customer brokerage fees) so they can “see” their customers’ orders and direct them to where they get paid to send them.
And the SEC is fine with that.
The problem is all those orders are sent all over the place, and before they even get to where they’re going they can be intercepted by super-fast HFT computers that have the ability to know what the orders are (which means they know how those orders will affect prices) and can trade ahead of them, trade against them, or get out of the way if they have their own orders in transit that would be disadvantaged by trades about to be processed.
In other words, there’s a “latency” problem. Not all players get order information or execution data at the same time.
Everyone who doesn’t have access to those computers (like you and me) has that latency problem. But it’s our problem because the SEC let HFT shops put their servers next to exchange servers and let them front-run everyone’s orders on account of being able to see them before they get to where they’re going.
In short, HFT traders have this advantage because other market participants have latency problems, which the HFT computers created. And now HFT players are saying IEX will disadvantage them by intentionally delaying data because it creates a similar latency problem for them.
Yeah, it’s that crazy out there.
The craziest thing is the SEC has let all this happen because it makes money for so many of the players it regulates, all of whom who spend a fortune lobbying Congress to make sure the SEC serves their profitability rather than the public interest.
If the suits at the SEC kill IEX’s application, we’ll know exactly who their masters are.
Watch as Shah discusses growing anxiety over the sloppy market, and why big companies in the private sector are losing value, on “Making Money with Charles Payne.”
Get Shah’s take on what’s making the market so skittish. What happens when reality hits companies like Snapchat, Dropbox and Square… Why private companies are afraid to come to the market… The potential impact on the public market from a crumbling private sector… Which stocks are bringing averages up… And what investors should be concentrating on right now.
Back in June, I told you that online dating is an incredibly powerful people-focused agent of change. Like Facebook, it’s a Social Disruptor that’s changing the way we live our lives even without a direct relation to cutting-edge technology or finance.
In fact, online dating is so powerful that I called it a Disruptor of Disruptors, forcing change amongst those companies whose influence is upsetting an array of sectors, markets, and disciplines.
It’s also a $2 billion industry.
That’s why I predicted that Barry Diller’s IAC/InterActiveCorp (Nasdaq:IACI) would spin out the Match Group of web-based dating services into an IPO.
Sure enough, next week the company’s going public on the Nasdaq under the symbol MTCH, at an upper valuation of $433 million.
Is MTCH marriage material?
Maybe, but I’ve got a better way to play the company’s IPO right now…
The Dating Business Is Booming
As you know, what thrills me about this Social Disruptor is the dating business.
Match Group has a portfolio of 45 brands, including Match.com, Tinder, OKCupid, OurTime, BlackPeopleMeet, Meetic and PlentyOfFish.
That’s a lot of reach.
In fact, Match Group boasts 59 million active monthly users (including 4.7 million paid subscribers). Their dating services introduce people in 38 languages across an astounding 190 countries. I love that.
They’re profitable and they’re growing their top and bottom lines.
In 2014 Match Group made $148.4 million on $888 million in revenue. They’ve increased revenue and net profits handsomely over the past three years.
But I’m just not sure the company won’t have entanglements with its overlords at IAC (more on that in just a minute). I’m not sure their properties couldn’t or wouldn’t get hacked, or that some negative publicity from a hack (think AshleyMadison.com) wouldn’t hit the stock hard.
My interest in the Match Group will be fairly high if the stock comes out on the lower end of its price range and doesn’t get ahead of itself right out of the gate.
If the stock soars on its debut, and the market isn’t marching higher to new highs, I definitely won’t chase the stock.
But while I think the Match Group’s IPO is a smart move, there are a few issues that give me pause.
The Question of Independence Is Crucial
First of all, Match Group won’t be completely independent.
InterActiveCorp will still own 86% of the new company after some 33.3 million shares are sold to the public. That number could rise to 38.3 million shares if underwriters pick up an additional 5 million shares, which they’ll do if investors drive the stock price up.
Since IAC will own all the company’s “B” shares, which have 10 votes per share, at the end of the day they’ll have 98% of all voting rights. So don’t think that any outsider, any activist, any shareholders, or any executive is going to have a free run at the company.
Owning stock in a supposedly independent company that’s anything but independent doesn’t thrill me. That’s especially true when the overlord of the property is Barry Diller, who moves around companies like he’s playing corporate chess.
Of course he’s got plenty of incentive to grow earnings and profitability at the Match Group. After all, the Match Group contributes almost 33% of IAC’s revenues. I’m just not sure there won’t be some gaming going on when it comes to deals and loans between Match and IAC.
The IPO price has tentatively been set between $12 and $14. But with the roadshow for institutional investors beginning shortly, that price range can change depending on how receptive money managers are to the dating game.
At $12 a share, the company will raise $400 million. At $14 it will raise $466 million. And if all the shares head out the door at $14, the company will take in $536 million.
So, what’s Match going to do with all that cash?
Give it right back to IAC to pare down some of the $1.2 billion the company spent on acquisitions since 2009. So much for working capital.
That doesn’t thrill me, either.
Here’s How to Play This Social Disruptor
To me, the stock is worth a look on account of their vast array of properties and their ability to sell ads across all their platforms, increasingly via mobile, which is key.
But I’m not planning on getting married to the stock. I’ll take profits if I get in and get a nice move and the stock slips back, for whatever reason.
In other words, it’s a trading stock for me until I see how it handles a few quarters as a standalone company.
The better way to play Match Group is to buy IAC. After all, they will own 86% of Match.
I like buying IAC right here around $66. I’d average down and buy more at $60 if it gets there, because there’s “support” there.
If the stock breaks below $60, it could go to $55 to $50 in a hurry. So I’d get out of my shares at $58 and see what happens next.
On the plus side, if Match takes off and IAC’s other properties continue their growth trajectory – which collectively has been underwhelming, but moving higher nonetheless – I can see IAC getting back up to $80.
Shah showed up after hours on Fox Business to discuss two huge stocks reporting earnings – Facebook and Tesla.
Even though he thinks it’s too expensive, Shah still likes Facebook and says it has much higher to go from here on the strength of their efforts to monetize mobile. As for TSLA, Shah’s still short the stock, and says that the numbers just don’t add up.
Host Charles Payne also asked Shah about a possible Fed rate hike… will they really raise rates in December?
So here we are, heading back to 18,000 on the Dow Jones Industrial Average after dipping below the 15,500 mark back in August, a 2,500 point move up.
If you’ve been in the market all along, if you got out of the market on the selloff, if you got back in anywhere going back up, or if you’ve been on the sidelines all this time, there’s a good chance you’re wondering how to trade the market at these levels.
I’m going to tell you.
That’s right. I don’t do this often, but today I’m going to show you how I’m going to trade it and why. You can follow along for free.
If I’m wrong, we lose a little money. As a professional trader and hedge fund manager for many, many years, I’ve put on lots of trades that didn’t go my way. We’ll plan to get out of the trade with a small loss and get back in the trade again or switch gears and go long.
If I’m right, you’ll make a boatload of dough and post a nice comment here.
Here’s my thinking…
Cheap Money Brought Markets All the Way Back
Markets have been riding zero interest rate policies and quantitative easing for years and are duly inflated. Everyone knows that.
What we don’t know is how this game is going to end.
We don’t know what the “free-market” level of stocks should be because free markets have been hijacked by central banks acting like central planners.
But that hasn’t mattered because more and more QE and “stimulus” programs flooded market players with more and more liquidity, meaning more cheap money to play with.
And since economic growth has been a questionable route, most of that money went into short-term positions in financial markets. They’re short-term positions not because the investors who’ve been chasing stocks higher are necessarily short-term traders, they’re short-term investments because they can be liquidated on a dime.
We saw what happened back in the summer of 2013 with the “taper tantrum,” when then Fed Chairman Ben Bernanke hinted the Fed was considering winding down asset purchases.
All hell broke loose and markets tumbled.
Lots of stuff happened between then and this past summer, but not a lot of it mattered. Markets kept being fed their baby formula and kept getting fatter.
That is, until this past August…
Stocks fell globally, and very quickly, because the Fed was talking about raising rates and all of a sudden China decided it would devalue its currency.
That caused a major panic. If the Fed raises rates, the dollar should appreciate. And a rising dollar in the face of a falling Chinese yuan would mean other emerging markets countries would have to depreciate their currencies to compete for exports with China… or the markets would do it for them. The panic concerned how, with depreciating currencies, foreign borrowers would pay back U.S. dollar-denominated loans to the tune of almost $9 trillion.
Oops. The Chinese backed down instantly, the Fed backed down instantly, the ECB suggested more QE to come, the Bank of Japan choked, China had to lower interest rates and reserve ratios again.
It was a mess.
Here’s What’s Pushing Markets Higher Now
That is until investors said, wait a minute, we know how to dance to this tune. And here we are back up where we left off in August.
But I’m not buying it.
Yes, I know I’m going against the tape (and I rarely do that), and I’m going against the Fed (they may not raise rates in December, next year or ever, just kidding), and investors are all giddy about the big bounce and we’re coming into the end of the year when money managers desperately try to take the averages up to make their awful years look better. I know all that.
But, what if the Fed does raise rates?
What if all the profits that have been made look like they’re going to evaporate?
Markets could fall, and quickly.
Yes, we’re back up here at 18,000, but that’s the headline story.
But here’s the truth: the major indexes are being driven by a handful of “hot” stocks.
Those big percentage gainers – Amazon, Facebook, Microsoft, Google – are giant companies whose mathematical impact on capitalization-weighted indexes belies what’s going on under the surface.
But where’s the “breadth?”
Fifty-two percent of stocks that make up the S&P 500 are trading below their 200-day moving averages.
Big stocks, as measured by the S&P 500 (keeping in mind their narrow leadership mentioned above), are up 13% from their August lows. But the Russell 2000 Small-Cap Index is up a mere 5%.
In the bounce after the 2011 dip, more than 90% of stocks traded quickly above their 50-day moving averages. This rally’s only pushed 79% above their 50-day moving averages.
A lot of the “buying” looks to me like high-frequency traders taking out small offers on successively higher prices as fast as they can, to push socks up in gap fashion.
Commodities have to hold up, too. Oil (WTI) has to stay above $45 and get above $50.
Copper has to stay above $2.30/lb. and not break below $2.20/lb.
And that still-giant elephant in the room, China, has to firm up. The Shanghai Composite took a few hits again recently. If it heads back towards 3000, or heaven forbid, breaks 3000, rallies everywhere will reverse and we’ll be back in correction mode in no time.
We’re on a knife edge, and any number of these “negatives” could scare markets.
That’s why at 18,000 I’m willing to put on a downside position that will make a lot of money if we can’t hold 18,000 and slip backwards.
Here’s what to do…
Take a Small Risk at a Major Pivot Point
Because 18,000 is a pivot point, meaning a point that we were at before, a psychological point, a point where investors have to decide to get back in, get more in, or take profits, it’s a pivot point, a fulcrum point, a point where we can go either way.
I like taking a small risk at pivot points. I look at the big picture and I get all the headline bluster, but I also see that not everything is on solid ground.
That’s why I’m buying the ProShares Short QQQ ETF (NYSEArca:PSQ).
If the Nasdaq Composite, which is what the QQQ ETF follows goes down, and I’m choosing the Nasdaq because it has performed the best lately and if stocks turn tail, investors here have the most to lose, then PSQ, which is an inverse ETF (meaning it goes up if the Nasdaq goes down) will rise in price.
So here’s what we’ll do…
Buy PSQ at $51.75 or lower.
If I’m wrong and stocks rally, I’d sell PSQ at $49.16 for only a 5% loss.
If I’m right, I expect to make maybe 20% on the trade.
Risking 5% to make 20% is a worthwhile risk/reward play for me.
And if I’m right and I see markets weaken, this will only be one trade I’ll have on. I’ll put a lot more leveraged trades on if we start heading down from here.