Mad Hedge Technology Letter
February 27, 2018
Fiat Lux
Featured Trade:
(WHERE TO FIND HIGH BETA IN TECH),
(SQ), (ROKU), (QCOM), (AMD), (JD)
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So, you think the markets have been volatile lately?
I happen to know that for some of you the markets have not been volatile enough.
These people focus on a select group of technology stocks that often move three, four, or five times more than the main market.
I know this is not for everyone. However, today I will toss some red meat to those of you who are true volatility junkies. I will concentrate on five names. Hold your hats, fasten your seat belts, and down the Dramamine!
Either way, higher volatility is here to stay for the time being and traders need to readjust their portfolio strategies accordingly.
Square (SQ)
This Fintech outfit is visionary Jack Dorsey's brainchild. Square is an omni channel payments processor that focuses on bringing affordable payment solutions to small sized enterprises.
Their goal is to eat the lunches of giant, high charging Visa, Master Card, and American Express.
Jack Dorsey invented Square (SQ) after he was kicked out of Twitter (TWTR), another company he founded. It is reminiscent of Steve Jobs departure from Apple, only to return a decade later as the prodigal son to save the company.
Square overtook Twitter in market capitalization in November 2017, vindicating Jack's vision.
The pullbacks in the share price are often violent due to fintech's place as a still nascent segment of tech that causes the elevated beta. The proprietary technology developed at Square is wonderful...they even accept bitcoin.
Roku (Roku)
Roku has a Facebook type business model in terms of advertising, but they are in the embryonic smart television industry. They do not create original content like Netflix (NFLX) but harness a digital distribution platform for 3rd party content using the most sophisticated smart top box device.
In turn, advertisers are charged on Roku and it is a hot new product for all the Millennial cord cutters out there.
Roku posted an earnings beat last week, but its stock sold off a nauseating 22%. That was after the stock moved from $19.50 on October 30, 2017 to an all-time high of $52.31 on December 11, 2017.
Although this is a case of too far too fast, the technology is legit and could develop into the premier platform competing for millennial advertisement exposure.
Qualcomm (QCOM)
This San Diego based company earns the majority of their revenue streams from patent licensing and chip manufacturing. They have been a mainstay in producing chips for your iPhone as their claim to fame.
Qualcomm is the preeminent tech volatility stock in current day terms because of the current hostile takeover bid from Broadcom (AVGO). Hock Tan, the maverick CEO of Broadcom, won't take no for an answer.
This battle royale is taking place at the same time Qualcomm is attempting to buy Dutch semiconductor manufacturer NXP Semiconductors (NXP) for $44 billion. This defiant move has one unequivocal winner - Higher Volatility.
Expect treacherous whipsaws and shocking headlines to affect its share price for the foreseeable future.
AMD (AMD)
Dr. Lisa Su heads the cavalry of this always also ran microprocessor manufacturer. The majority of their revenue derives from CPU's and GPU's. Their main competitor in GPU's is Nvidia (NVDA), so the GPU market is now largely a duopoly.
The CPU chip struggle is contested by Advanced Micro Devices (AMD) and Intel (INTC). (AMD) has solidified their silver medal position in this market. (AMD) was trading down at $1.72 on September 1, 2015 and now sits at over $12.
AMD has a beta of 3.22 meaning it stock moves 322% relative to average stock price movements. Consolidation and chip shortages are overarching themes to the chip industry in 2018, which is why we have been so heavily long them this year.
JD.com (JD)
JD.com or otherwise known in local Chinese mandarin lingo as Jing Dong and is the younger brother of Alibaba (BABA) in a 2-horse race. JD.com is an e-commerce sales platform just like Amazon and mainly sells goods from 3rd party vendors.
Jing Dong is a BAT that isn't a BAT. I am not talking about the furry winged friend who sleeps upside down in a dark cave. I mean the Chinese tech BAT's comprised of Baidu (BAIDU), Alibaba (BABA), and Shenzhen's Tencent. They are China's answer to the American FANG's.
The Chinese e-commerce outperformance has put Alibaba squarely in the running for the world's first $1 trillion company. JD.com is headquartered in Beijing by Liu Qiangdong and Beijingers and Northern Chinese alike swear by this service, especially the authenticity of electronic devices.
If you order an iPhone X on their digital platform, a real iPhone X will actually appear. This isn't always the case in China. It has fewer problems with selling fake goods than Alibaba (BABA).
Alibaba is headquartered in Hangzhou and breeds higher trust levels in the South of China. JD.com also control its entire logistics chain, which streamlines its facilitation in the movement of goods. If the trade war between the US and China deteriorates, Alibaba (BABA) and JD.com (JD) will be hard hit, with JD shares dropping twice as fast as Alibaba's.
"You make the most money when things go from terrible to only bad." said Tim Seymour of emerging market hedge fund, Triogem Asset Management.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
February 26, 2018
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE PHONY WAR
(SPY), (AMZN), (MSFT), (NFLX), (VIX), (TLT),
(USING MOMENTUM STOCKS TO CALL THE MARKET),
(MTUM)
Armchair historians will recall the beginning of WWII in 1939, where Germany, Britain, and France had declared war against each other, but no shots were fired for eight months.
It was called the Phony War. It ended when Germany invaded Belgium, and then France.
We have a Phony War of our own in the markets these days, being fought tooth and nail around the S&P 500 50-day moving average. Every assault is repulsed, every false breakout followed by a retreat.
Hyper bulls believe an upside breakout is imminent. Bears think we have to go back and retest the lows before proceeding. I am in the latter camp, but only see a weak retest at worst.
Volatility spikes are like cockroaches. There is never just one.
There is just too much money out there trying to get in. And now that earnings season is over, so is the "quiet period" and companies have free reign with which to buy back their own shares.
With tax cuts and repatriation, they now have more money than ever with which to buy back their own shares, and they are doing so with both hands.
We have a Phony War of another sort, that against stocks. The 13.3% intraday top to bottom move we saw in the Dow Average was totally bogus, as I expected.
The net result of all this is to leave the major stock indexes unchanged on the year. A zero return for two months of work! I heard wages were falling, but not that fast!
This month has been a harsh lesson in the uselessness of technical analysis. Not only did it fail to predict a top, it also missed the bottom by miles. If anything, technical services were urging you to sell at the bottom, as they always do.
Those like me who use fundamental research to drive decisions KNEW that share prices made no sense with a Dow at 23,000 given the robust state of the economy, especially technology ones.
That gave me, and therefore you, the confidence to load the boat with technology stocks at the bottom, to great effect.
It has been another eye-popping performance this week.
We saw the first failure of a US Treasury bond auction in yonks. The Treasury attempted to unload $258 billion in paper last week and there were few takers.
Foreign investors, who normally take half of Uncle Sam's bond issues, were virtually absent. The two-year Treasury bill saw a yield of 2.25%, a ten-year high.
It turns out that using tax cuts to starve government revenues, while dramatically increasing spending to achieve political goals, isn't such a great thing for bond owners.
As for me, I have covered the last of a dozen short positions in bonds that I have strapped on over the past seven months. Things were getting just too good. During this time, the ten-year US Treasury bond yield leapt from 2.03% to a 2.95% high on Thursday.
That's an increase of 45.32%. What happens when yields rise another 45.32%, and another 45.32% after that? What will be the impact on stock prices? I fear no good, not good.
This is what all stock traders and investors have in the back of their minds these days, if not the front.
I wish there was such a thing as a Cassandra Index. The more talking heads and newsletters decrying the end of the world, as we saw in droves on February 9, the better the risk reward for investing.
The Volatility Index (VIX) used to perform such a service, but it does no longer, overtaken by algos and extreme leverage.
So, why are the FANGS really going up? I bet you'd like to know, since if you have been following the Diary of a Mad Hedge Fund Trader you already have them coming out of your ears.
Not only have they outperformed every asset class by miles over the past two years. They bounced back like silly putty in the wake of the recent crash, some already to new all-time highs.
The concentration of the rally has been breathtaking. Some 48% of the rise in the S&P 500 this year has been accounted for by just three stocks; Amazon (AMZN) (27%), (Microsoft (MSFT) (13%), and Netflix (NFLX) (8%).
How about this theory? Technology is virtually the only sector of the economy that does NOT borrow money. Their profits and cash flows are so enormous that they can generate any money they need to finance future growth internally.
When they do borrow, such as seen with Apple's recent 30-year bond issue, it is really only to engage in financial engineering. Borrowing at 2% to buy 2% yielding stock back when your compensation is tied to stock performance?
How hard is that to figure out?
This coming week will be dominated by raft of new housing data, followed by an updated read on Q1 GDP.
On Monday, February 26 at 10:00 AM EST we kick off the week with February New Homes Sales.
On Tuesday, February 27 at 8:30 AM we learn February Durable Goods Orders. The S&P Corelogic Case Shiller Home Price Index is out at 9:00 AM EST, a three-month lagging indicator of residential real estate prices.
On Wednesday, February 28, at 8:30 AM EST, we get another read on Q1 GDP. February Pending Home Sales follow at 10:00 AM.
Thursday, March 1 leads with the Weekly Jobless Claims at 8:30 AM EST. The PMI Manufacturing Index comes next at 9:45 AM EST.
On Friday, March 2 at 1:00 PM we receive the Baker-Hughes Rig Count, which saw a small rise of three last week.
As for me, I shall spend the weekend pouring over reports from my technology, looking for the best place to strike during the next selloff.
What I am learning from my own Mad Hedge Technology Letter, which by the way has a perfect track record since inception, is nothing less than amazing.
Good luck and good trading!
