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You Are Seeing A Rotation To Cyclicals, Do The Opposite And Buy Tech

Summary

  • Don't follow the Value herd, unless you want to get slaughtered.
  • Be contrarian, the run to Value is unsustainable. Generally, the worst junk jumped the highest. That can't last.
  • If you are a seasoned fast money trader, go ahead have a ball. I've seen this movie, it doesn't end well for the typical trader.
  • As the momentum traders rush out to embrace cruise lines, buy the tech names.
  • I would look for names that are percieved as pandemic-related but are great stocks with sustainable business models, like Slack, or Teladoc, even Zoom at the right price.

Sector rotation and value stocks

This seems to happen many a summer. Investors rebalance by resizing the tech positions in their portfolios, and moving investments to other areas. Hopeful value investors seize on this action and declare that it’s their turn to shine. In turn, you have the momentum traders see a new shiny object and drop tech and other secular growers and jump on this new trend. Please fight the urge to follow along. If your trading time span is longer than the life cycle of a fruit fly, you’ll miss out on an even better opportunity.

It all seems very logical, the economic recovery is assured, so why not buy the value stocks?

Well sure, if you were smart enough or lucky enough to get in on the rotation early, you have already done great. The problem is, Finance, Airlines, Agriculture, Energy are not secular growth areas. So where are they going? How big is the opportunity? Look, if you bought Goldman Sachs (NYSE:GS) at $160 10 days ago, or JPMorgan (NYSE:JPM) at $82, or all the crazy airline stocks at like a buck (I exaggerate but not by much) but are now at 20 - 30 - 40 bucks great, just great. United (NASDAQ:UAL) is at $30.69, Delta (NYSE:DAL) at $26.32, American (NASDAQ:AAL) at $11.98, can you at this point really justify a significantly higher price for these names?

Sure, the flying public is coming back, and even if it doubles from this level, we still have a long long way to go to justify their current valuation. Also, the cruise lines were priced like they were all going belly up, but now? How could I in good conscience tell anyone yeah sure go ahead and buy Carnival (CCL) at $17.24, up almost 6% yesterday, or Norwegian Cruise lines (NYSE:NCLH) at 17.59, up almost 10% yesterday?

Don’t believe me, see for your own eyes with this chart…

Goldman Sachs 1 Month Chart


Almost literally 10 days ago, GS was 50 points lower, and it has gone parabolic. Hey, if you are a fast money trader, yeah, sure, go ahead be my guest, take a shot, and if it doesn’t work, blow it out right away. In fact, GS is up another 2 points in the premarket. I am not playing that game right now and I suspect my typical reader is not in that category. As an aside, please, if you are going to try and trade any stock, just look at the chart for a moment, as a habit and if you see this kind of picture, you’d better have a real good reason to buy any name with a chart like this. Maybe its a super-duper software name or fancy direct-to-consumer (DTC) setup that just IPO’d, then okay maybe, but Goldman freakin’ Sachs? At $209 a share are you kidding me? Where is it going?

Now Oil is interesting as a cyclical play, IEA has come out with a report yesterday that investment in energy, in all categories have dropped 20%, and in some cases, especially the Fracking sector, production is dropping significantly at the same time that investment in new wells are dropping sharply. Fracked wells tend to peter out very quickly and if you don’t drill new ones, your production quickly diminishes. I have no heart to get involved with the Pioneer Natural (PXD), EOG Resources (EOG), or Diamondback Energy (FANG) stocks and their ilk. I will tell you this, the price of WTI oil is going higher. Oil consumption while slowed temporarily has not peaked. As I said, my heart isn’t in it, but if some intrepid traders want to try their hand at speculating in this space now, they might just be getting in early enough in the cycle to make very good alpha over the next 6+ months. I just can’t do E&P anymore, I just can’t.

Housing is interesting, I will talk about that in my next piece...

Okay wise guy, what should I buy?

I am not telling anyone to buy anything. I write about what I am buying or am thinking about buying. So let me build out my thesis for what is going on now, and how I am approaching it. As I said, I think this move to “value” started with portfolio rebalancing by money managers. Just like the thought experiment that gained currency a number of years ago, “the flap of a butterfly's wings in the Amazon can cause a tornado in Texas.” traders combined the resulting price movement with the notion of recovery and is now causing a stampede to the crummiest stocks in the bin.

No offense to the great JPMorgan and Goldman Sachs, but let’s face it, cruise lines and airlines are now in the crummy category. Financials are very important to the economy, but where are they going with zero-interest rates? Unless the GDP goes back to the levels it was at pre-pandemic, their share price is capped below their all-time highs.

So what am I looking at?

Generally, names that have been categorized as pandemic names and are now being sold

Teladoc (TDOC), Zoom (ZM), Datadog (DDOG), DocuSign (DOCU), Bill.com (BILL), Slack (WORK), Anaplan (PLAN), Atlassian (TEAM), Alteryx (AYX), Elastic (ESTC) Twilio (TWLO), and Coupa Software (COUP)

I am not saying that you go out and buy these names blindly, again, I am only talking about how I am thinking about trading at this moment. The message is a refrain that I say very often, be contrarian. This run to value is faddish, in the end, growth is where it is at and more or less tech is where growth is. So look for tech names that are being sold now, like how about the chips stocks? Nvidia (NVDA) had a great earnings report and is selling off right now, or Advanced Micro (AMD) and Micron (MU). Micron actually confirmed nicely positive guidance and is now selling. I am listing the above names as examples of how to approach this market. All these names can drop a lot more in the next several days. Watch them, look at the charts for a support level, and decide. I am going to edge into names and not buy a bazillion all at once.

Don’t buy the FAANG names right now

They have all peaked in stock price just a few days ago, and are now selling off. I think the stampede out of these names will intensify. At some point, they will be a buy, but right now, they are being used as a source of funds. At some point, momentum to the downside will attract short-sellers and press some of these names down harder than you would imagine right now. Stand back and wait for Amazon (NASDAQ:AMZN) to fall a few hundred points then think about getting in. Think I'm nuts, look at the charts and see how many times AMZN sold off in the summer over the last couple of years.

Analyst corner

Seattle Genetics (SGEN) Goldman Sachs Group Inc. Upgrade from Buy to Conviction-Buy

My Take: If Goldman is calling something a conviction buy I take notice. Also, over the last several weeks, I have heard a number of people I respect talk positively of SGEN. I don’t pretend to know biotech, but if you are looking for an individual name that is a mid-cap stock, study up on this one.

Regeneron Pharmaceuticals (NASDAQ:REGN) Wells Fargo & Co Upgrade Equal-Weight to Overweight From $559.00 to $734.00 28.8% Upside

My Take: Sanofi (NASDAQ:SNY) sold $11 Billion in shares of REGN and hammered the stock. REGN is coming out with an antiviral for Wuhan Fever, but also recently debuted a powerful anti-cancer drug. This is a very strong call by Wells Fargo, calling for a 28% rise in a well-established big-cap

My Trades: I got stopped out of Bill.com but I am looking to get back in. I sold my NewRelic (NEWR) Calls but now regret it. I am looking to get into NEWR again or DataDog. I added to my DraftKings (DKNG) Calls. I am planning on rolling up the strike price to $40, from $30. These are January 21 exp, so having a $40 strike price is not so crazy in my opinion. I added to my VectoIQ (NASDAQ:VTIQ) via warrants and am looking forward to the June 2 reverse merger to become Nikola Trucks. Housing is super interesting... more on that later.

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