Rough jobs number on Friday. For the bears is shows a weakening economy, for the bulls it raises the chance of a cut at the next Fed meeting. The problem for the bulls is the Fed would be cutting for the wrong reason, economic weakness vs. inflation going down. It also raises the question of whether any of these numbers are real…..

I’ve always played under the assumption that they aren’t, but they are important because people trade off them and the Fed makes decisions based on them.

I run a weekly RSI system that identified potentially oversold stocks. Typically I may have 25-35 names on the list every week, 165 this week. Also, usually it’s mostly value type stocks, lot of growthier names on my list this week.

What this tells me is that Friday’s selloff wasn’t the beginning, things have been going on under the radar for a bit, it just became obvious on Friday. I’ve been talking for the past few days about how we have been seeing momentum names sell off. It finally rose to the surface on Friday.

So far this morning looks like a strong open. Strong opens that sell off tend to signal that this has more to go on the downside. Strong opens that stay strong could be an indication that Friday was a one day event.

It didn’t feel like a one day event, hence today’s newsletter topic. Happy to be proven wrong though.

So here we go, first real down move in the market in a while. Of course nobody can predict the market, so who knows if we get more downside from here or the BTFD crowd comes in force this week and we are at new highs in no time.

Typically, this type of move is not a one day event, but this market is far from typical, so you need to assume anything can happen. I often compare the market to cards. In poker and blackjack you bet bigger when the odds are in your favor, and less, or fold, when they aren’t. Looking at a chart of SPY, the odds are not in your favor right now….

We’ve broken the 10 day SMA and the 20 day EMA, and the 50 day SMA is in sight. Odds would favor that we at least take a look at the 50 day. Again, that doesn’t mean we don’t rally back hard instead. I’ve won poker hands with a 3/7 unsuited and won blackjack hands when I had a 15 and the dealer had a king. You just don’t make a living that way.

So here’s the playbook. This assumes you are not an active trader, in which case you should have been out, or net short, on Friday. The signs were staring you in the face, if you lost a lot of money your methodology is either flawed or you got too greedy.

I used to be a trader, but I don’t have time and my portfolio size isn’t conducive to it. I was down about 30% of what SPY was down. In my trading days that would have pissed me off, as an investor I manage things for 100% of the upside and about a 3rd of the downside, so it is what it is. I could lever up my strategy for way more upside, and more downside, I choose not to.

Always have hedges—-Seasoned market participants should have seen Friday coming a mile away. I told you in this newsletter that with all the data last week, and the market at highs, that the path of least resistance was down.

For most though, they see the market going up every day and just assume it’s going to keep going. They would not have seen this, so they should always have hedges. BONDS ARE NOT A HEDGE. Yes bonds would have helped you on Friday, but to be a hedge you have to work every time. Expectations of an interest rate cut spiked Friday, which brought interest rates down. If you remember the Liberation Day selloff, interest rates also spiked.

Some examples of hedges—

Readers know I shorted ARKK calls a couple of weeks ago. I shorted the September 82s when it was somewhere in the mid 70s. Worst case scenario I would get exercised and be short ARKK at 82. Be careful shorting options if you don’t know what you are doing.

In tamer times I love ratio spreads because if the market continues to go up, you can set them up so you don’t lose anything. I was adding put spreads the past couple of days, as ratio spreads need big moves to make money, put spreads don’t.

How much to hedge depends on taste. I like to always have hedges make up 10% of my portfolio ON A DELTA ADJUSTED BASIS. This is key, if I have a 100K portfolio I am not spending 10K on SPY puts. I delta adjust my options positions to equate to a dollar amount, in the example above this would be 10K.

I then move that percentage up when things start to look frothy. I came into Friday with around 14%. You need to balance this out for your risk tolerance. Again, I am not trying to time the market here. I just felt coming into last week the odds of success were not in my favor.

Hedge your equity curve. This can also be important. If you are making more than you should, hedge and/or take some profits. You have to feel this. I had a reader recently reach out to thank me as he was following some of our thematic advice and was way up. He shared with me how much he was up, and I told him to hedge or take profits. He had something like 5 years of gains in a month, that’s not normal, unless you are Nancy Pelosi. One of my favorite market sayings is “take your profits or someone will take them from you”.

We started SPCX at the end of 2020 and by February 15 2021 we were up something like 25% year to date. Readers know I love pre merger SPACS and think they should be part of a portfolio, but they should also be up like 8-12%/year. 25% in a month and a half wasn’t normal, so instead of being excited, like most people would be, I was nervous and cut as much risk as I could. Of course that was the top of the SPAC market for that cycle.

Review your strategy. If you weren’t hedged, or where way overextended, then it’s time to review your strategy. FOMO is not a valid investment strategy!!!!!! I know it can suck watching things move up parabolically and miss out, and it can be enticing to run the numbers on how long it will take you to be a billionaire if the market keeps going up. That’s not how markets work intermediate to longer term though. It can be easy in the short term, not intermediate or longer term.

Don’t panic. No this is not the traditional Wall Street advice about losses aren’t real until you take them, or don’t worry you are a long term investor. Losses suck, and paper losses are losses. If someone lost me a bunch of money and told me not to worry about it, I’d probably want to punch them in the face. On the other hand, one down day, or even more than one down day, does not absolve you from being stupid. I remember years after the 2008 crash I would meet people who rode the market all the way down, got out at the bottom and never got back in.

Know the difference between a correction and a bear market. No it’s not some stupid 20% rule. When you worry is when something is structurally very wrong. 2008 was a great example, the mortgage mess almost took the entire economy down. Covid could have been another example if we had stayed shut down. At the moment you have an extended market, lots of data, and tariff uncertainty. No big deal at the moment.

Have real diversification. Growing up in the industry I was always told that diversification was the only free lunch on Wall Street, maybe real diversification is, not what Wall Street recommends. Having some large stocks, small stocks, value, growth, US, international, etc. isn’t going to cut it. I have thematic stocks, a countertrend strategy that tends towards value stocks, gold, crypto, preferred shares, P&C stocks, and hedges. I also diversify between bought calls, short puts, and stock when there isn’t a decent options market. My thematic stocks got CRUSHED on Friday, but my gold and my hedges bailed me out.

A new report from Brendan Wood & Partners (BWTG)

Today’s stock is Amazon (AMZN). Between the 50 and 200 day so be careful here. Also a potential gap fill to the downside, so there is risk to $195ish. Also, if this selloff isn’t over, there could be more downside pressure…..

At some point, maybe very soon, this is going to be a great dip buy. You could also sell puts in the 180-90 range as there should be pretty strong support there.

Been talking to a bunch of reporters about meme stocks, here’s one of the stories….

Bottom line is that this is about much more than short interest this time, it’s thematic. Ignore market themes are your peril.