RKLB - Should Santa Fail To Call Bears Will Come To Broad And Wall

2023-12-24 23:28:52 ET

Summary

• The Santa Claus Rally has officially begun, with the S&P 500 and Nasdaq-100 performing well on Friday.
• I predict a market correction in mid-Q1 but hope to be proven wrong.
• The article provides advice for new investors, emphasizing the importance of patience, diversification, and risk management.

I concatenated this old Wall Street saw originated by the Founder of the Wall Street Almanac. The full rhyme is: ”If Santa Claus should fail to call, bears may come to Broad and Wall" - Elliot Hirsch. Besides it being a nifty saying it does bear out in the historical records. Check out this table, Source LPL Research and Bloomberg

So just to set the table, the official Santa Claus Rally started this past Friday, and it is supposed to run through to the first week of January as I understand it. So far Friday was not bad, even if you include the 2 fairly large-sized blow-ups of last week, FedEx Corporation ( FDX ) and NIKE, Inc. ( NKE ) the S&P 500 and the Nasdaq-100 both performed reasonably well on Friday. The truth is I don’t see much in the way of economic news to upset the “apple cart.” As far as earnings I don’t see any company worth noting to keep Santa from his appointed tasks. In this case, it is spreading cheer on the trading desks of Wall Street. This is all to the good. There’s always the Grinch or should I say Black Swan lurking in the shadows, but I can’t conjure anything that would sustainably upset markets. Yes, there are the Houthis and the Iranians, and perhaps Hezbollah that could worry the headlines but that isn’t the news that I fear.

Aren’t you the one looking for a big sell-off, why are you rooting for good news?

I’m glad you asked that question. Yes, I have a strong conviction that this rally we are having will end in a correction, but I would rather be wrong. Perhaps the stock market levels off and moves sideways in a plateau. You can have a correction, over time, instead of space as it were. In any case, no matter how much cash I generate using the Cash Management Discipline, and even the hedging that I will be doing, most of my positions are long ones. I would much rather have those hedges go to zero (but using my option trading rules that won’t happen) and the market rallies, then the market corrects 10%.

This article and the last one I wrote is an outreach to that new investor

I am reaching out to the newly active stock market tyro. If you have read my stuff I ask for a little patience and hopefully, I will have some interesting stuff for you at the end.

As many of you know by now, I treat my long-term investments very differently than my trades

I am not touching my long-term investments, and presumably, they will take that 10% hit. So no, while I see the odds in favor of some sell-off mid-Q1 I would rather appear foolish to you my loyal readers, and community members than to be right. The biggest ask I am making is to slowly trim positions by 1% to 3% per day or every other day of winners and losers. The goal is to have 30% cash into the new year. So let’s say that by January 5th, we will have 30%. The days have crept up on us so if you are starting this Tuesday shoot for 10% cash this week, and maybe 5% by the following week. I am at 23% cash, though I have a lot of fast money trades that I am shepherding through so I will easily have 35% by this coming Friday. Now I am talking about your trading account, not your long-term investment account. If you have been reading my content long enough, you know that I advocate keeping them separate. Human nature being what it is, when you have a hammer, everything looks like a nail. When you have your trading hat on, you could end up selling a great long-term investment without thinking twice, and you don’t want that. So rule number 1 is to keep them separate, the other rule number 1 is once you create a trading account and you put money in, that is it. That account is hermetically sealed to new cash.

Why can’t I put new money into my trading account if I want to?

Because your trading is SUPPOSED to be making YOU money. Most people add money to their trading to cover up their mistakes. That is no way to learn. You lost money, fix the behavior that cost you that money. Dumping more money in is merely a salve to your ego. Instead of adding more money to trade you are better off putting your money in the S&P 500 ETF (SPY), or some other general ETF. If you are not going to impose the discipline necessary to be an active investor and trader then you are just burning money that could go to fixing your house up, or getting that MBA you’ve been thinking of.

Be an investor first, then work on being a trader later

This is so hard for someone who has taken a shine to the stock market. There’s so much action and everywhere you turn in financial media someone is telling you to buy this or that. Everyone is talking about what your return on a trade could be. No one talks about risk. That big payoff might not come, and most of the time if you are new to the game, you are acting on old news. You are buying expensive shares from savvier more experienced traders, is it no wonder that so many trades seem to drop the moment you buy them?

All the talking heads and financial media mavens talk about what to buy not how to buy

There needs to be a how, otherwise, you can walk into a trade or even something you consider an investment and lose a lot of money. In the beginning that money is your hard-earned savings, and you could find out that unbeknownst to you, you are very risk averse. Or perhaps not, that is something you don’t want to find out all at once. So the first thing you need to do is get out of margin. For some crazy reason, beginners always find out about this pot of gold (fool’s gold) called margin. I know this because I was one of those who leaped headlong into the margin. For people who are new to trading and that usually happens in times like this when stocks have been going up for months, new people want to be where the action is. So in the beginning the margin is just super-fantastic, you have all this leverage and you get 300% (I don’t even know what the multiple is), maybe it’s 400%. Here’s how it works; the broker lends you money on the cash and securities you have in the account and you use that extra cash to buy stocks. Being new, you want to have the most exciting stocks there are. You haven’t looked at the chart, spent time observing the price action, or even done some reading on what the company represented by the stock symbol does. All you need is the tip, that this stock is going up, and of course you want to buy 200 or 400 shares, why not, it’s someone else’s money. So what is the downside? The downside is that at some point and maybe it’s mid-February, and the overall market falls very quickly by just 5%. The stock that you have margined to the hilt is likely what is called a high beta stock. That means it moves in multiples to the overall market. When the market is soaring that is just fine, mighty fine. You look at your portfolio and you’ve never seen so much dinero. No one tells you that that money isn’t yours until you take profits. You’ll learn that lesson in Chapter 2. Right now, the market is down 5% but your stock is down 10% to 12% (high beta) but it is down a lot more than that because you are on the margin. Now you are underwater and you get a notification from the margin clerk that if you don’t add more money to this account they will sell you out of every position until the debt is satisfied. Add insult to injury, you are almost always sold out at the bottom and the market begins to recover without you.

Needless to say, your mental health has been challenged along with your wallet.

Now begins a vicious cycle of trying to save your margin call. Or once you lose it try to “win” it back. Please for heaven’s sake save yourself the aggravation and worse, and close out your margin, or at least stop using it. There are other ways to leverage, without risking your life savings. I am talking about options, which are also too powerful in the hands of people who are unprepared and unguided. It requires study, trial and error, and not the subject right now. What I say to the beginner is something very simple, start small. Don’t buy 100 shares of anything. Even if you are sitting on several million dollars, start with a few thousand. Leave the rest in a money market. Scale into a position, also there is no need to trade anything right now. This might sound crazy to my regular readers because I am all about trading especially now. I am leaving that aside because I remember very vividly the very difficult lessons, I learned the hard way. After all, no one told me anything. I had to find out in the school of hard knocks. You don’t have to!

What is a good investment?

A good investment pays you to own it. It’s called dividends, and you should look for growth stocks that pay a dividend. Don’t pay attention to the price of a share. Some stocks cost $500 per share but they are cheap according to the earnings they throw off. Look for stocks that grow their dividend, and that the company revenues are growing faster than the economy. How do you buy and mitigate risk, buy just a few shares at a time. This idea of buying 100 shares at a time because that is what the “Pros” do. That is nonsense, we have 0-commissions now, it doesn’t matter if you buy 1 share or 1,000 shares it’s still zero. No one is looking over your shoulder to see if you bought 100 shares either. You can buy 3 shares a day for a month and have your 100 shares. You can do this with 5 stocks or 10 stocks at a time. The key notion here is taking small bites.

Taking profits.

If you decide on a stock that has strong fundamentals, but has no dividend and you buy it. The only way to get a return from that investment is by selling it. Or you can hold it for a very long time and it could be bought out, or it could start paying dividends or buying back shares, boosting your holdings. Most of the time even if we are holding for the long-term you want to manage the size of an investment by taking at least some profits.

The question is, and this is the key lesson from before, when do you take profits? The primal urge is to sell everything all at once, get in fast, and get out fast. Fight that urge and once again take small bites, this time in reverse. Stock that goes up tends to continue going up. If it is a growth stock it could be volatile and it can be stressful to see a stock up 20% and then lose all those gains and be down 20%. There are ways to smooth this out using options, but the main message here is, to be gradual. There is no need to be a “wolf” on Wall Street. Gunning for big rewards means that you are raising your risk. That is okay once you have some experience, develop some trading rules, hone your stock-picking skills, and learn how to read a chart. I talked about watching the price action, learning what the trading range of a stock is, where is it losing momentum, and where it finds support. Is the stock breaking out of its trading range or falling through support? I know this all sounds daunting but golfing and snowboarding have some arcane stuff to them too, and they cost a lot of money. In the case of snowboarding, it can cost some bones while you’re at it. Look I assume that you’ve read this far that you have already taken the red pill or the green pill not sure which but you are interested. That means learning the craft. Even if it is just about dollar cost averaging into some ETFs, that is a great way to start, It is about making small purchases over time to save for the future. That is a great start. It is also mitigating risk because you are building positions over time, and while there could be some bad years or months, at that time your investment will buy more shares. If you decide to move into individual stocks buy higher-quality names to start. Read a lot, and watch all the webcasts that the online brokers offer. Be wary of “tips”, even if it’s really exciting it is probably too late for that moment. Wait a month, and I am willing to venture that stock is now down 20%. If you still think the stock has a great story great buy a few shares then wait another few weeks to buy some more. Ok now for something a bit deeper.

Why do I think the stock market corrects mid-Q1? Sometimes it pays to be a bit of a historian

I find the recent market behavior very reminiscent of another time, going back to the aftermath of the Presidential election in November 2015. For whatever reason, the stock market was rallying even before the election. Afterward, it rallies some more, why? There was optimism about new policies that were seen to be good for the stock market, let's leave it at that.

I took a screenshot from Yahoo Finance from the period of Oct 2, 2015 to April 25, 2016 see below.

That enthusiasm began to wane (again for whatever reason) on December 29, 2016, and reached its nadir on February 14. Why is this germane for us? Patterns tend to repeat and, in this case, there is a similarity in that now the zeitgeist is overwhelming positivity that the inflation dragon has been slayed by Fed Chief Jay Powell, that this level of interest rate is no longer needed, and that stocks always go up when interest rates are lowered. The cherry on top is that the cuts are going to happen in March. Everyone says so! Hurrah!

I do believe that this time Santa Claus is coming to Broad and Wall, but I also believe that our euphoria will meet some serious reality again, perhaps in late January or mid-February.

It doesn't matter what the cause is, it could be that we get a bump in the inflation number, since it has been going straight down, natural systems tend to jump counter-cyclically at any one time, or it could be the opposite (most likely IMO) that we get cold numbers that could portend a recession. I have written numerous times about the "Reccessionistas", it is only a matter of time until we get an unemployment number breaking 4% or higher, or if not that then massive disappointment in Q4 earnings, or any number of underperforming economic numbers that the bears are just itching to jump on when it becomes visible.

It could very simply be that all this rallying and reaching for old highs from 2021 has already discounted the benefits of loosening rates. We could easily be “borrowing” from 2024 right now. I do think we are going higher in the next few weeks, maybe we break through 4900 to a really exciting start to the year. Then I am afraid, we could have a bit of a post-New Year.

All I am suggesting right now is to pile up a little cash

This is a basic tenet of CMD, use the loading and unloading of cash as a way to manage risk. Cash is the cheapest hedge. It also gives you optionality when stocks fall hard enough to buy at the lows, or its support level. If you stay “all in” then you have to take losses of something to buy something else and that makes no sense. Better to trim a little now, just in case this boomer is correct. What if I am wrong? Well at some point you should be taking profits, and throwing in the towel on losers. The best time to do that is when stocks are flying to the moon.

What did I trade?

Speaking of flying to the moon, I decided to get long calls on Rocket Lab ( RKLB ) these are out to January ‘25 at the $5 strike. I intend to hold them out through all of 2024. I have had the shares in my long-term investment account since they went public. The Department of Defense gave them a half-billion-dollar contract when their whole market cap was $2B. The US government wants a competitor to SpaceX and RKLB does have a lot of the capabilities of SpaceX just on a much smaller scale. There is room for more than one. I also got Long DocuSign ( DOCU ) Calls at the 60 Strike and March expiration. They are now very quiet about shopping the company but if it does go private I don’t think the stock is discounting that. I hope they don’t sell out, because, I think they have a bright future even if Adobe ( ADBE ) is trying to eat their lunch. I am also long Zoom ( ZM ), they are profitable and growing, I think they are undervalued, I have Long Calls out to March with a 70 strike. I don’t intend to hold these 2 names past mid to late January. I think they should rise naturally into the climax of this rally, I will then take profits and hold the cash.

Okay, enjoy your holiday, and good luck on Tuesday!

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