- Why I sold July SPY 350 Index Puts this week for ~10%
- I added to positions in Amazon, Apple and Shopify
- Expect a near-term bounce to around 4200
No-one can pick bottoms.
Anyone who says they do is probably lying.
But what I can do with certainty is not buy the market at the top.
That I will guarantee.
With the S&P 500 trading a smidge below 20% off its high this week… and the Nasdaq firmly in “bear market” territory… it’s my view that equities represent far better risk/reward than they did earlier this year.
In fact, some are as attractive as I’ve seen in over a decade (and why I added to select positions this week)
That said, there could be even better value ahead.
My advice to investors is simple:
If you don’t have any long exposure to the market at present – now is a great time to be lightly establishing long-term positions in quality names.
And whilst it’s highly probable we see lower lows… you can buy quality names (e.g., Apple, Google, Microsoft, Amazon, Meta and many others) at some of the most attractive multiples we have seen in a decade or more.
Let’s explore what I think is next… and some trades I put on this week.
Expecting a ~6% Bounce
If you scroll back over my missives the past 6-9 months – we will see things have traded largely “per the script”
My own portfolio is down ~5.5% this year (not great) however it’s not a bad result against the broader index which is down ~16.5%.
In short, I took ‘chips off the table‘ near the highs – waiting to put more cash to work (in quality names) when the market fell 10-15%.
We got it.
What’s more, I was actively selling call options against my long-term holdings when I sensed we were likely to see another leg down.
This enabled me to increase my yields on these names.
And as stocks continued to fall – I put further cash to work.
For example, this week I added to Shopify at ~$320, Amazon at $2,100 and Apple at $141
I also sold an Index put which I will talk to in my conclusion for 10% annualized.
To illustrate my patience – Amazon is a good example.
Three weeks ago (pre-earnings) I felt the stock could trade as low as $2100.
Now Amazon hit a low of $2049 this week and my (patient) 3-week ‘standing buy order‘ for $2100 was filled). Good news.
But here’s the thing:
In this environment, we could easily see each of these names drop another “10-20%” this year.
And that’s more than okay with me.
As long as the fundamentals of the business don’t change too much (cash flow etc) – my view is each of these names will be meaningfully higher over the next 3-5 years.
I digress…
Let’s now talk to what I see as the next phase in this market.
I use the term “phase” as I nominated the previous 4 phases here. For example, here’s the chart I shared April 11th – looking for the next leg down.
April 11 2022
Let’s now update the weekly chart for what could be next:
May 15 2022
My thinking here is there’s a high possibility we see the market rally as much as 6% in the coming few weeks — testing the zone of 4200 to 4300
I have nominated this zone as it overlaps with the 10-week and 35-week EMAs.
I’ve labelled this as a ‘zone of resistance’
For anyone trading with a very short timeframe – this could be a “tradable” bounce. However you will need to be agile.
On the other hand, if you’re someone who has worn a lot of pain this year in more ‘speculative’ (high multiple) positions — then I would consider using any near-term strength to reposition your portfolio.
I’ve stressed the past few months (and it bears repeating for newer readers) — this is not a market to own companies with:
- low-to-no earnings;
- negative cash flows;
- low pricing power;
- high multiples (sales or earnings);
- weak balance sheets; and
- low defensible moats
Get rid of them.
They are not coming back for many years… perhaps as many as 5 or 6 years.
As an aside, here’s a great example of a fund (Cathie Woods ARKK) that concentrates exclusively on these names – it’s a train wreck:
However, on the flip side, those companies that exhibit each of the above (and have fallen in the realm of 20%+) – look to buy those names at levels we saw this week (or below).
That’s the approach I’m taking.
It’s establishing long-term core positions in strong (proven) businesses that will lead the economy going forward – with the power to ride any economic storm / significantly higher-rate environment.
Putting it All Together
Over the past 50 years we have seen 10 bear markets.
A bear market is said to be where the market corrects 20%.
And they can often last at least a year.
Now if we include “close calls” (i.e., where the market was within 1% of a 20% correction) – we’ve seen 15 bear markets in 50 years.
Put another way, 30% of the time you are invested – you’re going to see the market move at least 20% lower.
And as I said the other day, the average bear market downturn is typically in the realm of 25% to 35% when we head into a recession (which I believe we will see in H2 of 2023)
This tells me we should expect the market to perhaps fall another 15% from current levels.
For example, if the S&P 500 trades at 3500, that would be a peak-to-trough decline of 27% (well within the 50-year average bear market)
And if we assume S&P 500 earnings in the realm of $235 (according to Factset’s earnings latest insight) – that’s a forward PE of 14.8x
Which brings me to my Index trade this week…
I sold SPY July 15th 350 (naked) puts for $6.05 for a ~10% annualized return.
Note: selling 1 option contract represents buying USD $35,000 of the Index.
Here’s how I calculate my annualized return:
(($6.05 / $350) * 365) / 64 = 9.9%
* where 64 is the number of days until the option expires.
One of two things happens with this trade:
- The S&P 500 holds above 3500 at July 15th and I bank the 10% return on capital invested (i.e., put option premium received); or
- The S&P 500 falls below 3500 at July 15th and I am ‘exercised’; where I will be long the market at 3500 (i.e. a forward PE below 15x)
From mine, this was a good ‘risk/reward’ trade.
Either I make 10% annualized on the risk capital I invested; and/or I take delivery of the Index at 3500 (which I feel is a reasonable long-term (3-5 year) entry point)
In summary, I put more capital to work this week.
I increased my exposure to quality stocks like Shopify, Amazon and Apple… and I sold July 15th 350 SPY Index Puts for a 10% annualized return.
There’s no guarantee these trades work out over the next few years… but that’s investing.
However, I feel these are solid bets and represent far better levels than what we have seen at any time the past 24+ months.