For the past few months we have been talking about the possibility of the kind of selloff we are experiencing at the moment. Investors became too bullish and too complacent and profits came too easily in 2017 for to continue. The tax cuts are very bullish for corporate profits and therefore stock prices. We were a bit concerned that the passage of the tax bill would be the setup for a sell off. We think the rally of 2017 was due in part to investor anticipation of the tax cuts. Recent market action is classic “buy the rumor, sell net news” behavior.
Worried that a significant selloff was likely, our longs were limited to value stocks and fast growers. For protection, we offered a few portfolio hedging ideas using ETFs (SPY & SMH) that are doing the job of protecting portf0lios. We always like to have a balance of bullish and bearish trades on the books for times like these. Like everyone else, our bullish trades are suffering, but our bearish trades (FB & TSLA) up nicely. As we move forward and navigate the volatility ahead, the overwhelming goal is to preserve capital. At the end of every correction and bear market, there are bargains to be had made by sellers who can no longer suffer the pain of holding on another day.
