Seeing Beyond The Black Swan Event

Just before the COVID-19 pandemic struck the S&P 500, Nasdaq, and Dow, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect but they were ill-advised in what was an already frothy market with stretched valuations. I'm sure Ray Dalio quickly realized that his "cash is trash" mentality, and public statements were imprudent. The COVID-19 pandemic has been a truly back swan event that no one saw coming. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.

The S&P 500, Nasdaq, and Dow Jones have shed approximately a third of their market capitalization, with the sell-offs coming in at 33%, 29%, and 36%, respectively, through March 20, 2020. Some individual stocks have lost over 70% of their market capitalization. Other stocks have been hit due to the market-wide meltdown, and many opportunities have been presented as a result.

Investors have been presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I have begun to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It's important to put this black swan into perspective and see through this on a long term basis while viewing this as an opportunity that only comes along in decades.

Most Extreme and Rare Sell-Off Ever

The abrupt and drastic economic shutdown and velocity of the U.S. market's ~30% drop within a month bring parallels to the 1930s. This sell-off has been extreme and rare in its breadth, nearly evaporating entire market capitalizations of specific companies. The pace at which stocks have dropped from their peak just last month from all-time highs is the fastest in history. The major averages just posted their worst week since the financial crisis (Figures 1 and 2). The Dow is tracking for its worst month since 1931, the S&P since 1940. As of March 20, the S&P 500, Nasdaq and Dow Jones have sold off 33%, 29%, and 36%, respectively. Continue reading "Seeing Beyond The Black Swan Event"

Don't Be Remiss - Start Buying Stocks

The coronavirus (COVID-19) epidemic has pummeled stocks and has caused a complete collapse of the entire market. Broader indices such as the S&P 500, Nasdaq, and Dow Jones have lost over 20% of their value, while most individual stocks have lost 20%-70% of their market capitalization. Airlines, cruise lines, and casinos have been hit particularly hard. Other stocks have been hit due to the market-wide meltdown, and many opportunities have been presented as a result. I'd be remiss if I didn't use this unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I have begun to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones.

The Financial Crisis and 1987 Black Monday Comparators

The broader market sold off in a historic downward move as the coronavirus has spread outside of China throughout the rest of the world, effectively shutting down economic activity on a grand scale. During the last week of February, the Dow Jones and S&P 500 sank by 12% and 11% for the week, respectively. This marked the worst weekly performance since the financial crisis for the markets. The Dow posted its biggest one-day loss ever during the week and tumbled into correction territory, down more than 10% along with the S&P 500 and Nasdaq.

As the markets moved into March, the S&P 500 officially closed in a bear market on March 12th, down more than 26% from its record high set just last month. This ended the historic 11-year bull market run. The Cboe Volatility Index (VIX) jumped to more than 76 and hit its highest level since 2008 (Figure 1). On March 12th, The Dow Jones and S&P 500 had its worst drop since the 1987 "Black Monday" market crash, when it collapsed by more than 22% (Figure 2).

This market-wide meltdown is in response to the negative impact that COVID-19 will likely have on the global economy and corporate earnings. A wide array of companies have already issued warnings about their upcoming quarterly earnings. This placed a damper on the outlook for the markets, especially with rising concerns Continue reading "Don't Be Remiss - Start Buying Stocks"

COVID-19 Market Meltdown - Hysteria Presents Opportunities

The coronavirus (COVID-19) has wreaked havoc on worldwide supply chains, shipping routes, commerce customer demand, and travel. The broader market sold off in a historic downward move as the coronavirus has spread outside of China. During the last week of February, the Dow Jones and S&P 500 sank by 12% and 11% for the week, respectively. This marked the worst weekly performance since the financial crisis for the markets. The Dow posted its biggest one-day loss ever during the week and tumbled into correction territory, down more than 10% along with the S&P 500 and Nasdaq. This market-wide meltdown is in response to the negative impact that COVID-19 will likely have on the global economy and corporate earnings. A wide array of companies have already issued warnings about their upcoming quarterly earnings. This placed a damper on the outlook for the markets, especially with rising concerns over a potential outbreak occurring in the United States. The OPEC fiasco and plummeting oil prices are exacerbating this market weakness. These events are presenting buying opportunities across the board in high-quality names and the indices on the whole.

The Market Meltdown

The number of new cases in China continued to rise and spiked in South Korea and Italy during the final week of February and the first week of March. During this time, the Dow posted multiple declines of more than 1,000 points. One loss of 1,192 points was the Dow's biggest one-day point loss on record. The Dow was down 14% from a record high during this period. The S&P 500, posted declines of more than 2% multiple times during this two week period as well. The S&P 500 fell 13% below a record high, and this marks the average's fastest decline from a record high into a correction ever, outside of a one-day crash. It's noteworthy to highlight that 96% of the entire S&P 500 is in correction territory, and all 30 Dow stocks are down more than 10% from their respective 52-week highs. Furthermore, the COVID-19 market sell-off has wiped out over $3.5 trillion in market value from its high during the two weeks. Continue reading "COVID-19 Market Meltdown - Hysteria Presents Opportunities"

Capitalizing On The Coronavirus Induced Volatility

The Coronavirus has become the black swan event that has materialized into worldwide hysteria. The spread of viruses globally has halted supply chains, commerce, retail, and specifically the travel and leisure sector. The Coronavirus has been the catalyst for the overall indices to drop double digits or ~13% over the course of roughly a one week period in late February. The coronavirus event induced extreme global market volatility that hasn't been seen since Q4 of 2018. This extreme volatility provided options traders with a vast landscape of stocks that possessed rich option premium pricing.

As volatility spikes and stocks sell-off, options traders can sell options and collect rich premium income in a high probability manner with a statistical edge and expected outcomes. Even better, options can be sold with defined risk while leveraging a minimal amount of capital to maximize return on investment (ROI). Whether you have a small account or a large account, a defined risk (put spread) strategy enables you to leverage a minimal amount of capital, which opens the door to trading virtually any stock on the market.

Volatility - Options Trading Edge

The Coronavirus injected volatility across the entire market throughout February and into early March. This volatility resulted in rich option premium pricing, which enabled options to be sold on a wide array of uncorrelated tickers that can be spread over various expiration dates.

Selling put spreads is a great way to leverage a minimal amount of capital while maximizing returns. A put spread is a type of options trade that risk-defines your trades and involves selling and buying an option. These types of trades maximize return on capital; often, a ~10% realized gain over the course of a month-long contract with an ~85% probability of success. The required capital is equal to the maximum loss, while the maximum gain is equal to the option premium income received. Continue reading "Capitalizing On The Coronavirus Induced Volatility"

Transformation Underway - CVS Health and Aetna Combination

The combination of CVS Health (CVS) and Aetna is proving to be a success after initial skepticism by investors. CVS has broken out recently due to a string of better than expected quarters, in part attributable to the Aetna acquisition. CVS is generating large amounts of free cash flow, paying down debt, and returning value to shareholders in a variety of ways. To further boost long-term growth prospects, restore growth, and fend off potential competition, CVS combined with Aetna. This combination creates the first through-in-through healthcare company, combining CVS's pharmacies and PBM platform with Aetna's insurance business. The new CVS combines its existing pharmacy benefits manager (PBM) and retail pharmacies with the second-largest diversified healthcare company.

This is a bold and hefty price tag to pay yet necessary to compete in the increasingly competitive healthcare space, changing marketplace conditions, and political backdrop with drug pricing pressures. CVS made a defensive yet acquisition required to enable the company to go back on the offensive. CVS had been beaten down for years, plummeting by over 50% ($113 to $52) from its multi-year highs. As of late, CVS has broken out to the mid $70s on the heels of its positive string of earnings. At current levels, CVS presents a compelling investment opportunity while the company is still in the early stages of its CVS-Aetna combination, which drives shareholder returns.

Challenging Backdrop

The pharmaceutical supply chain cohort, specifically CVS, has been unable to obtain a firm footing in the backdrop of consolidation within the sector, negative legislative undertones, drug pricing pressures, rising insurance costs, and a market that has lost patience with these stocks. All of these factors culminated into sub-par growth with a level of uncertainty as the sector continued to face headwinds from multiple directions. Many of the stocks that comprised this cohort presented compelling valuations in a very frothy market. This allure had been a value trap as these stocks continued to disappoint. It's no secret that these companies have been faced with several headwinds that have negatively impacted the growth and the changing marketplace conditions have plagued these stocks. Continue reading "Transformation Underway - CVS Health and Aetna Combination"