Europe fears strike again.
Greece gets one step closer to dropping out of the Euro.
France elects an anti-austerity government that quickly ensures its CDS are the ones going up the most.
The markets, all around the world, go into a crazed risk off dive. The tree shakes, and it shakes bad. Speculators all around drop to the floor as if they were over-ripened fruit long past its due date.
What can a reasonable trader do in a day like this? It's actually quite simple, if care was taken before this day came, one would have a few short hedges in place, and obviously, one wouldn't have any excess exposure. Also useful, one would have compiled a "to buy" list. So in a day like this, one could remove a bit of short exposure and add some positions from the buy list. Say, Exelon (EXC), because of the natural gas (UNG) thesis. Or other more common stocks, such as Intel (INTC) or Apple (AAPL). If one is going to buy those stocks, might as well do it in these dips, and not when they're flying high.
The stocks on a "buy list" need two things:
- They need to be fundamentally sound and fairly valued, where the only thing missing is the buying dip;
- A thesis for them to resume their upward trends once the dip is gone.
I've already talked about how I expect natural gas to go up in price during 2012 and 2013, so that's the thesis for Exelon. As for stocks like Apple or Intel, one just needs to remember that Bernanke is not going to sit tight forever with the market going down the tubes and employment numbers also turning weak again. So, as the stock market drops, long exposure needs to be built up slowly for the inevitable QE-fed rebound.
But not exposure in any kind of stock. One needs to buy quality. There are still stocks, such as Salesforce.com (CRM) or Amazon.com (AMZN) that trade entirely on hope, not fundamentals. Those might rebound as easily as the other stocks, but they also carry the risk of permanent and heavy losses. One day, they'll fall and not come back. They'll fall 50% and not come back.
For now, Intel and Apple don't share those risks. For instance, in Apple one has the near certainty that it's about to launch their smart TV. The chatter is building up strongly, and it can't be long before it's announced. That, along with China, will provide it with enough ammunition to come back from even a substantial rout in the market.
Days like today are days where you should remove some of the short exposure and build some long exposure in quality stocks. If you don't have a "buy list" set up already, you should use some time to build one, so that when faced with days like these, you do some buying.
Additional disclosure: I am also short AMZN.