- I believe we are past the worst of it. We may have a bit of overhead resistance in a few days.
- My plan was to select some high-quality, high-priced stocks that have fallen hard this past month, and build positions that will hopefully return 20% to 30% by year-end.
- It's important to identify emerging trends as soon as possible. This is the way to find the winners before the crowd.
- If you understand a trend you can identify, the factors that must come together for a trend to really become visible. A great example is the Space sector and the lower cost of getting to space.
Two Weeks Ago My Trading Plan Went a Bit Awry
The actual behavior of the market was completely opposite of what I predicted it would be. I thought we would get the dip buyers to boost the index first, then the sell off. Instead stocks slammed down and then at the end of the week appeared to find firmer footing. Whatever happens tomorrow we are at the end of this phase of selling. We have finally achieved a +5% sell-off. Perhaps we will see the bear sputter and roar but it will turn into a yawn as it prepares to hibernate. October is known as the most volatile month of the year and many of the worst dives in the history of the stock exchange happened at the beginning of October. However, October turns into a very bullish climate as does the rest of the year. I am in fact looking for Friday's action to continue tomorrow. It will be just as volatile but in the end the best stocks will end higher.
I Managed to Limit the Damage
Midweek, I sent out an email that listed many of the actions that I thought I got wrong. A high-performing individual needs to assess honestly so that they can correct their tactics if needed. I aspire to be such a trader. I am thankful that the market's volatility was up as well as down. This allowed me to do some fast trades, repositioning, and managed to whittle down my loss to a bit under 8%. My actions let me add more to the stocks that I believe will provide Alpha into the end of the year. No one likes to fall back in the value of their portfolio; however, when you are catching a falling knife (in my case knives), your overall score is going to suffer in the short term. The maxim "never try to catch a falling knife" is true if you want to day trade. I try to counteract the harm of diving stocks by buying in small increments. Still, at the end of the day, it does damage anyway. The fact is I have a 40 point range in buying MNDY, 20 points in PYPL, 35 points in ROKU, 25 points in TWLO, etc. No matter how small your increments are, if you want to build a decent sized position that kind of fall is going to hurt now, hopefully for a benefit later. The aim is to turn this 7ish% drop into 25% to 35% gain by the end of the year. I basically did dollar cost averaging but at a shortened timescale than a typical investor. I managed to create some cash on Friday so as long as these names are below their cost basis I am still buying.
Am I Sure That The Downside is Over? No, Actually We May Have a Little Turbulence
I wanted to take a look at the S&P 500 using the SPY ETF after I revealed what my instincts were telling me. It has been my experience when you have nearly vertical down and up volatility in a few short days that usually means (to me) a change in direction. So since we have been going down for a month that action should mean we are going to rebound. The chart attests to that, but it also shows that we will likely face resistance in a few days. Perhaps the thrust of the market breaks right through or we could also go sideways. Anyway, let's take a look.
There is a lot of information here. The black line is the 50 DMA, the blue and red lines are trend lines drawn by me. Remember that resistance becomes support after a stock breaks above. The blue arrow is showing that SPY broke right through those lines of resistance. Where I believe we will have renewed resistance is that 50 DMA. It looks like we have 1% of upside to that resistance, so perhaps we will see some turbulence in 1 to 3 days.
The Main Takeaway For Me is That We Likely Have Broken the Downtrend
Energy is Working and I Am Not Talking About it. Why Not?
Occidental (OXY), Diamondback (FANG), Devon (DVN), Marathon Oil (MRO) all finished last week up between 10% and nearly 12%, and I missed that. Perhaps some of you were lucky enough to grab that ride. I can't tell you how many times I've tried to trade these names, and gotten badly burned. I have to be frank and admit I don't know how to time this sector. There just are too many variables for me, such as the whim of the OPEC cartel to take into consideration, and the movement of the dollar. I have to concentrate my energies to where my chances for alpha are best served and it's not oil. Now I am hearing that some traders are betting on $100 Brent Crude, which would take WTI to $95? What happens if our frackers decide to drill baby drill again, while at the same time OPEC starts to cheat in earnest, and we have a mild winter. Right now, it only pays to do some fast money trading in oil. I will say that LNG and NatGas are interesting, and that LNG may have a sustainable uptrend. Perhaps if this was a different time I would try again. Right now I am on a different plan and I don't want to dilute it.
New Trends That Bear Watching
The three emerging trends are possible by technology advancement and also regulatory innovation. This country still has the ability to be the home of innovation, and entrepreneurialism. I hope the creep of regulation and the looming increase of taxation that will stunt the impetus for wealth creation will be turned back.
The 3 Trends are:
Low Code No Code software
In a world where there are over 10 Million Job openings for 9 Million unemployed, the demand of corporate computer applications development is outstripping the supply of fully trained Software Engineers. The concept of an ordinary person developing software using programming and needing little knowledge or none at all is very appealing. Yes, there are overseas resources for development, but what if the algorithm or the data is very sensitive. Or, you need to work very closely with the end users, or the business is a pilot and doesn't have the budget for full support. There are a myriad of reasons to use easy application development, aside from a lack of labor. Giving the end-user the ability to modify an application or build their own might make the IT department a bit nervous. I suspect that low-code and no code programming will still be IT driven but the personnel may very well be "embedded" into the end-user group. I bet, though I haven't searched it yet, that LinkedIn has tons of Low-Code jobs and specialists out there already. I am listing this first because it only dawned on me recently how huge this opportunity is. I unfortunately don't fully understand yet who the leaders are, and also there are likely specific cloud applications that have a low-code capability. I believe that ServiceNow (NOW) and monday.com have a low-code capability. I don't think that is the way to go. If I were an IT executive, I would want a best-of-breed standalone low-code/no code (LC/NC) workstation that can work with any business application and that the output code conforms to a universal standard. Learning a myriad of LC/NC environments is just not efficient. One final caveat, which I already touched on, I am just beginning to research this trend, even though it has been around for years. So I am sure that I don't have every name on this list, or even the best name as yet. So please don't go off and buy the first name listed, or the whole group. Look through the list and do your own research. I will add to this list when I find new names and hopefully be able to crown the winning name.
Turns out there are quite a number of them:
- Appian Corporation (APPN)
- Pegasystems (PEGA)
- Microsoft Power Apps (MSFT)
- Salesforce Lightning (CRM)
- SAP AppGyver (SAP)
- Twilio Studio - I own shares
- monday.com - I own shares
Well, as you can see there are very few standalone low-code/no code public companies or I just couldn't find them as yet. Still, I think this trend is so important that I am leaving this up here. Clearly, a successful Power Apps will not create meaningful alpha for a Microsoft investor. There are a lot of these application specific LC/NC capabilities out there. That still does not shake my faith that some kind of universal tool that plugs into a wide range of business applications is out there. I think we all should keep our eyes peeled for any new entrant that in fact is a pure LC/NC workstation that is a stand-alone product. If such a company IPOs, it will have my attention.
Commercial Space trail-blazers
Space is now the final frontier - for business. Ever since NASA changed its MO from all government activities to an outsourcing model, this sector has exploded with new businesses. The first new leader is SpaceX but unfortunately it isn't public yet. Most of the new names are public through a SPAC. As an aside SPACs are a tool, they are not a monolithic asset class. I think that with the hindsight of a few years hence we will look upon this SPAC era as one of great creative fecundity. Until recently the oft heard complaint was that too many companies go IPO after all the value creation is done and the public is left holding the bag. The likes of UBER come to mind as the prime cautionary example. Now the complaint is that many of the companies that used the SPAC weren't fully baked. I for one would rather choose between the tadpoles to find the one most likely to turn into a Bullfrog than an IPO with all the juice already squeezed out. There are several at the bottom of the list that are older names that have been around for years if not decades. Some of the new companies below are already growing revenue, like the first on the list below:
- Rocket Lab (RKLB) - I have shares in this name. I am looking to add more
- Astra (ASTR) - I have shares in this name. I may cut this position further
- Spire (SPIR) I have shares in this name. Very small position
- BlackSky (BKSY) - I have shares in this name. Very small position
- Redwire (RDW) - I have shares in this name. Very small position
- Virgin Galactic (SPCE)
- AST SpaceMobile (ASTS)
- Momentus (MNTS)
- Aerojet Rocketdyne (AJRD)
- Globalstar (GSAT)
- Iridium (IRDM)
- Viasat (VSAT)
There are many other non-public space-related companies in a very fertile development phase. There are probably hundreds of rocket companies, satellite builders, satellite components, satellite operators and software analytic companies. We will likely see many more companies go public. Most are about observing the globe. Some are about in-space activity. I am going to maintain several small positions to see how this sector evolves.
eVTOL "Flying Taxis"
This trend is the most improbable emerging sector to highlight while at the same time it has the most potential to change our lives, or at least change what we see in the sky. eVTOLs are projected to begin commercial flights by 2024-2025. eVTOLs are compact, low-noise, vertical-takeoff vehicles that will have a pilot in the beginning but at some point soon will be robotic and pilotless. The flight range would be about 100 miles, and fly over 100 mph. Cost per flight? How does $40 to $50 sound? Why so little? With the eVTOL, you do away with a turbine-driven vehicle with all the complex machinery and expensive jet fuel, and highly and extensively trained pilot. Instead of tens of millions of dollars for a helicopter, the cost should be at the level of an exotic supercar. An eVTOL will have battery powered electric motors and many propellers or ducted fans. Because of the multiple propellers, the wingspan can be much smaller. Right now the cabins can fit up to 4 to 5 passengers and one pilot. The Pilot eventually will need no more training than a long haul trucker as landing and takeoff will be largely automatic, and in a few years thereafter no pilot at all. As batteries improve their energy density and the aerodynamics improve, the passenger capacity, range and speed will likely expand. Still never being in a traffic jam again on the way to the airport sounds mighty fine. A trip to Boston from NYC might be in range within the next generation or two. Also since it will fly no higher than 5,000 feet, it will not have to be a concern of the FAA, and some more automated flight traffic control can be implemented. I could imagine the sky around New York and the tri-state area would have hundreds of such vehicles. In fact, every metro area here and across the globe will be buzzing with them albeit at a much reduced noise level than what we expect flying machines to have. I know that if you aren't familiar with this technology it may seem like a hoax but it's not. There are actually a lot of new public companies that already have actual vehicles going through their paces and approval processes. There are as many as 30 non-public companies that are developing eVTOLs right now.
- Joby (JOBY) - I own shares
- Lilium (LILM) - I own shares
- Archer (ACHR) - I own shares
- Blade (BLDE) - I own shares
- Wheels Up (UP) - I own shares
All the above companies went public via SPAC, so I know many of you might still scoff. If I were to tell you that Airbus (OTCPK:EADSY), Boeing (BA), and Textron's Bell are in the game as well, would that help? Also, the US Air Force is trial testing them, and several US airlines are already investors. BLDE is going to act as the "Sky Uber" and I suspect that UP will get in the game, right now they are more concentrated in fractional ownership of a variety of planes.
I Added a New Name that I Recently Bought During this Sell Off; Sprout Social (SPT)
I was in this stock a year ago, I was trading it way lower than where it is now. Here is another name that I should have kept a core position in. SPT is a tool for enterprises to manage their social media communications. During September it like many other good growth tech names took a hit and I am taking advantage. I know this contradicts my plan of shrinking the number of positions I have in my trading account. I have no defense other than I like their business model and I think it has years of growth ahead of it. Here is a very simple chart, showing the drop and the rapid bounce that is forming. I am expecting it to eventually get back to its ATH going into the fourth quarter. Since I have a late start, I may not manage to build more than a core holding and that's just fine with me.
Recently Morgan Stanley gave SPT a new price target of $146, which is already at its recent 52-week high of $145. I wouldn't be surprised if SPT continues to break higher.
Still Executing On My Plan
The stock positions that I built during the September sell off should be familiar by now; however, there are a smaller number of names now that I bought specifically for the sell-off than when I started. Let me enumerate them: Affirm (AFRM), Asana (ASAN), Confluent (CFLT), DraftKings (DKNG), DocuSign (DOCU), GXO Logistics (GXO), monday.com, PayPal, Roku, SentinelOne (S), Twilio, XPO Logistics (XPO), Zillow (Z).
The bolded names above are names I chose as new positions to take advantage of the sell off. The other names are ones that I had from before but added to during the dive.
I have my eye on Upstart (UPST) which fell 40 points from its ATH mostly during the last week. If it falls another 30 to 40 points, I will start adding to my core position again. UPST had two prior sell-offs where it lost about ⅓ of its value. I am hoping it happens again so I can buy it at a discount.
Please remember that what I publish on Seeking Alpha is largely a chronicle of my trading, my tactics, strategies and thoughts regarding where I think the market is going as well as stocks that I have bought or intend to buy. In no way am I recommending that you buy any stock. If you are inspired by what I write please take full responsibility for it. Do your own research and understand the risks. I generally talk about trading high beta stocks, which means they can dive deeply when the overall market is selling off. In turn, that means that it can be risky and is not suitable if you can't afford to lose your investment. I do invest for the long term in a separate account and I hardly ever trade in that account. You should look for solid, dividend-paying stocks that are in sustainable businesses for long-term investing…
This article was written by
David H. Lerner is an analyst with a decade of experience utilizing his professional background in software consulting and technology to identify market trends and provide long and short trade ideas. David employs a combination of technical analysis and market psychology to capitalize on narratives for outsized returns. He also utilizes “Cash Management Discipline,” a simple trading style to hedge against the volatility of today’s market climate.
He leads the investing group Group Mind Investing where he uncovers actionable trading and investing ideas nearly every day. Other features include: long and short swing trade alerts, daily macro analysis, weekly articles, and chat for community interaction and questions. Learn More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
AFRM, ASAN, CFLT, DKNG, DOCU, GXO, MNDY, PYPL, ROKU, S, TWLO, XPO, Z, UPST, JOBY, LILM, ACHR, BLDE, UP, SPIR, RDW, BKSY, ASTR, RKLB
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.