It's almost as if some traders have never experienced an aggressive rotation before Wednesday. Pullbacks in the market have been few and far between over the past half-dozen years. Rotations, while more common, have been methodical. Slow-roasted brew, rather than instant coffee.
But when we do have one of those instant rotations, it kind of smacks you in the face. Instant may mean hours or a few days, but the moves are sharp, volume is high, and in the grand scheme of time, it really is instant. It also often means the baby gets thrown out with the bathwater, for whatever sector or group is being sold.
If this drop has caused you to lose sleep at night, then either you've completely forgotten anything before 2012 or you may be new to trading. Speaking from experience, yesterday was a blip, and if it caused you heartburn or a sleepless night, then you need to dial back your risk pronto.
Most of the FAANGs closed three days deep into a drop. Those not are two-days deep. That is not the optimal time to initiate a short position. Shorting is challenging enough, but shorting-in-the-hole is a recipe for emotional disaster. For those long and losing sleep, now is the time to at least consider a collar or some put protection.
It's time to justify puts, since it is almost equivalent to shorting-in-the-hole. You do need to be able to sleep at night, and a simple put protection does limit upside beyond the put premium. I'm still of the notion of sitting on my hands for tech names another day or two while the volatility shakes out.
If we continue to see volatility, then I'll consider some out-of-the-money put sales on names I'd be willing to own. Otherwise, I'd take a different approach, especially if my portfolio were predominantly momentum, tech, or cash.
What I would consider here, especially if you find yourself overweight FAANG or technology/momentum names, is diversify into some bottom feeders. I outlined Allergen (AGN) along with Jim Cramer on Mad Money this past Tuesday evening as one of my favorite beaten-down names.
I still think it can be bought right here, either stock or in-the-money calls, possibly $160s or $165 calls expiring in March. Either way, the close over $175 yesterday, along with two solid upgrades and a clear bottom at $168 on the stock, has me optimistic. The risk versus return is enticing, and any correlation to technology and momentum names is spurious.
If you can get past the heartburn of eating and owning Chipotle Mexican Grill (CMG) , the push to $300 Wednesday on the news of the CEO's departure is a positive. Shares have pushed into the huge earnings gap from last month, and should have little resistance back to $320. The risk-reward here isn't as enticing as AGN, as the downside stop is about equal in size to the initial upside target; however, I do think we could see more activist involvement with CMG.
Although CMG isn't "cheap" by definition, sentiment is about as negative as it can get with a company, and yet they are still posting decent numbers. With a large 20% short interest, any hints of a turnaround, activist, or buyout could squeeze shares all the way to $400. Once CMG clears $320, resistance is soft for the next 20-25%. Again, I favor shares here, but for option traders, the March $285 calls provide a similar capital risk to where I'd place my stop on 100 long shares.
The upside is the call eliminates gap risk, but the time value of the call makes up more than 50% of the option price. The decay is very small for the next few weeks, so there is little cost in using the option as a long proxy versus using shares.
Ford (F) , with its nearly 5% dividend along with a strong move yesterday, has set itself up well for both income investors and momentum traders. The stock looks poised to continue a massive turnaround and push into the $14 area over the first half of 2018. Low interest rates continue to funnel money into new cars, rather than old car repairs, and as the driverless car race expands outward, it appears as if every automaker will have a hand in it.
This means we should continue to see money roll away from Tesla (TSLA) and into names like Ford and General Motors (GM) , but it is Ford with the best setup here. Speaking of driverless cars, don't sleep on Delphi Automotive's (DLPH) spinoff Aptiv. It's still a name I believe is worth owning, for the slightly more aggressive investor.
Those looking for balance and yield should scoop up Ford shares. I would consider using the dividends from Ford to buy calls in Aptiv. This would be one method of funneling old-school auto money into the evolution of autos.
This commentary originally appeared on Real Money Pro at 10:00 on Nov. 30. Click here to learn about this dynamic market information service for active traders.
