It's time to play b-sides. I like to drop classic rock references into my Real Money columns, and this is the first time I have quoted Blue Oyster Cult. So, the relevance of that sentence is driven by the market's action this week.
For 11 months, one style of investing has worked ... and worked consistently. Just lever up and buy as much as possible. Sure, there will be the occasional GameStop (GME) -- which is rising from the dead again in the past two trading sessions -- but based on the feedback I receive from readers on these columns, most of you are investors, not traders.
So, this is where some classic portfolio management techniques take over from the buy, buy, buy buy the (expletive) dip mentality that has ruled Wall Street of late. To play a-sides was to make very good money in the market for the better part of the past year, but now it is time to play b-sides.
First and foremost, you have to understand the cause of the selloff. The bond market is crashing. It is that simple.
Bloomberg's rates and bonds table shows that the yield on the 10-year U.S. Treasury note is now 1.48%. While that has been an amazing move in the past three weeks -- on Feb. 1 that yield was 1.09% -- it is still not the most important figure on the page. That would be the price of that bond, currently listed at $96.72 on a base of $100. That's what you have to understand here. Not every security is GameStop. If you were a Treasury bond fund manager and you bought that Treasury note (Bloomberg and most data sources use the convention of using a "generic" 10-year note, not one specific bond , as the bond's remaining time until maturity would only be exactly 10-years for a fleeting time) at par, and you had suffered a 3.3% unrealized capital loss, you would be freaking out.
Yes, that's right a 3.3% unrealized capital loss could ruin your day. But remember that, as recently as two weeks ago, that "generic" 10-year was trading well above par, so we are talking more like a 5-6% capital loss, which is not compensated for by the coupon interest rate of that security. So forget Robinhood and GME and everything else. We are looking at a group of people who simply cannot handle a 6% loss, and they are selling Treasuries like hotcakes. You need to understand this. There are forces at work, and trillions of dollars at play, that are heavily leveraged to falling yields and rising stock prices.
As soon as that changes, at the margin, it is "Katie bar the door." That is exactly the type of action we are seeing this week.
I was a 20-year old intern in my first job on Wall Street when I first heard someone utter the phrase "the stock market follows the bond market," and, dammit, it is still true 30 years later. It always has been. Some folks just forgot about that while foisting their ridiculously overvalued story stocks on you. They didn't actually forget, but selling requires self-confidence, even if it is misplaced.
So, what should you do with your portfolio? Here are three common sense approaches to playing a jittery market:
First, sell out-of-the-money calls against long-term stock holdings, especially in tech. The great thing about this strategy is that the price of a call, other things equal, is increasing now because the implied volatility in the market (often expressed as the Volatility Index) is rising. You get more "bang" for each "buck" of money-ness than you would have last week.
Second, buy out-of-the-money puts. I have been doing this all week. The gains there are more (much more actually) offsetting any losses from my longs. I have been buying puts on Tesla (TSLA) and Cathie Wood's ARK Innovation Fund (ARKK) , whose largest holding is TSLA. Readers of my columns would know my feelings on these two securities. It's the inverse of averaging down. You simply average up. Wait for good news, and green figures, and buy more puts at cheaper prices.
Finally, and third, don't bargain hunt. The last cheap big-cap stock that I could identify was Exxon Mobil (XOM) . As oil prices rise yet again today -- WTI at $63.65 a barrel and Brent at $67.11/bbl --XOM hit a recent high of $57.24 this morning before pulling back with the overall market. Exxon's safe 6.25% yield means that it is still not expensive, but I liked that figure a lot more in the eight area, so I am not buying more XOM here. Almost every other big-cap stock is still expensive from a price-to-earning or earnings yield (the inverse of P/E) basis, so I am just going to let them get cheaper before I buy.
