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  1. Home
  2. / Investing

This Isn't a Forgiving Environment, Long or Short

It's not often you have both overnight and intraday gap risk, so be aware, and good luck out there.
By TIMOTHY COLLINS
Mar 02, 2020 | 11:45 AM EST
Stocks quotes in this article: VXRT, TNXP, NVAX, SPY

This market opened in no man's land for me today. I exchanged emails with Jim last night. I worried that a green open could fizzle a potentially strong rally and red would be better. Another test of the recent bottoms as he summed up well with the simple response, "Test test test." And he's right. We may get a bounce, and we may even see it this afternoon, but the idea of a V bounce feels foreign to me. If we can catch (SPY) $300 on the close today, I do think it opens the door for a move into the $310 to $312 range, so some solid bounce potential. We finally have some extreme oversold reading in terms of trend and momentum on the daily view of the major indexes with the Nasdaq looking the best and the Russell 2000 the weakest.

I'm watching $297.80 and $292 on the SPDR. Should we get over $297.80, then I'll be interested long. I'd also be looking long on a bounce off $292, so around $292.50, but in between, I feel like we're just flipping a coin and calling heads or tails. After the week we experienced last week, the Monday bounce has lost some excitement. Futures trading down 40 handles to up 20 to back down 30 to up 10 may have exhausted momentum heading into the day. In other words, don't force a position, but have a plan. This is not a forgiving environment, long or short, and that may be the most important thing for traders to realize. Mistakes and stubbornness for both longs and shorts will be punished... severely.

Speaking of punishment, trading corona-related names has ratcheted the risk level up another notch on Monday. Until Friday, it was straight up to nose-bleed levels. Now, we're beginning to see some rotation with money flowing into new speculative names with the original names experiencing selling and increased volatility. A few other important items have popped up for those trading the group need to understand.

First, secondary offerings are hitting the market. I think this is a great move by the management of the companies taking advantage of the recent pop. Odds are little real business will develop for the vast majority of these companies, especially the smallest of the biotechs. Some companies may be able to raise more capital than what their market capitalization was before the coronavirus painted the headlines with tragedy and fear. That's huge for those companies. If nothing productive comes from their pursuit of a corona cure, at least they will have funds to pursue other needed medicines, products, treatments, or procedures. If they do find success around the coronavirus, I doubt the capital raise will hinder the overall company valuation much at all.

From the investor side, holding overnight will expose you to an offering potential. That could dilute shares 20%, 25%, or even 50%. The stock may gap down by those levels or more. Additionally, many of these offerings will come at a large discount to the market, so it is almost certain to have an impact on long positions. Vaxart (VXRT) from last Thursday, Tonix Pharmaceuticals (TNXP) from Friday, and Novavax (NVAX) from today, Monday morning, are all examples. Honestly, ALL of these companies should be hitting the markets for capital. I worry more about the ones that don't than the ones that do.

Second is volatility. We're already seeing Reg SHO hit most of these names today. I posted a list last week, but that list has seemingly grown with each house in each day. That also means halts. Some of these names will be halted because of volatility. While those halts sometimes result in the stock opening a few minutes later in the same place, they open traders (long or short) to intraday gap risk. A stock could get halted, then plummet through your stop price while halted, and open below where you might have sold. The same risk holds on the short side. A stock could easily gap higher coming out of the halt.

It's not often you have both overnight and intraday gap risk, but it's there with this group, so be aware, and good luck out there.

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At the time of publication, Timothy Collins had no position in the securities mentioned.

TAGS: Investing | Markets | Stocks | Trading | Coronavirus

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