Between a rock (Omicron) and a hard place (Powell)

Good morning and Happy Month!

I am sure we all had a difficult day yesterday, full of volatility and moves that pushed both the $SPY and $QQQ to low levels. The news is so full of signals that push the market in different directions, which finally ends up in a bottom. We have so many unanswered questions regarding Omicron and this makes investors restless. On top of this the FED Chair Powell pushes ahead and with speed towards tapering, while addressing the Omicron bump, saying that it will create bottlenecks. This leaves a bitter pill to swallow for us investors. What is the next step? Quality versus growth, and therefore stocks like $AAPL bloom. At the same time if we let ourselves dominated by the chatter and fear we may lose a buying opportunity in the small caps (growth sector). If Omicron is a milder version of the virus and we find out in the next couple of weeks that vaccines are effective we may see a sharp turnaround, which will shake the tree of value stocks. The idea is to keep a clear head, follow the levels and try to be tactical when the volatility index is off the charts. After yesterday’s ugly close we had an aftermarket situation in which the $QQQ jumped 3 points and the $SPY 2 points. What does it mean? We were oversold and this whole ‘mutated’ situation has been blown out of proportions. Even the biotech sector was hit, as it is in the growth category, but it did an impressive reversal late afternoon. If you have all media outlets screaming ‘panic’ it is best to see ahead and try to position yourselves a bit outside the box, as this usually means that everything is already priced in and a reversal may take place. I am not saying to go all in on buying hurt stocks, I am just suggesting being tactical and not to push shorts when the volatility is already high and the $SPY reached below 50 day.

$AAPL Chart

This is an oasis stock in a desert of losers. When the $QQQ went down 10 points this stock went up 5. Why? Because it is a good place to park your money in a frothy environment, and it has may exciting things in the pipeline. We trimmed along the way yesterday, stock and options, and we left a trailer for continuation. It has been an amazing stock to hold after Friday’s down move, and it has paid us handsomely. Today it would be the third day up and I recommend caution, as it can have a digestion type of day. It made a new all time high in aftermarket, so you can see some money-taking. At the same time it is the first day of the month, so things can go both ways. Follow the levels and see that $AAPL holds $162 (middle of the flag) for continuation.

$TSLA Chart

Let’s talk about my ‘toy stock’. I hope you followed my advice yesterday and got involved in this stock as it was strong when the $SPY was crumbling. At the opening I bought the stock and trimmed along the way until $1148. I got stopped out of my trailer when it reached the 8 day, but I also covered my sold calls for this week, and therefore I could participate in the second move up t0 $1168. I did not rebuy the stock for the second move since the $SPY was so weak, but by leaving naked calls for this Friday this keeps me in the game. I was not more bullish as I did not want to give back my gains for the day, but I still left a door open if Tesla wants to show its horse power today. Sometimes not having FOMO can protect you from bigger losses. Big risk does not always bring big gains, and therefore I chose a ‘safer’ path yesterday.

$XBI Chart

Let me present to you one of the most crushed sectors out there, with the biggest outflows in the last couple of months. Do you remember last week’s reversal? I do, and then yesterday I also witnessed another reversal down, only to be followed in the afternoon by a second powerful reversal to the upside. When a sector has been so battered reversals can take a while to mature and translate into upside follow throughs, therefore they are best approached with options. Last week I bought call spreads for this week’s continuation on the upside, and in yesterday’s gusher I covered my sold calls, since they were worthless. This way I was left with only naked calls for a possible move up. I was right and my $116 will pay me nicely if the trend continues. The idea was that the spreads were almost worthless, so there was no more risk involved, just a possibility of gain from that moment on. I am looking to add to my position today if the biotech sector sees monthly inflows, which according to seasonality it should. Until it reaches the 8 day EMA of $118.73 I am not touching my position, but if it does I will be a buyer. In order to show this reversal is real it should not go below $114.84.

I fell like I have entered an entertainment park from Friday until yesterday and the rides kept on going non-stop. There were uplifting moves, but also sharp down-moves, and this created an excitement which is always detrimental to the markets and our portfolios. I am happy that we were not overly invested and that we stayed tactical, even if we suffered some losses. The idea is to keep a clear head, follow the trends and see where the backbone of the market – the $SPY- takes us. Omicron, tapering and inflation took us below the 50 day in the $SPY, will this be the end of this downtrend, or will we see a correction? Until we have a more definitive answer we’ll do more day trading for cash flow, and leave most of our portfolio in cash. For updated please follow our Twitter and for more in-depth analysis read our Morning Game Plan.

Good luck!

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