Managing Through the Uncertainty

Over the past week, the stock market seemed like it wanted to break out, especially with some positive news from generally better than expected bank earnings.  However, the market's performance was muted, with uncertainty about rising COVID cases in Europe and the US, setbacks in vaccine / therapy development reported by Eli Lilly (vaccine study paused due to safety concerns), Johnson & Johnson (vaccine study paused due to safety concerns) and Gilead (Remdesivir may not improve COVID survival rate), proposed regulation of "big tech," the US presidential election and the nature / timing / amount of fiscal stimulus all serving to tamp down the bulls with all three major stock market indices up only slightly for the week.  Some other potential negative news was China looking at approving its own technology protection law (restricts sensitive exports vital to national security), which could make doing business more difficult for all technology companies in China, including those with foreign investors.  

Positive news included Apple's announcement of its new iPhone product line, but as usual the stock sold off after the announcement.  Apple reports earnings the week after next (on 10/29) and could see a run up to earnings after last week's sell off, so that one is worth watching.  Retailers got a boost from the "new Black Friday" Amazon Prime Day and similar events held last week by other big box retailers (Wal Mart, Target, Best Buy) and also a positive retail sales report on Friday.  While goods seem to be leading the recovery, services (including food service and drinking establishments not to mention travel and leisure) which account for 2/3 of the US economy are still firmly in a recession, which is the cautionary note coming out of the otherwise positive report.   In other positive news, General Motors (GM) announced that it will be deploying fully autonomous vehicles in San Francisco, which follows news that Google's Waymo launched a fully autonomous service in Phoenix.  GM is also launching an electric version of its iconic Hummer truck, which will certainly get some attention.  Up until now, the autonomous vehicles were required to have human "co pilots."  This is a significant development, particularly as Tesla (TSLA - also slated to report earnings next week on 10/21) has talked about a "robot taxi fleet" program where Tesla owners could rent their car to the program when not in use and earn extra money.  That program, if launched, could be a game changer since estimates are owners could earn up to $30K a year from leasing their car to this program.

For now, it seems like volatility will continue at least until early November and the election results are known.  Some analysts think there will be as much as a 10% dip if the election is contested, but polling and betting oddsmakers currently show that will be unlikely.  Many believe there will be a relief rally once the election results are final.  As always, trying to time those events will be difficult so it's best to remain broadly diversified and appropriately invested in the market.  I'm still bullish, but I am increasing my overall cash position to wait out the election and its aftermath, given all the volatility in the past several weeks and the related uncertainties discussed earlier.  I'm mostly looking at smaller bullish earnings option plays for select companies reporting in the next four to six weeks.  My favorites are the big box retailers (especially in light of the aforementioned retail sales report, early kickoff to the holiday shopping season and continued strength in housing), such as Home Depot (HD), Lowes (LOW), Target (TGT), Wal Mart (WMT) and specialty retailers Lululemon (LULU) and Ulta Beauty (ULTA).  I also like Fed Ex (FDX), which looks to continue to do very well in the post-pandemic world and especially as the holidays approach and which will certainly see the highest ever online purchasing due to COVID.  Similarly, McDonald's (MCD) seems like a good play for affordability and safety (drive through / delivery) in the midst of the pandemic / recession and also it's great marketing, recently partnering with celebrities to drive sales.

Diversification, managing leverage and position sizing are critical.  Borrowing too much on margin or taking too large a position in any one stock / option could wreck your portfolio.  A good rule of thumb I have learned is limiting to no more than 2% of your portfolio in any one position for pure option trades (buying or selling puts or calls).  For stocks, it's good to limit yourself to 10% - 15% of your total portfolio in any one stock, unless it's a very low volatility cash flow / dividend play, in which case a higher percentage may be okay.  

The Financial Fortress approach would ensure that you are broadly diversified across asset classes and your stock trading portfolio should not be a large component of your overall financial picture, so even if you suffered heavy losses (which shouldn't happen if you are managing risk appropriately), the impact to your net worth should be minimal.  The diversification in your stock trading portfolio need not include other asset classes like bonds or real estate, unless you don't have exposure to those areas in other parts of your Financial Fortress.  I'm not recommending any particular stock or strategy and full disclosure, I do own / manage positions in the stocks mentioned above.  Stay safe, healthy and positive.  

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.

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