Transcription
[Music] Hello everyone. Are you a little perturbed about the pullback? Well, don't panic. This podcast is for you. We're off to the first two trading days of the year, and it's been a little bit of a bumpy road to start. But if you want a New Year's resolution that you can stick to, we have a suggestion: learning not how to panic during pullbacks. It's Wednesday, January 3rd, and welcome to another episode of Investing with IBD. I'm your host, Justin Neelen, and joining me, as he always does, is Arusa Piis from O'Neal Global Advisors. He's a portfolio manager over there. How was your New Year's, uh, Arusa?
Uh, it was okay. And, uh, that was quite an introduction there, Justin. You must have been working pretty hard on that for a while. Well, you know, the perturbed producer, uh, doesn't panic, and so he helps out a lot with that stuff. You know, I'm just the puppet. You know, so we're going with all of the PWS that I know. Um, but any New Year's resolutions for you?
Honestly, no. I haven't really, I didn't really think about it. Yeah, it's not for everybody. You know what? You got up on that. I've given up on the New Year's resolution. Don't worry. You've got a whole year to think about it, you know, until next year. So, uh, and also joining us on the podcast this week, it's Chris Gessel, of course. He is the Chief Content Officer at Investors Business Daily, a good friend of mine, and my boss. So that's why I'm going to be nice to him. As always, how you doing, Chris?
I'm doing very, very well. It's good to be. Excellent. Yeah, it's been a while. We realized we threw you in. And of course, uh, Chris's usual, uh, answer to most things is, "Wait, when did I agree to that?" Um, especially when you take vacation, too. You know, like, what? Who approved that vacation? But, uh, let's get into it a little bit. Uh, the market, uh, a lot of folks were saying, "Hey, you know, we're, we're looking awfully extended going into the end of the year." Um, we had things that were even wildly extended in terms of like Bitcoin and, uh, some of the semiconductors, a lot of the tech stocks. And of course, you know, when things get that extended, and you've run a lot of scenarios, you use our, uh, Pine, one of our programmers, he's got a nice little AI tool that you use to kind of say, historically, how far are we, uh, from our moving average lines? Is that normal? So when you come to that expectation that a pullback is possible, how do you deal with it? You know, knowing that it's, knowing that it's probable, but things are so good, you don't want it to end. So what do you do there, Chris?
Well, there's really three main strategies. One, uh, you can, uh, take some profits and reduce your exposure. You can hedge your whole portfolio, or you can hedge in individual stocks and do that with puts. And, yeah, uh, I think I used to do a lot more hedging with my portfolio. Doing less of that, I'm more likely to, to sell the things that, you know, uh, maybe they're not looking like the biggest winners, so I'll just bag the profit. Uh, but with stocks that I want to try to hold, then, then I'll hedge them with, um, uh, uh, with puts. Yeah.
Okay, we'll definitely get into a lot of that with the second segment. But first, let's talk about the market right now and where things stand. So we had, uh, another, another rough day, uh, in, in, in the indexes. Of course, NASDAQ has been the one taking it on the chin most of all. So we, we were really, we didn't have any sell signals for quite a while, and distribution was very light. Now we're starting to get a little bit of back-to-back distribution. So, um, how does, how does that change your outlook?
Well, this is really expected. And the fact that we, you know, gave up the 21-day moving average, uh, uh, today again, not surprising, given how far that we've, you know, uh, gone up. So I think that, uh, maybe for the last two weeks, we were surprised, like, I can't believe this market still is going up, and it just, you know, won't give in. But, you know, I think the tax selling, uh, for the, the beginning of the year probably kicked things, uh, into gear, at least with the pullback. And, you know, it's, it's basically, you know, going as we, uh, expected. Um, and I think that, uh, the question is, you know, is it going to, to moderate somewhat and let the, the 50-day catch up to it, rather than plunging down to the 50-day? That would not look very good.
Yeah, Chris, let's talk a little bit about that more about the, the 21-day when it does break. Because, and this, you know, IBD Live definitely helped me out with this, too. And talking to Mike Webster for for years about how important that 21-day moving average is. Now, this was the first time it's closed below it in probably a couple of months or so, right? Does that, how, how do you adjust your strategy there? Do you, do you maybe go and reduce maybe some of the higher beta stocks? Because, you know, usually our stocks perform pretty well when they're above the 21-day. But when they're start, when the indexes start getting below the 21-day, you know, a lot of those higher beta stocks might need to base out and consolidate for a while.
Well, for me, it all depends on how much, uh, profit cushion I have. And so, let's say, um, I'm up 20% and on the stock, and it, and, and that's after losing the, uh, the 21-day, and maybe it's, I don't know, seven or 8% to the 50-day. Well, that's a stock I'll, I'll sit with. And, and especially if I've got conviction about it. And going back to the conviction stocks, do you have a, a certain number of conviction stocks? Like, I can only have like three high conviction stocks? Or, or is it sometimes maybe your whole portfolio is high conviction stocks, and you're going to ride them all down? Or do, do you try to prioritize a little bit?
Uh, yeah, I, I mean, I would love to have all convictions. But they, those, that's when it hurts, though, when they do all pull back. But honestly, not, not a, you, not if you hedge. And we can get into that, uh, later. But, uh, yeah, it just depends on where you got in, and, and, uh, do you have enough profit cushion? And is this a real leader, or has the, the possibility to be a real leader? And that's where the fundamentals come in. I know that we talk a lot about technicals, but before you, you know, uh, you know, you make a, a commitment to a stock, you got to have some, you need to understand the fundamentals of the story and where it might be going.
So, so let's, let's talk a little bit about the way in which the pullback happens. And again, if we just kind of stick with the market index right now, with the NASDAQ up, uh, we, we've got the pink line. For those of you that are watching the video, uh, you can always find that at YouTube or investors.com/podcast. The pink line is that 21-day moving average line. And yesterday, on Tuesday, it came right down to it to kind of start the year. Seemed like it was getting support, actually bounced kind of at the end of the day. And then, you know, today, it kind of went right through it. Now, you mentioned, you know, if it comes down to the 50-day moving average line, I guess it depends on how it does it, right? Is it like one of those nice gradual things? Because already the first three days here, uh, down have been a little bit more dramatic than, uh, what we've seen lately, a little bit more volatility. But we still have what, like three and a half percent, uh, until we get the 50-day. So what, what is that, what, what does that look like, those different scenarios to you, in terms of a pullback to the 50?
Well, you know, if, if tomorrow and maybe the next day, we, um, you know, let's say we hang around where this, uh, bar today is, that would, you know, then the 50-day is coming up to, to the market, rather than the market falling down to the 50-day. So, I mean, if we just, you know, fall again another percent or more tomorrow, would not, uh, look so good.
And what about levels? I mean, certainly we were kind of, uh, looking at that 14,000 level for a while, and that seemed pretty important. We gapped above there and really didn't look back. We had one test, uh, kind of at the end of November, where it came back down to 14,000, but then really took off from there. And then 15,000, of course, was a level that a lot of us were looking at, another round number. We got above there, only held above it for a few days, and now, now we're back below it. So, are, are these kind of the, the guardrails?
Yeah, I would say so. I mean, it would, it would not look good for the market if we lose 14,000 in a, in a dramatic way. And in the same way, you know, uh, when you come up to a round number like 15,000, and even though you poke above it for a day or two, I mean, you really have to, to claim it and move above it. And so we, I mean, that is definitely the, uh, the overhead, uh, resistance right now.
Mhm. What, what about also the fact that now we've, we've collected what, I think it's like four distribution days maybe on the, the rally? But when you're looking at the price and volume, especially the volume action, as it's been pulling back over the last, uh, four days or so, and compare it to the volume as it was been going up, are you taking that into account too?
Yes, generally, uh, I mean, the, the down volume hasn't been as bad. However, you know, the, you know, one of the distribution days was, uh, last week, you know, in between Christmas and New Year. So that's usually a fairly quiet week, although there were some big days that, uh, that week as well. Um, I guess I'm less concerned with the volume profile. I think what was more troublesome was how, how so many stocks really sold off hard yesterday and today. Now, I need to go and look at the market. I've been in meetings, you know, for the last couple hours, so, but it, you know, uh, especially yesterday, there were, you know, some stocks that really, uh, went through the moving average and basically just kept falling.
Yeah, 4%, 5%, 7%, uh, or, or greater, uh, losses, uh, in a lot of those individual stocks. Um, but before we wrap up this market segment, um, let's, let's go ahead and just take a look at, uh, the S&P 500 and the Russell 2000 for kind of comparison purposes. Um, you know, one of the things that we were, I guess, cheering, you know, uh, is that the breadth certainly improved. Um, the S&P 500, which does have a lot of tech, you know, high-tech exposure, uh, based on the market cap, you know, that's still above its 21-day moving average line. And the Russell 2000, we were kind of cheering the fact that this got above 2000. But again, it didn't, it didn't stay there for very long. That 2000 level, especially if you go back to a weekly chart, you can kind of see how it's, it's really kind of an important level. And we, we've kind of tested it a few times where you get just above it, but it doesn't, it doesn't stay there. So, is that another sign of concern that maybe this, uh, rally isn't as strong as we thought?
Well, just the action of the Russell over the last few days just seems, you know, a lot more, uh, pronounced to the downside than what we're seeing on the S&P and NASDAQ. And, you know, today, I mean, a gap down and it closes right at the low. That's not good action.
And another thing that I think it's worth mentioning, um, there was a, a recent shift in the way that the Big Picture does its market outlook. So, rather than going with the confirmed uptrend, uptrend under pressure, and market correction, um, one of the things that we've done is kind of shift that to a more exposure, a little bit more, uh, gradual, or, or more of a gradient, I guess I should say. Market School is something that we've talked about before on this show, something that Charles Harris and Mike Webster, uh, created and and spoke at, and I kind of did the back, the back office stuff. Um, and, and with that, we kind of had five different levels as opposed to to three. So, can you talk a little bit about why that switch happened?
Well, you know, before, we just had, uh, confirm uptrend, uh, correction, and, you know, uh, uptrend or rally under pressure. And so it was a little, um, and especially, you know, with our ETF market strategy, you know, generally, it was 100% uh, exposure on a follow-through day, 0% when we go to a correction, and if we say, you know, uh, rally under pressure, take it down to 50%. But that's not how we handle our own portfolios. So, you know, you get a follow-through, and you start making some purchases, and then if the market, you know, continues to be strong, you buy more and add to some of your existing, uh, positions. And then when things start, you know, getting extended, you start pulling back. And so what we wanted to do was create a system that really reflected how we handle our own portfolios, how we talk about the market, and everything like that. And so that's why, instead of having these three kind of and-or statements, uh, uh, that we could move through the cycle of the market and start with 0 to 20%. It's usually a correction, but it could be a follow-through day too. When, uh, if there's nothing really moving on a follow-through day, or it's not the most impressive follow-through day, there's no reason to get super, um, uh, exposed. And then we, you know, things start looking better, we go to 20 to 40%, and then 60 to 80%. And as we were, up until, uh, uh, today, 80 to 100%. Although, uh, I'll give everyone a little, uh, tip that we did, uh, reduce it to 60 to 80% just because we lost the, the 21-day, whereas yesterday we held it.
Mhm. Yeah, honestly, yeah, because I just noticed this recently, and I really like it because it, I think it captures more kind of the, the realism of, of being in the markets, where you really ideally want to incrementally increase and decrease and try to go with the flow of the markets, and ideally not do too many things extreme. And I've done that plenty of times when you let your emotions get the best of you. Because if you have a little bit of a position, so, so say you had some stock and it was doing really well, and it started getting hit over the last couple days, instead of selling out the whole thing, if you hold a little bit of position and now bounces, I've found that it's a little bit easier to get back into it when, when it's the right time, versus, uh, sometimes when you get shaken out right at the bottom, and it starts moving back up again, your price anchoring, it's really hard to kind of adjust at that, because, oh my God, I just sold it much lower. How can I buy it this high? Right?
Yeah, I, I think that's it. It's more reflective of reality. And, um, I think, uh, just a better way to handle your portfolio. And, and it just gives more insight. I mean, we'll still talk about uptrends, follow-through days, corrections, but there's a difference on on how we're, um, handling it. And it's not, you know, all or nothing.
Yeah, and certainly, like a day like today, you know, you can go rather than going from 80 to 100% all the way down to 50%, you know, 60 to 80%. It can be a little bit more gradual, which is nice. And on the flip side, when you have a follow-through day, rather than going 0 to 100%, it's like, okay, you know, let's go ahead and test it out, see what happens. You know, do we get some traction? And then, and then go from there. So definitely, uh, something that we've been talking about for a while. Glad we, we got it implemented. And, uh, hopefully, uh, this is something that really benefits our subscribers. So we'd love to hear from you on how this is working out for you. Um, we're going to take a quick break, and when we come back, we're going to have Chris talk about handling pullbacks, how to not panic, and the different options you have in terms of, uh, handling them and, you know, protecting your positions. So stay tuned. We'll be right back.
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Welcome back to the Investing with IBD podcast. It's Justin Neelen here, your host, and it is our first podcast of the new year. Also joining me, as he always does, is Arusa Piis from O'Neal Global Advisors, portfolio manager. And, uh, Chris Gessel is our special guest, of course. He is the Chief Content Officer at Investors Business Daily. And right now, we're talking about handling pullbacks. Certainly, this is a pullback that was expected. You know, we started off the year a little bit rocky. Um, and again, it's, it's, it's one of those things that's kind of hard to manage sometimes because even when you know it's coming, and you're like looking for the opportunity to even buy on the pullback, sometimes it doesn't feel that great when your, uh, when your portfolio is getting hit. The last thing you're thinking of doing is, "Oh yeah, let me put some more money to work." Um, so you mentioned kind of three things that you look at: hedging your entire portfolio, looking at individual stocks, you're, you know, raising cash. So let's kind of go through some of these, and maybe we start with the overall portfolio. So, what's, what's your kind of, uh, philosophy here in terms of ways to protect yourself and manage your portfolio during a pullback?
Well, one of the easiest ways, although it's, it's not always very, uh, precise, and that is, you can buy, uh, uh, an ETF like, um, sorry about that, SQQQ. SQQQ. You could buy, uh, an ETF like SQQQ, which is the inverse of TQQQ, which is triple the, the NASDAQ. And so if the NASDAQ goes down 1%, this is going to go up 3%. So it's, it's a way to really, uh, give yourself some protection. And there are, you know, there are ways to, to look in your trading platform and see the relationship between your portfolio and that ETF. And but a lot of times, you just need to buy some and then say, "Okay, well, it's not really working quite well enough. I'll buy some more." And you'll find that that happy, um, um, spot where the market keeps going down and your portfolio is going sideways. And that's, uh, a pretty good feeling when, uh, you, you jump on that early and you're, you're ready for it. And it should be mentioned that a lot of times, and we, we've used this on Leaderboard, um, a lot of times, you know, you, you look at the chart and it's like, "Well, why would you ever buy something that looks like?" You look at the weekly chart, Arusa showed that, and it's like, you know, remember, yeah, there, there's contango, and there's a lot of things that get involved with the leverage inverse ETFs, the way that they use derivatives and expiration dates and all that. But you're looking really short-term here. This is not, you know, something that you're going to be holding for a long time. It's really to kind of just take some of that, uh, pressure off of you, because if your portfolio was getting hit, the idea is that SQQQ will be going up, and it will kind of help offset some of those losses, so you're just not taking as big of a hit.
Now, what is the risk, um, uh, of using this kind of method of, of hedging?
Well, there's two risks. One is, you might be wrong, and the market just rallies, and you've missed, uh, the rebound. Um, the way the market, you know, was so extended, it was highly unlikely that that would be, you know, the case, uh, right out of the box. And then the, the, the other issue is that, uh, you're, you know, you're not hedged enough. And that's what I was talking about before. You just need to find exactly where the, um, I guess the happy medium is for your portfolio. And sometimes you can be hedged too much, and you're thinking, "Oh, this is awesome. I'm making money." And then you turn around and the market rallies, and now you've lost it. So, uh, that's, uh, it, you know, it, it definitely can reduce the drawdown, but you need to work at it, and you need to pay attention to it.
So, is there a way to, that in from your experience, is a way to just slowly scale into it? Like maybe 10% of the portfolio to start off with, or 20% with the SQQQ's to to start off with, and then gauge to try to figure out that happy medium?
You know, I've done it both ways, and I'm more likely these days to, um, just to, to approach it as a short position. And, but there, you know, in 2020, when the market was so wild, and we would have these days where the, you know, the market seemed extended, and then the next day, you know, it would gap down more than a percent in the morning and then just, you know, keep falling. And so that's when I really got into hedging, and I actually, uh, started using futures. Because especially if you're not on margin or anything, you, you, it's very easy to hedge your whole portfolio because the, the leverage on on futures, like with the NASDAQ futures, NQ, it's $20 for every point that the index moves. So that's, you know, you think a triple, you know, TQQ, this is 20F. So yeah, which again, is good. But it's amazing how, uh, you can really get eaten up by, you know, small moves up or down, you know.
And, and part of that also depends on your portfolio size, of course, right? If you have a smaller portfolio, you're not going to want to do, uh, an NQ. You can do the micro minis. There's, there's, you know, different, different instruments out there. But I, I think it should also be mentioned that sometimes you have to be careful of the instrument that you choose as your hedge. Um, certainly, one of the things that might have gotten people into trouble this time around is if, uh, in 2023, if they were using, um, SQQQ, for example, as a hedge for their portfolio. Well, there were times where your stocks might have been going down, but the market was going up because the Magnificent 7. So if you didn't have the Magnificent 7, for instance, um, and you had other things in your portfolio, you could have had a situation where you were losing on both ends. Your stocks were going down, and the market was going up, making your SQQQ position unprofitable. So you weren't getting the hedge that you wanted. You were just, uh, losing more money.
That's always a risk. And that's one reason why I kind of have moved more to picking the stocks that I really am focused on and I want to hold, and then buying puts on those to hedge them.
Okay, so let's talk about.
That's my favorite strategy because when you're right, it absolutely works wonderfully. So, uh, let, let's, let's take an example of something where, okay, you have a position. So how, how much do you hedge? How, how many puts do you buy in order to hedge that position properly?
Okay, so let's say, okay, this is a great example. In fact, we, we talked about this, we wrote a story on on the day, the the peak day from, uh, last week. And this was Marathon Digital. Take a simple Marathon Digital, a Bitcoin, uh, related stock. And I mean, just look at it. How much was it over the 50-day? So it was, see, I'll give you all the stats here. So it was 136%, really, 137% over the 50-day and 168% over the 200-day, right? And 37% over the 10-day. So, you know, you, uh, you can look at a stock chart and look at other times where a stock has pulled back and just say, "Well, uh, you know, how, how far was it above the 50-day that time?" And what is that? 71% there? And then go back to August, uh, a year ago. Yeah, right there. How much was it there? Near the, uh, 80%. 80%. Okay. So, you know, 70, 80%, and now you're 130 or whatever it was. Yeah, 136. That is getting untenable. And in fact, uh, it, it started pulling back the very next day. So let's say I had 100 shares of Marathon, and I'm loving it. I think, uh, Bitcoin is, is, you know, still going to dominate in 2024. But I know this thing is so extended, it's got to pull back. So what I would do is I would go in and buy two puts for every hundred shares. And I would buy a put with a 50 delta. Which means that tells you how much the put moves in relation to the change in the stock price. So this, if it, if it's a 50 delta, and the stock goes down, uh, a dollar, the put is going to go up 50 cents. So if I want to be completely hedged, I know I need to buy two of those puts with a 50 delta. And I, delta is usually going to be the at the money put. Yeah, it's usually right around at the money. Now, uh, the other thing is, you want to go out. I, I used to, I, through a lot of trial and error, I would buy cheap, uh, uh, puts because it's like, "Well, I don't want to spend a lot of money." Well, they didn't work. And then I realized when you're doing this properly, and you're applying it to a stock like Mara that is extended, the cost of the put is not the, the outlay, it's really the spread and the time value. And so I'll go out at least three months because usually these things happen. They'll, they'll pull back, uh, over, you know, maybe a month or so, and, you know, you want enough time so you're not, the puts don't start getting hit by, um, theta decay. So time decay. So you want, uh, you know, well more than 45 days on that, on that put. And the great thing, and this is why it's my favorite option strategy, is when the stock starts falling, that means the put is getting deeper in the money, the delta is increasing. And so when this thing, let's say this thing goes down to 15, and you're at, uh, the 50-day moving average, you're going to be better off between the stock and your puts than you were right there at the top above 30 because the puts are going to, uh, gain more money than the stock loses because the delta keeps rising. So that's why this is my favorite, and it's worked a number of times for me. And, uh, and again, it works best when the stock is is extended. Um, if it's just the market is extended, yeah, you know, you might, it's, it's not as, uh, dramatic as in the, the way it works. Um, and then the other good thing is, if you're wrong, and the stock starts, you know, continuing to, to move higher, you're going to lose a little bit of money. But the, the good thing is the delta will start going down, and so you, you're, you're going to have missed profits, but they're not going to be as great, um, as they were if, you know, um, at when you had first bought the put.
So, so let's talk about that scenario a little bit more. So say, say you started a hedge when it was getting above 20. Right? Now you've done it three months out. Are you, so when it runs up over 30, are you, you're still holding on to those puts, even though now they probably lost like 80% of its, I'm assuming, or something like that, or maybe 50% of its value?
No, I, I, I wouldn't be doing something like that. And that's why I, I use this when it's very clear that the stock is extremely extended. I usually don't, uh, put it on when the stock is, uh, still going up. I'll wait for the first down day and, you know, when it undercuts, or, um, I'll just, uh, or when there's a big break in the market, or the character of the stock changes. So, call, call up ELF. Yep. So I, I held ELF, um, back in, let's see, this was in, yeah, it was in, uh, September, or no, I guess it was in, um, uh, it might have been in October when I first did this one. And I'm sorry, August. So it gapped up, and then the market was getting weak, and it started to sell off a few days later. And so I'm like, uh, you know what, I think I'll, uh, put on a hedge. And so it was kind of going back and forth, and it did go back up to 137. And then, like, the, you know, couple days later, it really sold off hard down to the 50-day. And I think at that point, um, I got out of it and, and just decided, you know what, I'll, I'll move on. Another one that I did this on recently was, um, do you remember the ticker, Justin? Um, this is where Ali Wood. I know Ali Wood. Not, we'll figure it out. So, uh, it's just, um, I mean, it's harder to, it wasn't ANF, was it? No, EXTR, maybe? Oh, yeah. Yeah, it was EXTR. Works. Okay. This is a, this was a really good, uh, example. So, uh, uh, this had triggered, you know, uh, David Ryan's Ants indicator. So it was up 20% in within, uh, uh, 15 days, and the, and the volume doubled, and that's as it was breaking out. So I put it on my watch list, and it pulled back to the 21-day, and I bought it. And it was going good, and I was like, "This is perfect." And then, you know, there in August, it had that big break on, uh, where it, you know, had just hit, um, 3273 and then and sold off. And so when it started falling that day, I didn't wait till the end of the day. It was in the morning that's when I put it on. And I held it, um, until I think I was on vacation and walking through an airport and right, oh my gosh, this thing is really sold off. This thing looks broken. I'm just going to close it now. But again, I was better off where I sold it probably around $23 or something, rather than if I had sold it right at the top at 32.
So, then, so on that point, when it was breaking heavily below the 50-day, you sold out of both the, you closed both positions?
You closed? Yeah, I closed both of it because now, now it's not a stock that I want to be in, right? So it's like, "Okay, this is dead, dead to me." Yes. And, uh, and then I'll just move on.
So we've got different ways to hedge. You got the, the use of futures, you've got the inverse ETFs, you know, to kind of look at your overall portfolio. You've got the options for individual stocks using your put strategy. Um, I guess one more to talk about is raising cash. You know, where does that fit into, uh, your, your overall protection policy?
Well, those are the stocks that I don't have conviction about. Maybe I'm treating it more as a swing trade, or, or, you know, maybe I thought it might turn into something, but it really hasn't. And so when that starts happening, that's when I'll be quick to sell and move out of a lot of stuff. And, and, and sometimes they might be great stocks, but maybe I got in late, and so I don't have a big profit cushion. I don't want to round trip a 10% gain. I'm, I'm just going to get out when maybe it's down to one or 2% and just so I can, you know, walk away at least with a winning trade and wait for another, um, entry. So, uh, yeah, I, and that's one reason why I have kind of moved away from hedging my entire portfolio when this happens, and just focus on getting rid of the stuff that I don't have conviction about. And the stocks that I think could really be a big mover, then I'll buy puts on those.
And it's also worth mentioning that, uh, uh, for, for those shorter-term trades, a lot of times you might be selling them into strength, because you're, you're not thinking that you're going to be holding on to them for that long. And so, selling them into strength, this is something that Mark Minervini talked about a couple episodes ago on the podcast. What, what happens a lot of times is it reduces your exposure. And then if you can't find anything to replace them with, uh, you, you, you naturally have a kind of a lower exposure portfolio. And so you, you don't get hit as hard.
Um, one, one more thing though, when do you start taking the hedges off? Because again, what can happen is you're, you're pulling back. Uh, if, if it's just your run-of-the-mill pullback, eventually you get a bounce. And at what point do you start saying, "Okay, it's, it's time to take the hedges off. It's time to, uh, shift thinking and, and go back into, uh, buying mode?"
Well, let's say with Extreme Networks, when it came down and it got support there at the 50-day, for about a week or so. And so instead of breaking through the 50-day, if it had taken out, uh, that high of the day before, it really, uh, collapsed. Exactly. Then I would have taken the hedge off and just let this thing roll and, and then, you know, dealt with it with my normal sell rules.
Yeah. Very good. Well, uh, that wraps it up for this segment. When we come back, we're going to talk about some of the stocks that are on Chris's radar. Stay tuned. We'll be right back.
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Welcome back to Investing with IBD. It's our New Year's special, the first episode of 2024. I'm Justin Neelen, your host, along with Arusa Piis, who joins me every week from O'Neal Global Advisors. Uh, he's a portfolio manager over there. And our special guest this week is Chris Gessel, the Chief Content Officer at Investors Business Daily, and, uh, good friend of mine and my boss. So it's a pleasure to have him on. And, uh, let's talk stocks, Chris. Um, of course, it's, it's sometimes a little bit tougher when you're in an environment like this, where you've had a few days down, and you're, you're kind of thinking of what to sell, not what to buy. But this is exactly the time when you should be kind of getting that watch list of things that maybe you missed. And it's the, the old second chance saloon, right?
Absolutely. This is, you know, corrections are the best time to stay engaged because that's when the best opportunities arise. So let's go ahead and start with, uh, ServiceNow. And I still do have a position in this myself. Um, so let, let's talk about this a little bit. So it did get, uh, extended. I mean, it was up, you know, 16, you know, 17% above its 50-day moving average line. Nothing like what, uh, Marathon Digital was. Um, it almost hit the 20% profit level. You can kind of see that green shaded area, uh, that it, it, it kind of fell short. Now it's coming through the 21-day moving average line. So what, what are you looking at here?
Well, I'd be watching the 50-day and the 10-week moving average. Now, this is one that I didn't get. And so I've got a lot of these stocks that, you know, I missed in early November and really didn't get, give you another chance. And so I'm watching, uh, those lines and seeing how they come down to them, and then once they hit them, how they act. So, uh, I mean, the good thing is, uh, you know, compared to a, a lot of the volume on the way up, the last couple days, I mean, that's that's pretty modest volume. So that that looks good to me.
So on a, on a price action basis, are you, so say it comes back down to to the 50-day, are you waiting for potentially like an upside reversal, uh, or something like that, a little bit of confirmation, instead of just buying on the way down, right?
Uh, I do want to see some confirmation. I'm not necessarily looking for a full-on reversal. If there, if maybe if I'm looking at a, a 30 or 15-minute chart and it's coming in and touching the line, and then you see on the intraday chart that there's some real buying coming in there, then maybe I'll start a position. And maybe I'll buy more on that reversal where it really shows itself. But, uh, you know, I want to, you know, if it's getting support where it should get support, then, uh, I, I'm willing at least to to risk some money.
And how much is it usually, like a 3% 5% position on your, kind of initial buy on a pullback?
Uh, probably in this market, it would be 5%, and then I'd, you know, add another 5% because I'm really trying to, to get out of the gate with 10% positions. And, and, you know, when the market is strong like it has been, that's can make all the difference.
Mhm. Um, and if we take a look at the weekly chart, you know, one of the things I was certainly looking at, um, I had, I had started this position, uh, you know, around the follow-through day, and was, you know, kind of looking at opportunities to increase the position size. We had that three weeks tight, and so that was kind of okay, you know, that's an opportunity to increase a little bit. But now that we're undercutting that, I had to kind of get rid of those shares. Um, and as you mentioned, we're right there at the 10-week moving average line now. Um, it, it did kind of, we'll see if it gets support, kind of at that three weeks tight low. It, it's right there. Um, and I guess, so now you're just, just waiting for the, for the bounce. What if it, what if it comes in a little bit further, you know, below the 10-week moving average line? How much, how much wiggle room do you give it? Uh, and, um, if it happens early in the week, how much time do you give it to wait for that Friday where a lot of times you might get some buying at the end of the week that pushes it back up above that 10-week moving average line?
Well, especially on the, the 10-week, given that the 50-day is, uh, well below it, it wouldn't be surprising for it to go through there and spend a few days below there. You know, sometimes, uh, the 10-week and the 50-day are much closer. But it, given how these stocks just kind of zoomed off the bottom there, there's a, there's a lot of of difference in the price, uh, between the daily and the weekly charts. So, yeah, I, it won't bother me if it undercuts the, uh, the 10-day, um, maybe even, you know, for this week, because 10-week, the 10-week, yeah, I'm sorry, the 10-week. Uh, but then I'll be looking at the 50-day and see how it, it handles itself around there. So it just comes down to the, the action once it hits these, uh, moving averages, and is there some support, and is some money coming back into the stock?
Yeah. Um, let's go ahead and switch gears. Uh, one of the standout areas has been the computer software security space. Zscaler, this is one that actually we have now on Leaderboard as well. But Zscaler is one that's on Leaderboard. Um, what is it that you're looking at here?
Very similar situation. I mean, it, you know, uh, in late October, it was getting support at the, uh, at the 50-day, and then once we got the follow-through, it just took off. Whereas before, it was kind of, uh, doing a stair-stepping way of moving higher, and then it, you know, just broke and kept going, uh, higher. So again, what's nice to see is that the volume of the past two days is generally lower than most of the up-volume that it made. So I think from a volume point of view, it's looking good. Uh, that on both the days, there was some support. The stock did not close right at the low. And, and so again, maybe this will take a few more days, and that 50-day will get to, uh, around 200, and that would be a really logical place for support to come in at a round number. And again, I'll be watching that and, you know, setting alerts and then looking at the intraday charts and hopefully building a position.
And, you know, if we could switch to the weekly real quick, um, something that is an issue with this one is there has been this overhead supply from back in 2021. And actually, you know, that level right around 230 that it got to, if you kind of draw a line straight back from there, you can kind of see that this was an area of resistance where it had a cup that it formed in 2021. So, how, how much are you looking at, you know, this, this old potential resistance? I mean, you know, now this is like two years, more than two years old. Is it still relevant, uh, or not?
That is not so much relevant. But I, that on the way down, I think all those peaks are areas that you're going to run into trouble because there are people who bought there, and they're still saying, "Okay, when it comes back, that's where I'm getting out." And so those are still in play. Like 300, you know, that was a peak, you know, and 300, you know, 340. Uh, yeah, got, got a few of them.
Okay, definitely worth watching. Um, let's go ahead and shift over to Uber, another Leaderboard stock, um, that, you know, we, we've got a good gain on, and it looks very similar. We, we were encouraged by such tight action in a lot of these stocks, you know, uh, you know, the three weeks tight that was happening, uh, for a lot of stocks, letting the moving averages catch up. And now we're just kind of undercutting a lot of that space. So, talk to us a little bit about Uber and what you're looking for here.
Well, Uber, you know, what, uh, when we were putting together paper on Friday, I think almost every stock on the first page of the IBD 50 had a three weeks tight. It was amazing that there had been that many three-weeks tights. Uh, so, uh, yes, we saw them all over the market. They were trading very tightly along with the market. This one, you know, had above-average volume on that first day. It didn't, it closed near the low. At least today, there wasn't, you know, too much of a, of a loss, and it came up off the bottom.
So that's looking a little better. Um, and you know, again, I'd prefer it if, uh, it takes a few days to get down to the 50-day. If it tomorrow goes down to the 50-day, uh, I'm probably not going to be as, uh, excited about this one. But, uh, so far, it's acting fairly well. I mean, yesterday's gap through there and then closing near the low, uh, did not look great. Today's action is, uh, much better in my opinion.
Now, now switching over to the the weekly chart. This is another one that's right at the 50-day or a couple percent right above it. It actually looks like it it touched it a little bit there. Um, 10 line, right? Oh, sorry, the the 10-week line. Is there are there ever any scenarios where you'll just say, you know what, I'm going to use a 10-week line because the, it's just such a gap before the 50-day, or you generally just staying with the 50-day?
Well, usually, like I was saying before, um, the, there's a lot more difference between the the 10-week and the 50-day in this environment because things just took off so quickly. Usually, they're a little closer. So again, I'm looking at the at the 10-week, um, but I'm probably looking much closer at the 50-day. And also, I I noticed that, uh, it looks like, uh, at the IBD mutual fund index, um, Fidelity Contra funds actually reducing the position. Does that ever come into play in when when you're analyzing a pullback that you might be interested in?
Well, you know, that that is usually, um, well, the the quarter just ended, so that's fairly up-to-date. And it looks like they were probably selling into some strength again, looking at this stock and saying, H, this is, you know, probably unsustainable. But, um, I guess, uh, I look more at this when I'm buying rather than when I'm holding. Maybe I should, but I I take my cues mainly from the chart action.
Um, one more thing on Uber. Uh, the fundamentals on this are very different from ServiceNow and Zscaler. You know, both of those have 999 EPS ratings. This has an 81. It just turned from, uh, you know, some losses in terms of its EPS to now it's profitable. And, you know, the the next year is looking pretty strong as well in terms of the estimates for 2024. Uh, does that go into your calculus when determining, okay, the the level of conviction that you have, you know, when you have something that's more speculative? Again, this has just turned profitable, right? So let's say I was looking at a stock like this and the I see that the, um, sales growth has really decelerated. That would be a big problem if the estimate for next year wasn't, let's say, the estimate was like 10% or 12%, something like that. Then I'm like, uh, this thing is probably running out of steam. The fact that that the estimate is, uh, fairly strong for next year, then I would have more conviction about doing this. But I, you know, like to dig in a little deeper and see, you know, what the sales estimates might, uh, look like and, uh, um, and just have a a better feel for what could be in the, uh, in the offing.
Yeah, and I should mention that, you know, the 2024 estimate is for a 68% increase in EPS. And, you know, sometimes I'll get a little bit nervous when that's off of like an EPS of a few pennies, you know, where it's like, okay, well, that's not as meaningful. But this is off of an EPS of, um, a dollar five, you know, for the estimate for 2023. And you would assume that they're going to be pretty close to that, given that this is the last quarter coming out. So it's not like we're dealing with pennies here.
Yeah, it's, uh, yeah, whenever you have a a a much larger number and you're right, when it's not pennies, you can feel a little, uh, a little more confident about that percentage change. Yeah, but of course, we'll have to see what happens with the, uh, earning season, uh, which is right around the corner. So maybe before we go, you can just kind of address that, you know, with the fourth quarter ending, a lot of the fiscal year's ending for stocks, uh, we're going to be looking at the the earning season coming up. And as stocks are pulling back, uh, we could be getting some of those bounces and the recovery could be happening right in the throws of our next earning season. So what's kind of the the way to handle that if that scenario plays out?
Well, um, assuming that this is, uh, a real bull market, um, I'm more inclined to buy options around earnings in that early in in a stock's run. It's not a good strategy when it's, you know, already up 400% or something like that. So that is one, uh, thing to do. The other is, you know, again, if you're taking smaller positions and you're you're, uh, you know, willing to to risk a little bit, uh, around earnings, maybe, you know, you don't want to buy right right ahead of earnings. But if you get in a few days early and you've got three or 4% um, gain, okay, well, you might lose all of that, but at least you're not going to get completely whacked, uh, most likely. So I think that, uh, between, um, buying options and also buying the earnings gaps when when they especially if they're gapping out of bases or consolidation areas, uh, this is the time to do it. That's when that strategy works very well.
Yeah, and you can look at like Uber when it reported earnings back in May. It had that earnings gap and that was kind of the catalyst for its first initial run in 2023. And the same thing, uh, you know, it it reported earnings right around the time that the market followed through. That's true. Very good. Well, hey Chris, always a pleasure having you on the show. Uh, we we'll have to make sure it's not too long, but we'll we'll put on your calendar much earlier. Uh, I'm sure we'll still get the, wait a minute, when did I agree to this? But that's okay. Always, always great having you on. Thank you. Really good to be with you guys.
Yeah, that's going to wrap it up for this episode. Uh, thanks a lot for joining us, uh, for the new year. Uh, hope all of you have a great 2024. And I hope you stick with us week in, week out. Definitely worth coming in next week because we're gonna have Matt Caruso from Caruso Insights. He always has such great knowledge to share. Uh, a great educator. So we hope you join us for that. Thanks a lot for watching this week, and we'll see you next time. Bye now.