The old adage that timing markets is futile doesn’t work for me. Most of us despise taking a bullish position and see it struggle a while before yielding profits. We have tools to make avoiding potential pitfalls easy. I will share my setup for Palantir (NYSE:PLTR) stock as an example. It has been consistent, so it will serve as a good example.
Two important points to make before we proceed.
First, to avoid a potential pitfall is easy. But that’s not the same as saying choosing a favorable entry point is easy, because it’s not.
Second, when I said PLTR was consistent, I did not mean quiet. In fact, it’s too active, but that’s part of my point today. If I can do it in a momentum stock, then it should work for all others. There is no need to suffer for no reason regardless of my time horizon. With a little bit of homework, investors can avoid the hind-sight dread.
The process for choosing an investment involves two steps. The first is evaluating the company’s worthiness for the risk. Second, looking for favorable starting points. I don’t just jump in without either of those two critical steps.
Palantir has an existing healthy business and a competent team. I am not alone in thinking this since it rallied 9% during Tuesday’s session. In fact, when I first planned this write-up, PLTR stock was 12% cheaper. I also leverage other people’s homework. Ark Invest owns 19 million shares and that’s a good enough second opinion for me.
PLTR Stock Range Is Set
Now that step one is done, let’s check the timing of it. I am eager to be bullish the shares but before I dive in, I always check the charts. This keep me from being a perma-bull oblivious to mistakes. Case in point, about a month ago I warned against resistance into $28 per share. I also suggested to buy the dip into $22. That’s exactly what happened and those who did that have nice gains.
It’s not much work, all I had to do is wait for a better entry point. Besides, the argument that in the long run it won’t matter works both ways. I respect those who are in it for the long haul. But if that’s the case, then why not wait out another day or two for a better entry? Taking the leap without any consideration to timing is silly.
Moreover, often there are outside factors to consider. Like currently I worry a bit about the overall conditions on Wall Street. The indices have gone past most expectations. The price action is at an extreme high, which raises the odds of a general pullback. A market-wide drop would drag all stocks with it, regardless of how good the thesis.
Try Something New
Luckily, there are work-around ways like through to the options markets. There I can deploy bullish risk while leaving room for error. I favor selling puts on bad days. That’s when investors panic and overpay for put options. Those who want to own shares can take advantage of that.
For example, instead of buying 1,000 PLTR shares, I can sell 10 November $20 put and collect $2,300. I would then be long PLTR stock without any out-of-pocket expense. My obligation is to buy shares at $20 if the stock corrects. My break-even point on this would be below $17.7 per share. Compare it to somebody who buys 1,000 shares today. They’d already be down 30% on their investment. Imagine this happening in several of their long term bets – it adds up.
My concern about a pullback is by no means a bearish call. Fear mongers are always selling us on the idea of a looming catastrophe. It will take a major new shoe to drop for this to happen. The largest stimulus in history and the Fed’s efforts are too strong. Plus, there are talks of another $2 trillion maybe more in fiscal spending. Corporations are reporting great profit-and-loss statements and we are entering another earnings season.
Therein lies the dilemma between a good stock and indices that have never been higher. This leaves the bulls vulnerable going into a seasonally weak period. They even wrote the sell in May and go away meme specifically for it. I don’t want to short markets but I want to be cautious picking my longs. At these altitudes I get nervous because everybody else is so excited.
Conversely, a few weeks ago when sentiment had soured, I called for buying the dips. And this is where I fade the rips. Booking profits up here makes a lot of sense. PLTR stock is approaching the resistance zone going into $28 per share. There are sellers but eventually they will give up. In the meantime, the burden of proof is on the buyers to make that happen.
Timing isn’t everything but it sure beats buying blindly and hoping for the best.
A Note About Risk Appropriation
Investors should never sell naked puts unless they intend to own shares. This is especially true when markets are near all-time highs. In this case, I am confident that the Palantir fundamentals are solid. I am comfortable owning shares of this quality company.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.