Yesterday the market had a bit of everything for bulls and bears. There were strong rallies and some disappointing closes. This indecision is symptomatic of being at all-time highs. Conviction at these altitudes is thin. Therefore investors are edgy. Today the goal is to find stocks to sell going into year end.
First I will poke holes in my own thesis. Any bearish thesis is like swimming upstream these days. Moreover, great companies are now starting to show leadership. Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) made new highs. MSFT stock cracked into the $2 trillion club even. It doesn’t make a lot of sense to fight this tape. However, there could be tougher days ahead because of the Federal Reserve.
I believe that they, too, are fighting the proverbial tape. They insist on calling very strong inflation transitory. Just yesterday even Treasury Secretary Janet Yellen Yellen sang the same tune from the Treasury. I don’t know about you, but absolutely everything I buy, from milk to houses, is at all-time highs. The difference is huge even relative to just 18 months ago.
The Fed Is Late
The Fed is literally behind the curve. If they stay dovish too long, they may even have to skip the taper and go straight to tightening. Since I don’t have a specific date, my note is more cautionary. I don’t want to be the one raising a five-alarm fire sale on stocks. But there is nothing wrong with booking profits, or at least trimming some.
At the very least, investors should delay chasing new positions. There is never a panic to buy stocks when markets are at all-time highs. It is inherently dangerous because we know that huge tailwinds will disappear soon. I have already changed my trading parameters to include more doubt than normal. Investors would do well to taper their enthusiasm as well until we get more clarity.
Opinions are aplenty, so I stick to facts. Today I will argue for bearish price action, not rag on company fundamentals. All three of the stocks to sell that I picked are great. My issue with them is purely the technical setup of their charts. They are at precarious levels, and are vulnerable to sudden corrections.
Conviction in all three cases is medium. I am confident in my thesis, but I am also sure that nothing is impossible this year. Take Rocket (NYSE:RKT) and Tesla (NASDAQ:TSLA) stocks just yesterday. Out of the blue they exploded up 5%. These are just two examples of many. It is possible that we are all missing a few pieces of the puzzle. At all costs I want to avoid the blindside like the one from 2008.
The three stocks to sell today are:
Stocks to Sell: Alphabet (GOOG,GOOGL)
I will start with the behemoth formally known as Google. Alphabet is a dominant force in search, and it operates several platforms with billions of users each. YouTube is one that I spend much of my entertainment and education time on. The scary part is that it is still learning how to turn it into a bigger cash cow.
Fundamentally the company is on rails and will be leading Wall Street for a long while. Clearly I am a fan of its bullish thesis. My issue today is with the rising wedge that GOOGL stock currently has. At these levels, the downside risk outweighs the upside potential for the next few weeks. Smart money should consider booking profits and rolling into more obvious upside potential. Personally I would rather cash in and miss out on whatever upside GOOGL may still have.
Conversely I would hate it if I overstayed my welcome in winning trades. The fundamental metrics for Google stock are not extravagant. It is expensive relative to itself, but in absolute terms it fits. “Value” is not the reason to fade the stock, and its momentum is impressive. Therefore shorting it outright is absolutely wrong. Facing the bulls in an equity this strong is asking for trouble.
One relatively safe alternative is to use put options. Investors can deploy a bearish thesis with finite risk. The CBOE volatility Index (VIX) is near 18-months lows so premiums are affordable. My bet is that investors will have a much lower entry point into Google stock by Halloween.
Nvidia (NVDA)
The second of these stocks to sell is even stronger than Google within its sector. Nvidia management has done a great job positioning the company in its leadership role. There is no doubt about how important it is to the chip sector. They are setting trends and the world is their oyster.
It has only two major competitors in Advanced Micro Devices (NASDAQ:AMD)and Intel (NASDAQ:INTC) and they are lagging it on Wall Street. Demand on tech is so strong that all three can thrive for years. My problem with it is that Nvidia stock has a habit of losing its fans without warning near all-time highs. Therefore, fading it up here would make for a valid temporary bearish thesis.
It is imperative that investors use tight stops and also use put options. The strength that NVDA stock has shown is too impressive and deserves respect. Using the traditional borrow-to-short outright carries too much risk for my taste.
Unlike GOOGL stock, Nvidia is exorbitantly expensive. In fact it is almost three times more expensive than AMD and seven times than Intel. Don’t get me wrong, I don’t want it to be “cheap” because it is a growth stock. I know that delivering blistering pace of revenue growth requires spending. Its high P/E is not my worry, but AMD is delivering equal results at half the stock premium.
I want to fade the Nvidia rally now and catch the AMD falling knife after a dip. It, too, is looking toppy with many potential bearish patterns developing. I expect this should happen in the next three months. I can patiently wait, as there are hundreds of better charts to trade in the meantime. If I am wrong I am OK missing a few upside ticks.
Stocks to Sell: iShares MSCI Germany ETF (EWG)
This is my second attempt at fading the EWG stock this year. I wrote about the first one mid April. The trade won, but it had its ups and downs, and I think it’s worth repeating. This time, the technical setup is even better for the bears. If EWG stock loses its support from last week, it could trigger a bearish pattern to $33 per share.
The long-term charts show that it has a habit of failing up here. It did so first in 2008 after the financial crisis, and more recently during the 2018 Christmas crash. My thesis now is to be bearish EWG for as long as it stays below the 2008 levels. If the bulls are able to breach that level, then the trade flips to chasing a rally.
The options markets provide a cheap way for betting against this ticker. The put options are cheap and investors can deploy them for the whole year. The risk is finite and the reward can have leverage. The U.S. has spent trillions reflating its economy, Europe is lagging in that department. Therefore the exuberance in the EWG now is wrong. All stock markets usually move in sync most times. The U.S. is heading into the tail ends of its quantitative easing programs. Therefore the easy rally days are ending. Markets are likely to face some selling sooner than later. This means that EWG will also suffer from downside pressure.
This is a good time to remind everyone that every opinion that I share currently carries medium conviction at best. I am humble enough to admit that I am flying in fog. If we take smaller trades during questionable periods, we potentially make smaller mistakes.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
