The last time I spoke with you folks, I told you about three different things that you could do - and that I'm definitely doing myself - in the midst of a world crisis like the coronavirus:
1. Risk less - around the office we have a saying, "Trade small, trade often," and there's a reason for that. Trade small basically means small risk, but also, trading often means we're able to diversify ourselves into many different things, both bullish and bearish.
3. Exploit volatility when it comes to options - boy, have we got volatility here now.
Now, I wanted to take a few minutes with you to show you how I assess these markets. I look at the markets every day and I do an overview.
I divide the overall market into four grids because wherever the overall market is going, chances are, your portfolio's being affected in one way or another. So I watch four key areas - the "four corners of the market" - to tell me what's going on, and the right action to take...
The Four Corners of the Market
Not only have the last couple of days been historic, but we're talking about taking away the last three-plus years of gains within the last three weeks.
So when we take a look at what's going on here, for stocks I'm looking at SPY - the ETF that follows the S&P 500 - and I just want to look at the day events here. A week ago, we were trading at 281 and then recently came down to a low of 228. That was in about six trading days.
That's a big, big move down.
Four Corners of the Market
Typically, when we get into what we call the red area, very seldom do we turn around and go back above into the green area. So I've seen very few days where we go from an outright bearish day to flipping over to a bullish day.
Now, what happened to the S&P 500 on this particular day is that we came down and crushed through the area of support, and this provided some really good selling opportunities for short-term traders. Now, eventually we came back, did a pullback, and ended up in what I call the neutral zone.
Now, let's take a look at bonds...
It used to be that if you were buying the stock market, you were selling bonds, and if you were selling the stock market, you were buying bonds. But that's decoupled in at least the last week as we've seen bond prices drop from their highs.
TLT (the ETF that tracks the results of the index following 20-year-plus Treasury bonds) for example, was at a high of nearly $180 a week ago and then dropped down to $139. After that first hour of trading, it just became a screaming bear.
So what that means for short-term investors is that they should trade the trend.
I also like to look at currencies. We recently had a pop in the U.S. dollar, and that's when the markets went limit down and it looked like everybody just ran in and bought the dollar. That's exactly what's happening.
Stocks are selling off, bonds are selling off, commodities are selling off, and the only area that I've seen that's getting any relief right now - other than Walmart, Blue Apron, and a couple other stocks out there that people are pouring money into - is the U.S. dollar. So Invesco DB US Dollar Index Bullish Fund (NYSEArca: UUP) is the U.S. dollar ETF that I look at.
So to recap, for stocks I look at SPY, for bonds I look at TLT, for the U.S. dollar I look at UUP, and lastly, I like to look at the oil market.
Oil is an industrial commodity. As we've seen, the price of oil has gotten absolutely murdered in the past couple weeks. First, it was with the Saudis and Russians not agreeing to a deal on limiting production. Now, everybody is just getting to cash. This is impacting the oil markets, as well.
In fact, when the big three automakers decided they were closing up shop for the safety of their employees, we saw oil drop lower. USO was actually trading at $5.70, and then it hit a low of $4.29 before recovering a bit.
Now what I do is I take a look at all of these and try to get a gauge as to where the market's going. I think we still have a lot more room to go to the downside. In fact, if you go back and take a look at the last big move we had, which was the financial crisis, we took a 50% dip there.
We could do the same thing here, but if you look at the Fibonacci ratios, I think we'll see the Dow at 18,000, the S&P 500 at 2,000, and the Nasdaq at 5,000. So equate that in, and you'll get a really good idea that I myself am short-term bearish on the market.
However, there are going to be some great long-term opportunities when the markets come around.
Trading Options Right Now
As an options trader, I want to show you where I go with options.
First, when I go to look at the trades, I do a high-low ranking on the penny and weekly stocks that are the most popular stocks that have options and trade weeklies. That basically means that I rank them from low to high in order to see which ones are going up and which ones are down.
Anything that you see that says "short" or "ultra short" is going to go up in a down market. For example, that's going to be the ProShares Short SP500 (NYSEArca: SH) and the ProShares Short Dow30 (NYSEArca: DOG), which are hitting new highs.
There are others, too, that are going up, such as Citrix Systems Inc. (NASDAQ: CTXS), Walmart Inc. (NYSE: WMT), Gilead Sciences Inc. (NASDAQ: GILD), Clorox Co. (NYSE: CLX), Teladoc Health Inc. (NYSE: TDOC), and Digital Realty TR/SH (NYSE: DLR). These stocks are all at 80% or higher of their one-year price range.
Now, the ones you want to avoid and that are the worst stocks to be in would be TJX Cos. Inc. (NYSE: TJX), iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI), Vanguard, Analog Devices Inc. (NASDAQ: ADI), and anything in the oil market like Marathon Petroleum Corp. (NYSE: MPC) or Hess Corp. (NYSE: HES), which are all hitting fresh lows. These stocks are all getting hit hard.
In fact, about 133 stocks are hitting new lows right now, and the ones I listed above are the absolute worst.
Where This All Takes Us
Now, we get the most violent at the end of a trend. Now the stocks in that lows list - good ones with positive cash flow that are just getting hit, like banks and technology for instance - those are going to be the biggest winners when the market finds a bottom.
But the big question is whether the market has found a bottom.
Maybe not quite yet. So that's where I get in and try to mix things up.
What I mean by that is following our guideline of "risk less," I look at stocks like Walmart, Citrix Systems, Gilead Sciences, Teladoc Health, and Eli Lilly and Co. (NYSE: LLY) - these are stocks that are hitting new highs as the market is coming down into new, multiyear lows.
So that's what I look at every day and how I approach my trading. I'll be back soon with more content on how to approach and navigate these markets.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.