It was another brutal week in the markets with the S&P 500 finally entering correction territory on Thursday. Even with Friday’s buy-the-dip relief rally, the index ended down 2.3% on the week and 8.3% from its high made just over a month ago.
I read an interesting article last week about the divergence in investment behavior between retail investors and investment professionals. The headline read: “As Wall Street Gets Worried, Retail Crowd Keeps Buying US Stocks.”
Apparently, individual investors poured $7.3 billion into stocks between March 10 and March 12, particularly favorites like Tesla (TSLA) and leveraged ETFs, demonstrating a persistent faith in the market’s upward trajectory. Yet, the S&P 500 fell 4.5% during that time.
Since market bottoms often occur when retail investors finally capitulate and sell off their holdings, this could potentially be viewed as a negative sign. The fact that they are still actively buying suggests that the market may not have reached its bottom yet.
The buy-the-dip mentality was evident on Friday as the S&P 500 shot up more than 2% on the day. But as you can see in the chart below (and likely in your recent brokerage statements), there’s still a long way to go.
We felt the pain last week, booking two large losses. Below is a look at all of the closed trades from March 10-14:
Both of our big losers suffered from poor timing. We entered a diagonal call spread on the Vaneck Semiconductor ETF (SMH) on Jan. 22, just as the ETF was making a six-month high. Since then, semiconductor stocks have been hammered, and SMH is down more than 15%.
While demand for AI-related chips has driven significant bullish sentiment, the sector is facing numerous headwinds. Among them are weakened consumer electronics demand, particularly in PCs and smartphones, and a cautious approach to enterprise spending on data center infrastructure amid economic uncertainty.
Ongoing U.S.-China trade tensions are also creating uncertainty, disrupting supply chains and limiting market access.
With trade wars likely to escalate, it was unlikely that we could get the kind of bullish movement we needed out of SMH to make our recovery trade viable. So, we decided to close the position down and take a different approach.
Immediately after closing the trade, we entered a bull put spread on SMH. We were relatively conservative, setting our short leg more than 7% out of the money (OTM). And we set our target exit price at just over 50% of max profit.
Our good ‘til canceled (GTC) order was triggered the next day as the ETF rallied 3%, and we booked a quick $204 in just over 24 hours. That’s obviously a far cry from the loss we took on the previous SMH trade. But the price action and broader picture necessitated a shift in tactic.
It was a similar story with our JPMorgan Chase (JPM) trade, which we put on during our Investor’s Blueprint Live round of Income Madness. It couldn’t have been timed more perfectly… with the market topping out.
After we entered the trade on Feb. 21, the stock sold off sharply and swiftly. Shares quickly fell from around $268 and blew through the 255 strike of our short put in just seven trading days. And they didn’t stop there, but instead continued to drop another 30 points.
Like most of you, we were hoping that the market would rebound, or at least stabilize, but that hasn’t been the case. The barrage of trade war headlines out of Washington seems to be halting any attempts at a rebound in its tracks.
And that has left us scrambling to adjust positions in a market that continues to move against us. Longtime traders know that this is all part of the game. However, that only lessons the sting of taking losses.
We have had a few trades work out for us, mostly on the bearish amid the current market turmoil, we are selling bear call spreads, collecting income upfront and closing the trade early on market sell-offs.
Since we began trading this strategy in late October, we’ve generated more than $1,500 in profits. And that included managing a position through the post-election market melt-up.
In the weeks ahead, our focus will be on minimizing losses and targeting small wins by being a bit more conservative than usual. We will also continue to look for opportunities to capitalize on bearish sentiment until the market reverses.
We know that it’s been a tough few weeks, but hang in there. As painful as it has been, this too shall pass. In the meantime, we’ll adjust to the current market as best we can.
