November and December have historically been better months for stocks than most are, but what plagued the marketplace throughout October hasn't been healed. How should we play this?
Let's check it out:
The Macro Situation
The U.S. macroeconomic situation doesn't look so great as November begins, outside of an obviously robust labor market. There are lots of uncertainties ahead, such as:
- Trade. The U.S.-Chinese trade conflict has become worse, not better. However, President Donald Trump and Chinese President Xi Jinping are scheduled to meet at the G-20 summit in Buenos Aires toward month's end.
- The Federal Reserve. The Federal Open Market Committee will meet on Nov. 7-8, and so far, the central bank is sticking to its hostile stance on interest rates.
- The U.S. Deficit. The U.S. fiscal situation seems to stray further and further from the crazy idea of a balanced budget. If not corrected, this will one day lead to a crisis of confidence ... but not in 2018.
- The Election. The midterm elections take place on Nov. 7 and voters on both sides of the aisle seem "motivated." Oh, joy!
The belief among traders is that we'll need to see some positive headlines on the above danger spots or companies won't post the earnings that markets are expecting. While I'm still net long as November begins, I've been forced through my own set of disciplines to embrace a more defensive posture.
Let's check out where the "Guilfolio" stands as the new month begins:
I wrote last month that I was doing especially well with my defense stocks, so I should address front and center that since then, this group has totally flopped.
All of my defense names except Kratos Defense & Security Solutions (KTOS) hit their panic points last month. Thank goodness for the disciplines I've developed over a long career, because if I didn't know what to do when some of those names tanked, a really unpleasant pullback could have become outright catastrophic for my portfolio.
I can't stress enough the need for target prices and panic points on every position, gang. It's like having your own risk manager ... and it works.
In this case, discipline forced me to cut my risk and sell some Northrop Grumman (NOC) and my beloved Raytheon (RTN) at a loss, although I didn't exit those names entirely. However, General Dynamics (GD) didn't make the cut. I took a loss there and moved on.
Conversely, I actually increased my holdings in Lockheed Martin (LMT) and Boeing (BA) . It looks like I nailed it with Boeing, grabbing some additional shares at what looks like very close to a two-month low. (Jim Cramer prefers Raytheon (RTN) and Textron (TXT) in the space for his Actions Alerts PLUS club's charitable portfolio.)
I'm maintaining my longs across the energy space despite weakness, as I like the sector's dividend yields.
I'm currently long British Petroleum (BP) , Exxon Mobil (XOM) , Royal Dutch Shell (RDS.A) and Schlumberger (SLB) , although I had to reduce my SLB stake by one-third when it hit my predetermined panic point.
I've also added KeyCorp (KEY) for its 3.7% dividend, and also recently bought PayPal (PYPL) because I like the way people use its Venmo product. That's been a nice trade for me so far, up about 8% so far. (Jim Cramer and his analysts at Action Alerts PLUS also like PYPL, writing recently that the strong U.S. job market "should continue to support the purchase of smaller ticket items such as those made ... with digital payments apps such as PayPal/Venmo." Click here to read their full analysis.)
I view health care as a vital part of any defensive sub-portfolio, so I either initiated or built-up positions recently in Abbott Labs (ABT) , Amgen (AMGN) and Pfizer (PFE) -- the latter one for the 3.1% dividend.
I've also been trying to get UnitedHealth Group (UNH) at a discount, shadowing the bid side. So far, no dice -- but I've managed to short some puts, so I do have some exposure.
I'm also still long General Motors (GM) , but that's against a sale of an options straddle. As long as GM stays between $30 and $38, I make money. (The stock is trading at $36.67 as I write this.)
Elsewhere, I'm long Walt Disney Co. (DIS) because I see it as simply the best all-around media/entertainment play. (I love ESPN+ -- it's the best place to catch a ton of college and Canadian football games.)
I also remain long Apple (AAPL) , but continue to manage my net cost basis by some selling out-of-the-money puts.
Tech: Cloud Stocks
Both the cloud and semiconductor sectors entered bear-market territory in September. Still, I remain long Adobe (ADBE) and Salesforce (CRM) , as I believe in both names despite the fact that they're much lower than they were September. And at least both remain above my cost basis.
I also remain confident in Microsoft (MSFT) . But as far as Amazon (AMZN) is concerned, I've had to aggressively trade that name to somewhat ease the pain in my core position. It's tough to add Amazon shares at the stock's still-lofty prices, but I've done so in small "bites."
As for the semis, my book is in surprisingly good shape. Intel (INTC) has rebounded a bit, while Micron Technology (MU) is a very "high-touch" name in my portfolio. While MU's share price has fallen a lot in recent months, my net basis is just above $38 thanks to a combination of strategic buying and the sale of puts and calls that reduced my cost basis. If the name holds at its current $40 or so (thanks to management buying back stock with renewed vigor), I think I can pull off a win here.
Elsewhere in the sector, I've just started rebuilding my position in Nvidia (NVDA) , which I sold off over time as chip stocks tanked. However, the sector recently got so undervalued that I started buying NVDA again. I'm back to 15% of the position that I ultimately intend to have.
Meanwhile, I've hung on to my shares in Seagate Technology (STX) -- and I always plan to -- for the surprisingly generous 5.8% dividend. Frankly, I don't care what the share price does.
I told the crowd at Jim Cramer's recent Boot Camp for Investors in New York that I was getting long Verizon (VZ) as a defensive play. That was one of my better trades for October, and VZ pays a nice dividend too.
Lastly, I did grab a small number of shares in Caterpillar (CAT) recently. I couldn't help it given the stock's current price (down more than 20% in the past four weeks to about $124).
Jim Cramer's Action Alerts PLUS charitable portfolio and club for investors owns 17 of the stocks that Guilfoyle likes. Click here for a free 14-day trial to the club and see all of the stocks that Jim's trust owns.)