Daily Brief - When to sell your stocks?

TLDR: When should you sell your stocks? Certainly not when the Economist asks you whether you should.

The Economist recently came out with a short piece on when to sell. They make the point that folding is hard. It’s a correct point, it’s VERY hard to sell your losers (and your winners too, to an extent).

The Economist mentions how poker players tend to fold 85% of their hands upfront, as the likelihood of winning is extremely low to begin with.

But this is not the problem we’re facing now. Our issue is that we are deeeeep into a bull market and that can rightfully make some investors nervous.

If you want to sell, it takes a second to justify your actions - S&P trades at a ludicrous PE, we’re talking about Fed cuts (which always signal the end of the cycle), and the US is experiencing its most divisive political climate since … Vietnam maybe?

But in spite of all of this, the market rallies. EPS are exploding higher. Monetary policy is adequate and the job market strong. It can be smooth sailing for a while.

How do I trade this?

If you are a bullish trader: if you backtest calls & call spreads in a bull market you will see how you make money with a very compelling risk/return. So if you believe the bull, stay with the calls.

If you are a bearish trader: this is the same advice we’ve been publishing for a month, use 1x2P and Skewed Butterflies. if the market rallies, you lose nothing. Look at our Leading Indicators email, many are pointing south.

If you are an asset allocator (which includes everybody with an investment portfolio): this is tricky so let us say (a) stay with momentum, (b) buy some deep protection, it’s (c) definitely buy treasuries to make a risk parity portfolio - aside from shocks like 2022, risk parity worked like a charm over centuries.

Earnings Spotlight: Takeaways from Big Banks' Earnings

Recent earnings reports from major U.S. banks, including Goldman Sachs and JPMorgan Chase, have shown a rise in investment-banking and trading revenues, driven by more stable economic conditions that have given corporate-banking clients the confidence to utilize services such as deal advisory and debt offerings.

However, the financial environment remains fragile, with the potential for economic downturns or geopolitical disturbances to halt progress. Banks with significant consumer-lending operations, like Bank of America and Wells Fargo, face additional challenges as higher interest rates and inflation impact lower-income customers.

Market Movers: When the FED (finally) cuts rates

Here is the historical 6-month response from S&P sectors post previous rate cuts by the FED:

1. Materials: 2.50%
2. Consumer Staples: 1.31%
3. Information Technology: -0.46%
4. Energy: -0.64%
5. Consumer Discretionary: -0.84%
6. Health Care: -1.69%
7. Industrials: -4.61%
8. Utilities: -6.35%
9. Real Estate: -6.48%
10. Financials: -6.49%
11. Communication Services: -7.98%