We are moving away from ranking the stocks by conviction as the organization forced us to choose between too many stocks that we have equal conviction on. The conviction and story rarely change and the monthly time frame set up an expectation that the conviction changes very frequently. What does change daily/weekly is price. Instead, we are going to display our portfolio and the stocks we are watching closely for entry. This will also serve as a reference page for Knox’s active trades. This list combines the fundamentals with technicals to find good entry points for our active watch list.
You can view our portfolio here.herehere.
These include: (1) Active Portfolio, which is the tech portfolio that tracks our open-trades and long-term positions; (2) Conviction List, which tracks the gains made in Beth’s top picks from the date of her first publication on each stock and those we are watching to enter; (3) High Growth list, which tracks the current momentum names for anyone looking to play quick moves in the market.
You can view a list of research and stocks covered here. stocks covered here. Please use this list to get acquainted with the general microtrends we are targeting as well as the positioning of the companies we believe will benefit most from these microtrends. We will build out this list to have brief information on the conviction so check back soon.
We are also testing a new hedging strategy that meets our objective of building and protecting a long-term, buy and hold portfolio (i.e. our “Active Portfolio”). Our cost basis for “long-term” positions is set with a series of trades (these are noted on the Active Portfolio as “open-trades”). Some of our positions have a low-cost basis and others are trading near our entry.
Regardless of when you build a tech portfolio, these stocks are high beta and the sell-offs can happen quickly, especially because momentum traders are attracted to the high revenue growth in tech names. Beth covered some of this in her H2 2020 Cloud PDF.
We have been working on a hedging strategy that allows us to remain in our long-term/buy and hold positions even when the market goes through drawdowns. In our industry, this can happen a couple of times a year regardless of the economic backdrop.
Picking the stocks is half the challenge. The other half is holding onto the company once you have a position. For example, if you had the foresight to grab Amazon near its IPO, you had to withstand six drawdowns that gave up at least 30% each time. Two of these drawdowns were greater than 50% and one of them was greater than 90%. Today, the position is up around 1800%.
This is the reality you face even with great tech companies that have massive addressable markets, little competition and are diversified across multiple growth segments (i.e. Amazon as the example). Emotions are difficult to manage and our goal when testing a hedging strategy is to not sell prematurely.
We are developing hedging strategies that will allow us to remain long. The first is a trend following strategy that is rules based. This strategy was inspired by Puru Saxena on Twitter, who is a must-follow. We watched him navigate the March 2020 sell-off and it was flawless.
We reached out to him for permission to test his hedging strategy especially because he also invests in high-beta tech stocks. He gave us the green light and we are grateful for the “FinTwit” community where everyone can continually learn and improve their craft.
We made a few tweaks on the strategy to fit our portfolio. This is because we cover a broad range of names including semiconductors, digital media, small caps and big cap stocks.
PLEASE NOTE: You will be notified of when we our hedge is on and when our hedge is off. You will not need to incorporate this directly. We will simply let you know when our hedge is on and off and you can choose to follow or not.
Please always consult with a financial advisor for any stock trades or strategies you wish to purse. Beth is a technology industry analyst only and I am a technical chartist and someone who manages my portfolios only who discloses my personal trades.
Trend Following Hedging Strategy
The first step is to find the ETFs that correlate with our portfolio. For semiconductors, this would be SMH. If we are overweight mega-cap tech names, our system could pick QQQ. Due to to the run-up in cloud software, we are more closely correlated to the Russell 2000 growth ETF under symbol IWO.
The following are rules to determine if we should be hedged or not: We will follow three exponential moving averages to track two trends: (please review the glossary of terms):
- Short-Term Trend: when the 5-day EMA > 13-day EMA, the short-term trend is up. When the 5-day EMA < 13-day EMA, the short-term trend is down.
- Long-term trend: when the price of the ETF is above the 150-day EMA, the long-term trend is up. When price goes below the 150-day EMA, the long-term trend is down.
When the long-term trend is down AND the short term-trend is down, we will short the dollar value of our tech portfolio. For example, for every $1 we have in long positions, we will take out an equal $1 short position in IWO. This means the short amount will be equal to our allocation in technology stocks.
While the long-term trend is down, we will follow the 5-day EMA/13-day EMA crossover to tell us when to short and when to cover that short. When the short-term trend is down with the long-term trend, the hedges will be on.
When the short-term trend is up and the long-term trend is still down, the hedges come off. Also, when the price of the ETF we are tracking goes above the 150-day EMA, the hedges come off.
The pros: you will have some segment of your portfolio that is long volatility in case of a deep sell-off. This should counter balance the losses we will experience in our buy and hold tech portfolio. This will reduce our drawdowns and help us comfortably sleep at night during times of immense volatility.
The cons: In a market like 2015/2016, there could be a number of whipsaws, causing minor losses and erratic signals. In this situation, we may sacrifice gains on the upside in order to protect our downside.