The 3s Report: How Dog Collars Are Saving Me In This Crazy Market
From timely to timeless, the 3 most important points we can make about stocks, bonds, ETFs, markets and investing...updated weekly
ROAR Score weekly update
Our "Reward Opportunity and Risk" (ROAR) score remains at 10 this week...barely
This means a 2-ETF portfolio that can only be allocated to SPY and BIL would be 10% SPY and 90% BIL.
If there were ever a time to do a rare "not on a Tuesday" adjustment to ROAR in either direction, it would be soon. We'll see.
3 Quick Thoughts on markets
Every time I look at the very simple (but powerful, I think) ROAR 2-ETF portfolio, I wonder if we're all making this investing stuff too complicated. I don't mean I'm planning to put all of my money into a tactical combination of SPY and BIL. But I am thinking of increasing its impact in my own portfolio, likely with some "side car" positions using options or something else to complement it. ROAR = CORE could be the mantra here. I'll be publishing a report on the whole ROAR concept very shortly, so stay tuned for that.
This stock market is (to me) not really about news headlines. It is about a bubble popping. It is always something that gets the blame: tariffs? Recession fears? Whatever. I've written here for months that the only thing left for market bulls was that prices were still going up. Nearly every other indicator I rely on leaned toward excess, speculation and "it's so easy a caveman could do it" type of market sentiment.
Oh, but I'm not saying this is THE bubble bursting episode. I wouldn't bet against it. And that my portfolios are nearly across the board positive since the 2/19 market top is about 1 simple concept I try to teach constantly (often to deaf ears, but I'll keep trying!). What's that?
Risk management is much more helpful when it is proactive, not reactive. That's it, that's the tweet, as they say over on X these days. Now, let's go to the charts.
3 ETF (or index) charts I’m watching
Note that I am doing most of my chart work these days using Barchart. Not so much because I recently started doing a little writing for them, as I've used that system for about 15 years. But because I am finding that system to be more robust and "bang for the buck" when it comes to technical analysis than any I've seen. So I am immersing myself in it more than ever, hopefully to the benefit of anyone who follows my work.
When the "VIX" volatility index spikes higher like that (25-30 is high, above 30 is nearly panic mode), options investing gets tougher. This is one reason for the bolded quote on risk management above. I use options in a range of ways to protect and enhance my returns. So those put options I loaded up on earlier this year have paid off nicely. But now what? They are more expensive to use, and thus I will be pivoting some of my hedging focus to ETFs that move opposite the broad market. There are several of them, and I've used them for about 20 years. More recently, a batch of leveraged ETFs have hit the market. Leverage is only dangerous in the wrong hands. I spend time in our investing group teaching subscribers how to sift through all of those defensive methods, so they can figure out which ones fit them best.
The S&P 500 naturally deserves a fresh look as it is one more big "whoosh" downward from entering "correction" territory. This is the weekly chart back to 5 years ago, just as the pandemic crash was in its worst phase, then a major bottom occurred. But what I see on the right side, top and bottom, is my best chart-case for this to get really, really ugly. I'll be thrilled to wrong.
If you remember only one thing about my approach to investing, let it be this: market direction does not matter to me. Making money and not losing big along the way does. So my process is to try to profit, come what may.
SPLV: "low volatility" sounds great...until it stops working. So far, this segment of the S&P 500 has held in quite well. So what I am scouting for now? In every major market decline I can remember, the steps were similar: the leaders lead (Magnificent 7 stocks), most stock lag (the rest) and then the laggards lead. Then, a fork in the road arrives. Either the whole market moves higher in earnest, or it is a case of "all fall down." Not enough evidence yet, but the ROAR Score tells you where I think things lean. I'm speaking in weeks to months here, not days.
3 stock charts I’m watching
As my subscribers and Seeking Alpha followers know very well by now, I am making vigorous use of what I call a "dog collar" approach.
I buy a stock (or ETF) that is way down in price but I think is now attractive (yet the market considers it to be a "dog"). I ALSO buy a put option that allows me to set my worst-case scenario at the time I purchase the stock. Most often I will complete the "option collar" but selling a covered call too.
Importantly, this gives me one advantage over the hoards of investors that do covered call writing when markets fall sharply. They can potentially lose many months or years worth of option income. I can only lose up to the point I decided (and paid for).
The past month has been the best example of how those approaches differ that I've seen in a while. I'm not a risk taker. Covered call writing without put protection carries tons of risk. As noted above, we have not seen that risk do much harm until recently. But that didn't mean the risk didn't exist all along!
CCI: this is one I "dog collared" earlier this year, and it is working well so far. If the stock goes up, that's obviously preferred.
Other times, risk "happens" as it did here with Boeing (BA). Without getting into all the math details here, my experience with BA so far: the stock is down 14. My combined BA position (stock, put, call) is down 2%. THAT is risk management. And I still have upside all the way to $210 a share (strike price of call option) through mid-August, if I choose to keep it on. How am I only down 2% on a stock that I bought at $173 that trades today at $149? My put option strike price is $170. That's the worst I can do. If BA falls to zero (not likely!) I can still sell at $170. It's not magic, it's the dog collar!
And with some dog collars, nothing happens for a while. Apple (AAPL) was one of the first I entered. The collar is out to mid-June, and the range I'm working with is $260 to $220. Below $220 I am protected, above $260 I might be forced to sell (big deal/so what, that's way up from here). I bought AAPL at $222, and the stock is at $219 as I write this.
So what's with the position? It has hopped around, but currently the total collar position is up 1% since I created it. The stock is down 1%. So in a market like this, a small win for now. Here's to a hopefully higher AAPL stock price by June!
Final thoughts for now
These markets are as opportunistic as any I have seen in 39 years in this business. Yet I am concerned that many well-intentioned investors have been misled by the non-stop financial noise that surrounds us. Buy the dip, invest for the long run, time in the market, Nobel Prize winning studies, best stocks to buy right now, blah blah blah.
None of that is investing. It is marketing! And while it often comes from a good place initially, it plays into the immediate satisfaction requirements of today's human condition. They have us right where they want us, with zero obligation to actually do what best balances reward and risk.
Look, I was a fiduciary advisor for 27 years. I enjoyed the client interaction, the relationships that my work built, and all that comes with that. I'm thrilled that my son has followed that path with a great firm.
But since I sold my advisory practice in 2020, amid a similar-looking market situation as we have right now, my semi-retired life has been not about delivering personalized advice. Instead, Sungarden and our investing group at Seeking Alpha are about taking 130,000 hours of experience (OTC:MINE) and disseminating it to a mass audience.
Our mission (a reminder)
The mission here is to make the methods I've used for decades available to a broad audience, to use as they wish. The free stuff that covers things at a 30,000-foot level, or the day to day, week to week and ongoing thought process that is Sungarde
n YARP Portfolio, the investing group I lead at Seeking Alpha.
I can't predict the future, so I won't. But I can say this: risk continues to be historically high, and that makes this a great time for self-directed investors to use that to their advantage. The mainstream investing world talks a lot about what you "should do." But dog collars, YARP dividend investing, stocks/ETFs/options and all of that is just an expanded toolbox of strategies I created. Anyone can learn to do it. They just need to decide to tune out the noise and get serious about it. This is a good time to consider that.