Better To Be Lucky Than Good

Today is options expiration where something like $2 trillion in notional value goes away. I do not think that influences the markets much as professionals have already done most of their work this week.

The bears have clearly won the first four days of the week. It’s interesting that they thwarted the bulls just shy of the 30,300 level I have referenced for months. And by the way, this is not a hard number. 30,299 isn’t a bad number while 30,301 is a great one. It’s a soft.

The question now is can the bulls push back on what has been a quick 3% decline. Given the pre-market strength, I would say no. I think this morning’s open, if it holds, is a better selling opp than buying one. I would like to see the NASDAQ 100 trade below 29,000 first which could clean up and out some short-term sellers.

On Wednesday I joined Fox Business’ Making Money to offer an update on recent picks in Merck and Moderna which released some groundbreaking and shocking news on phase III clinical trials on an MRNA vaccine for melanoma. Moderna was up more than 140% in one day. Our Unloved Gems owns both stocks and that makes up for a lot of mistakes I have made during the year. First, this was just luck to own them during the news release. This rarely happens to our companies. I think the last one was GW Pharma which was a takeover. Windfalls like this deserve action.

Second, after the initial shock wore off and I realized how large the position had become, we sold some in the first 30 minutes of trading because it was our single largest position in a very volatile company. Then, in the last hour when the stock rallied even more, we sold a larger piece to bring down our exposure in line with our larger positions.

Some folks questioned why we sold at all while others asked by we didn’t sell all of it. I love these questions. Right or wrong, we are paid and paid well to manage portfolios. In Unloved Gems that does not use leverage, position sizing and management is super important and that is based on conviction and volatility. I could argue that managing positions is more difficult than just picking stocks. Our general thesis is to prune when positions become too large, especially in more volatile and lower conviction names and plant more into pullbacks on higher conviction companies.

Below is the daily and weekly chart of Moderna. Context matters!

Merck is a totally different story. We bought it last October and this past April to add to an already large position in pharma because I wanted to lower the portfolio beta and de-risk some. Our other positions in Bristol, Pfizer and J&J were first bought when we were selling some highflying names in mid-2024. Merck had a 4%+ dividend like the others and I was okay being patient and getting paid to wait for the sector’s turn. We own Merck in Unloved Gems as well as our income strategy. As with Moderna, we pruned back some of the position on Wednesday as it grew in size along with the over size of the pharma position.

This is how good portfolio management works in good times. And it’s no different on the downside when we sell to stop out. Too many investors buy to die with stocks. That’s not how successful portfolios are run. For every Apple, I can throw out dozens of companies that went bye bye or have just languished. Always have a plan for when things go your way and when they don’t.

A relatively quiet summer weekend is here. One morning of golf, fertilizing and a lot of relaxing are on the docket.

On Wednesday we bought PCY, EMB, more CCJ and more MDB. We sold SSO, some MRK and some MRNA. On Thursday we bought WEN, CALM, more CHWY, more AMZN and more KMB. We sold DIA, XLE, EMB, PCY, some SPHB and some SLB.