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Patience! (Cestrian Stocks Bulletin #113)

Cestrian Stocks Bulletin
Patience! (Cestrian Stocks Bulletin #113)
By Cestrian Capital Research, Inc • Issue #113 • View online
Consider A Little Discipline On The X-Axis

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Hurry UP Already!
Most everything in securities analysis is about the Y-axis. Price targets, stop losses, limit orders, Fibonacci retracements, extensionzzzzzzzzzzz and blah. All Y-axis. Very little you see deals with the time taken for your forecast events to take place. This leads to unrealistic and/or incorrect expectations about the rate of change in price, and can lead the most rigorous investor to mess up by abandoning a strategy too soon, or waiting too long before declaring defeat.
When you’re carrying out your research, or evaluating others’ work, we believe the X-axis is almost as important as the Y. The X-axis is all about opportunity cost. For how long is your capital tied up in a particular investment or trade? Is it productive during that time - earning a dividend or gradually moving up in value? Or is it losing value or just treading water? Capital is a scarce resource - doesn’t matter if you’re Elon Musk or StockNoob, nobody has too much capital. Even La Musk had to sell some $TSLA stock to give to the IRS what belonged to the IRS. And so achieving timely returns on your capital is important. Money sat doing nothing - either as a weighty cash balance, or as an investment going sideways doing nothing much - is expensive money, because it is costing you the opportunity of making money on a better idea elsewhere.
In our published stocks analysis and indeed staff personal account investing and trading we are paying increasing attention to the timeframe over which we expect results to be delivered. Whilst far from perfect and perfectly capable of committing heinous sins of both commission and omission, our calls on the Y axis have worked out pretty well. In our subscription services we called the rise and then fall of $NET; the rise and then fall of $CRWD; and we’re currently out hunting for fallen angels deep in their Wave 4s with a view to ride them up the coming Wave 5. (We wrote up $MDB in this regard today in our Cestrian Tech Select newsletter).
If like us you use stock chart patterns to determine price movements, be sure to check back regularly and see whether prices are reaching your targets at around the time you expect, faster, or slower. This will teach you where your recurring observer error is, and you can then correct for that going forward.
Here’s a couple recent examples from our own work. These investments have worked out very well but one could most certainly have gone better had we thought more about the X, and one remains a partial work in progress.
Cloudflare ($NET)
NET has been a wonderful stock for us. We called it a winner in the $60s and started buying it in earnest in the $80s, rode it up to a Wave 3 high of $200+, selling down the whole time, and then as the stock reached Fib extension after Fib extension on the way up, we said, huh, this can’t last forever, it’s going to come tumbling down at some point, best buy some puts. We consulted the chart, thought that in the event of a Wave 4 down from that $200+ it could hit $160 for sure and maybe hit $120. So we bought puts with strikes at these levels, long-dated puts out to 2024 so as not to be under time pressure. So far so cool, calm, collected and dead inside. No stock-love here, simply chart logic. Our error was to not respect the X. We sold the puts in the early December downturn, pleased that the stock had plunged below the $160 level and feeling that the $120 strike was looking a stretch given the rapid rebound the stock achieved in the $150s. Across the 160s (in the money) and the 120s (out of the money but not by much) we packed away a tidy gain in addition to the gains already banked in the common stock when on the way up. Felt smug did we.
D'oh. Pride, of course, came right before the fall. $NET right now is sat at $110 and has been as low as $99 and change lately. We don’t want to think about what those 160 puts would be worth had we kept them; and the 120s would have been nicely in the money too. Why did we sell too early? Because we were impatient on the X. The stock had initially kept moving up faster and further than we expected, so we felt we had bought the puts too soon and with strikes (in the case of the 120s) too far from the current stock level. No matter that the chart in front of our faces said that with a shallow Wave 2 down, Wave 4 (the current downdraft) could be deep. A 0.618 or 0.768 retracement was very much on the cards. All we had to do was be more patient - as the chart shows.
(You can open a full page version of this chart here ).
$NET - our take.
$NET - our take.
Now, this was a great trade taken in the round and indeed we have been buying long $NET stock positions down at this level in anticipation of a move back up. But. Missed opportunities are missed opportunities.
So now we plan to make a different mistake.
Qualcomm ($QCOM)
Let’s look at $QCOM. We went to Buy on the stock in October when was in the $130 range. Indeed in the almost-free “Idea of the Week” paid version of this newsletter, yours for a measly nine fiats per month, we said 15 October, “Buy $QCOM at $130, ride it to $166 and beyond”. 15 November in the paid version of this newsletter, we said, target hit, this thing can keep going. And last week it hit just shy of our updated minimum target of $195. Much faster than we expected. And so, reader, we took gains. A very rapid and goodly return on capital thankyou very much. We also said, hm, the $QCOM chart has a big ol gap in it, and as any old-line chartist will tell you, gaps tend to get filled. Can take awhile, but they do tend to fill. Nature abhoring a vacuum and all. So we bought some long-dated puts with a strike in the $150 zip code, right around that gap. They’re a little in the money right now. We have resisted the temptation to sell them - when the market started the rebound today we very nearly hit Sell on these things - but, $NET error top of mind, we sat on our paper hands. Because, if the market moves up again, we’re happy to get back into $QCOM stock; but that gap? That gap can still get filled. And so this time we are going to hold onto those puts way too long and then write a cope-post in a few months saying, that was dumb, should have sold them in early January, look and learn folks, do as we say not as we do.
Anyhoo. X-axis. Matters almost as much as the Y-axis. If you’re a member of our pay services you’ll see us start to think much more about the opportunity cost of capital going forward and how to improve on the time to money.
And with that, we shall leave you to scratch your head about just what on earth happened in the market today. Green in premarket, crimson at lunchtime and then all of a sudden growth stonks be all green again. With the Nasdaq closing up on the day! Never a dull moment.
Cestrian Capital Research, Inc - 10 January 2022.
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DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, NET, CRWD, MDB, TSLA, and short positions in QCOM.
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