Top Nvestor of the Month!
Fredrick Zhou, 30 day return: 33.7%
The market has become more volatile than ever in years; midst of it, Fredrick has managed to triumph in biotechnology sector last month, when intuitively longer exposure to the market would cause less than optimal performance. We wanted to hear his thoughts on his top trade HALO, which we deal more in detail later, and his thoughts on pharma/bio sector, which has become his top industry on Nvest as of this month.
“If you lived in North America long enough,” speaking of his general sentiment towards the sector, “you will realize biotech/pharmaceutical has the edge for companies at different stages. Money are simply flowing into the industry because government is ultimate buyer of their technology, and people are beneficiaries. With this business model, bio stocks are always going to charge a premium.” Indeed, as we point out in this month’s review, pharma stocks were left relatively unscathed in this volatile trading environment, rising sharply after some fears that the healthcare sector in general was overpriced, which was the sentiment in late December, which seemed to have benefited Fredrick’s timing. “Lastly, in my personal experience, bio stocks are getting more attraction than ever. VC are leaning towards bio and startups that are focusing on bio are getting all the hype.” Frederick has begun another round of healthcare related recommendation.
You can follow Frederick’s trades here: http://www.nvest.me/users/Fredrick
Top 3 Recommendations
Recommendation 1: Buy/Short PBR (William)
William gained total of 12.16% return from his five separate PBR trades in the last month (6.03% buy, 0.34% short, -2.38% short, 7.0% buy, and 1.17% short respectively; http://www.nvest.me/companies/PBR) Although in the last quarter PBR has seen its share values drop overall as was the case with many energy stocks, in last month it has shown even more volatility, gaining and declining alternatively throughout weekly sessions, while suffering its decade-low on January 6, only to rebound and close 21.93% above this level just last Friday.
Interview with William: William was kind to provide us with insight as to his success with the multiple PBR trades. “I’ve heard of PBR since May, and really started following it in Sept, around the big Brazilian election.” Indeed, there was much speculation regarding Brazil’s political landscape. More on the political situation factoring into his decisions, William said that the answer was “yes and no. Brazilian election already settled, (worst already happened) and its correlation with EWZ [Brazilian index] has also decreased, so I haven’t really taken the politics into the valuation anymore.”
Further clarifying his initial decision, he said that “then the stock was heavily correlated to EWZ, I think it was 2x …. after the Brazilian election settled I really just played PBR as a proxy for oil.” However, once PBR “bottomed”, it became “not as sensitive to oil prices anymore.”
Regardless, William believes that PBR is still attractive. “I was impressed with its earnings and dividend and always wanted to get some action … I like the stock, and I think oil will go higher in the long term from here.” Additionally, speaking more on big oil firms other than PBR, William had to say this about BP: “I like BP, BP demonstrated similar insensitivity to oil drops in the recent days. I remember that $44.3 oil day when BP didn’t drop much at all.”
You can follow William’s trades here: http://www.nvest.me/users/volatility
Recommendation 2: Buy/Short TVIX (Hertel)
Hertel gained total of 7.53% return from his six separate TVIX trades in the last month (1.0% Buy, 0.47% short, 2.69% short, 1.0% buy, 2.13% short, and 0.24% short respectively; http://www.nvest.me/companies/TVIX) TVIX is an ETN issued by Credit Suisse AG, designed to track CBOE SPX Volatility index with exposure of 2:1 leverage, more commonly known by its ticker VIX. Since hitting its all-time low in early December amid S&P 500's return from the v-correction in October, the increased volatility in the market has uplifted TVIX’s price level since then.
Interview with Hertel: We first wanted to know more regarding how Hertel decides to go into TVIX trades, and what TVIX means. “TVIX is a volatility play. It is based on VIX.” We did ask a rather simple question, as Hertel’s TVIX trades show up under name of Credit Suisse, which is the issuer, rather than the actual ETN itself. On this, Hertel wanted to clarify that “It is simply a derivative that tracks VIX, which is volatility index (CBOE VIX) that used to be tied to volatility in S&P100, but now is onto S&P 500. So yes, it can be confusing, because people think it has something to do with Credit Suisse!”
In the end, Hertel explained that “all depends on VIX, and what fuels it.” When asked on his recent TVIX trades, Hertel said “they were all scalps. Since market has been in this state, I am happy with scalps. I did misread some signs as to where SPX was heading, but the trades did work out. That day I think there was simply some assurance on my part that SPX would head certain way; meaning, technical analysis on SPX. Once risk profile is clear from this process, I would try TVIX …… Due to the recent market sentiment, I have been very careful with it however.”
Hertel revealed that “I still find it little hard to hold onto it longer than very short period; I might try to do longer plays in the future.” Hertel has, in fact, tried to execute very timing-sensitive trades on TVIX, usually not holding onto single trade more than a day. When asked about his reasons for going into separate trades in general, Hertel said, “there is some correlation to be found within the market, and I probably had different reasoning for them. But recent plays have been based on volatility on SPX …… It is very hard to explain separate reasons for each enter/exit; but mainly, it always has to do with correlation (or rather, the inverse correlation) with the general market sentiment.”
You can follow Hertel’s trades here: http://www.nvest.me/users/hertel
Recommendation 3: Buy HALO (Fredrick)
Fredrick has seen 54.57% return from his HALO trade, holding it just under three weeks. (http://www.nvest.me/posts/4337) HALO had shown very weak pattern heading into mid-December; however, since then HALO has shown significant rise in price level in the week of January 05, where it surged 45.85%, comfortably outperforming its biotech peers. Price continued to rise in the following week, although at much diminished rate.
Interview with Fredrick: In this interview, we asked Fredrick on his specific reasons for initiating his long trade. As stated on his buy post, it had to do with his careful watching of a biotech ETF, in this case XBI. “I have been following XBI for a long while now. I was first an observer, then become a long term holder. It is the only ETF that is making consistent annual return in the past 5 year. Given that it is a passive ETF with very little MER, something must be right about its portfolio construction.” Using this logic, Frederick went on to explain “at the end of 2014, top holdings of XBI had at least 200% YTD. When the new year came, I immediately identified HALO become the top holding of XBI, someone must have done their research in order to put it there. I have used this strategy in non-biotech stock(s) before, but I know the gains are much more significant with biotech stocks, therefore I want to give it a try.”
However, we know many traders tend to get very nervous when their open trade surges exceptionally high. Therefore, we wanted to ask more on his exit decision, and how one must approach biotech stocks, usually known for their notorious sudden gain and loss: “it is always good to watch out for the volume of the Biotech before making the sell decision. After the jump, HALO’s buying pressure start to diminish. This is usually a strong indicator that the stock will see a short term reversal. Pair with the poor economy reports and bad news from Eurozone, I decided to get rid of it on the first day that stock is going down …… we have to live with what we get when trading bio stocks.”
December/January market action
As was the case in our last edition, oil price’s fall into $45 range has grabbed most of headlines until early January. However, ECB’s impending decision to initiate quantitative easing, still with Greece in the frame, coupled with Switzerland’s central bank’s decision to abandon its ceiling on Swiss Franc, causing 39% appreciation against the Euro overnight, have been the market’s worry since then.
US equities have not reacted favourably since the new-year start. After Dow Jones Industrial Average hitting 18,000 late December, the market has shown bearish pattern since then, dropping for five sessions in a row twice since the peak, which has never happened in 2014.
A small measure of optimism was restored mid-last week, when the market shed away its losses in 2015. However, since then, it has recorded very sharp movement down, only rebounding last Friday. This points to rise in volatility in the market. Only healthcare and utilities were sectors that recorded respectable gains over last one-month period. It impacted gold price, rising from just under $1200 at the time of last issue to recording high price level not seen since September. It should be noted that the sharp rise part of this surge has come in 2015 alone.
US dollar has reached its all-time level high in years, with Euro depreciating sharply before ECB’s QE decision and Swiss Franc’s move, as discussed above. Fed’s FOMC minutes hinted at long-anticipated rate hikes in 2015 regardless of its weak inflation data, but it remains to be seen whether the monetary policy would be tightened, with most placing the possible rate hike to at least second quarter of 2015 earliest; economists point to disappointing wage growth and large gap between current inflationary expectations and Fed’s target of 2% as possible contributors.
