World markets have been pummeled overnight, bringing CME index futures to a crashing halt while U.S. equity funds forecast that the S&P 500 and Nasdaq 100 will open nearly 10% lower on Monday morning. Investors who have been told repeatedly not to panic in a downturn aren't heeding the advice, which is contributing to margin calls and forced liquidation. Unfortunately, catastrophic feedback loops can persist far longer than predicted through charts or spreadsheets.
More sophisticated market players have taken steps to hedge their portfolios through options, inverse funds, and a few commodities. Beginner and intermediate investors don't have that luxury because poorly timed or placed hedges can blow up into major losses that make things even worse. In addition, put protection is getting prohibitively expensive because market makers don't want to get caught on the wrong side of the trade.
It's even more dangerous if you've freed up enough cash to look at long-side opportunities because our first inclination is to buy stocks that performed well before the outbreak. Sadly, winners in one market cycle often underperform in the next, requiring fresh research to uncover the highest reward opportunities with the lowest risk. So, bottom line, you may wish to avoid FAANG stocks and their cousins because high-tech is a cyclical industry that needs a healthy business environment to grow.
It's also important to remember that "cash is a position too," and high cash levels will insulate your investment accounts from current and future shocks. Sitting in cash isn't as productive as betting the family fortune, but that 0% return could easily outshine 99% of your friends and relatives the next few months. And it's never too late to take a loss and turn it into cash because there are no guarantees that "stocks always go up."
Health Care and Biotech
Biotechnology and health care sectors are showing some resilience compared to broad benchmarks due to their participation in the hunt for COVID-19 treatments. Mid-caps and large caps that closed near 52-week highs on Friday include Quidel Corporation (QDEL), Centene Corporation (CNC), and Masimo Corporation (MASI). Alternatively, avoid sector small caps because most have been run up on speculation that could evaporate overnight.
Teleconferencing software companies have also attracted buying interest, but the group got pummeled last week after stocks were run up too far, too fast. Nasdaq 100 component Citrix Systems, Inc. (CTXS) could prosper after a pullback, with the 2020 breakout above 2018 resistance still intact. Teledoc Health, Inc. (TDOC) looks like another way to play the American retreat to the homestead, with that stock lifting nearly 30% since the start of February.
Traditional safe havens are acting slightly better than their growth counterparts, with high dividends easing the pain of lower prices. Campbell Soup Company (CPB) is trading close to a 52-week high after a strong earnings report and also pays a 2.84% forward dividend yield. And it's hard to resist a water play like American Water Works Company, Inc. (AWK) in this environment, despite the unimpressive 1.56% yield.
Market timers have far more options than traditional investors during the crisis, as we've seen in alternating limit-up and limit-down sessions. Pullback trades could pay the bills for these sophisticated players, with gold in retreat following two surprise rate cuts. Notably, the SPDR Gold Trust (GLD) is trading below the 200-day exponential moving average (EMA) this morning for the first time since May 2019, a zone of interest that could trigger a multi-week bounce.
The Bottom Line
The sectors and investments discussed above represent the few groups and strategies that could ease stress and rebuild profits in the second quarter.
Disclosure: The author held Campbell Soup shares in a family account at the time of publication.