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Buy Low, Sell High

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The US's "V-shape" recovery appears to have come to a pause as daily COVID-19 cases surge, and states begin to roll back reopening. The bulls and the bears are duking it out between S&P 500's 3,000 and 3,200.

Overzealous investors and analysts are driving the equity market rally. Analysts are continually upgrading their price targets as the best-positioned tech stocks hit higher highs seemingly daily. Is their backing to these upgrades, or is it just because these stocks keep blowing past these analysts' old targets?

Buying low and selling high is the idiom of every investor, but what are we defining as high? For short-term investors, we have unquestionably hit this "high" with many stocks trading in the 99th percentile of their last decade of valuations. I'm looking at these analysts' price target upgrades with a grain of salt in the short-term (though they may hold weight over a longer time horizon).

Someone Needs To Start Pulling Profits

The markets are frothy, at the very least, and I think we could be in for a rocky summer. The stretched stock market is due for a reality check.

When will the market start pulling profits?

Timing is challenging in any market condition, and the unprecedented economic uncertainty we are facing today adds to the complexity. I am most concerned about investors and traders selling off Q2 earnings. Investors are prone to pulling profits once they see what they wanted in a quarter, especially when they have accumulated some of the gains we have seen in the tech sector this past quarter.

I am not pulling profits in the traditional sense but instead buying puts to hedge my gains. My most prominent winners of 2020 are likely similar to yours: Microsoft (MSFT - Free Report) , Nvidia (NVDA - Free Report) , Tesla (TSLA - Free Report) , Adobe (ADBE - Free Report) , Sea Limited (SE - Free Report) , etc. The tech stocks that are expected to drive the next decade's equity market.

I don't want to sell out of my positions because I still believe in these company's long-term potential, but I also don't want to lose the gains that I have accumulated over the past 3.5 months. Considering how heavily weighted my portfolio is in tech, I want to choose a hedge that covers that segment.

Invesco's Nasdaq 100 ETF (QQQ - Free Report) is the perfect way to hedge my entire portfolio with just a few contracts. I am looking at puts with an August 21st expiration, which should provide me with the Q2 earnings season hedge that I need.

My sell level on QQQ puts is when the ETF hits $240 or the S&P 500 hits 3,000, whichever comes first. Of course, you need to be flexible if the options turn against you and cut losses if the economic narrative shifts (significantly) in a bullish way. 

Keep in mind that options are a very complex asset class and can present a lot of risk when used incorrectly. 

The Takeaway

I'm not overly bearish or bullish in this market, but I think a correction is imminent. The tech euphoria will fade this summer, and another buying opportunity will present itself. I am not advocating that you sell everything but be cautious and consider taking profits on some of your more exuberant gains.

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