Market volatility remained elevated last week with big swings in both directions and the Nasdaq dragged down by single-day drops of 25% or more in stocks like PayPal (PYPL) and Meta Platforms (FB). It certainly did not feel like the S&P 500 closed up for the week given the carnage underneath the surface, especially in tech stocks. Expectations of a challenging market were one of the reasons we wrote about a company that acts as a market maker and benefits from volatility in December and the company is up more than 12% in our model portfolio despite the general market decline.
In my article titled “Positions For 2022: A Changing Of The Guard” at the start of the year, I wrote the following,
I think there are opportunities in certain sectors and heightened risks in others. I’m about 75% invested after scaling back on several positions and would be more comfortable at the 60% to 65% level at this stage of the market. The rest of the portfolio does not have to be in low yielding cash but can instead be in relatively safe merger arbitrage positions to generate yield and to provide ballast during rough seas.
I have been very tempted to start buying after this recent pullback but have been showing restraint. I did write cash secured put options on Doximity (DOCS) and have been considering starting a new position in AirBnB (ABNB) or adding to my position in Twitter (TWTR), which took another hit after the disappointment results from Meta Platforms. We wrote the following two weeks weeks ago in our Insider Weekends post discussing the RV manufacturer Thor Industries,
What we saw in the markets this week was particularly worrisome because the sell off was broad-based and even asset classes with low correlations between them appeared to be down. We are currently seeing mean reversion in full swing. As market participants who have invested through multiple cycles know, mean reversion often overshoots the mean. In other words, stocks can go from “strong buy” to “screaming buy” to “how can it get any cheaper” before they bottom. We haven’t yet approached the screaming buy phase yet as folks are already lining up to buy the dip, which has worked very well during the last decade.