Biotech Basket

2018년 1월 24일

Generally speaking we're all pretty aware that a "Buy & Hold" strategy works well. Yet, we find outselves "trading". Despite the evidence indicating this is unwise.

In a snapshot view we can take a look at the daily chart (nearly a years worth) and view our 3 stocks in the Biotech basket - and we can pick up some obvious patterns.

• These stocks are very much sentiment based. They swing wildly, before Earnings calls - but less after.
  
• These stocks move with extreme volatility. This is typical of sentiment driven stocks.
  
• These stocks offer plenty of activity for a swing trader, or scalper, and show trade-able features.
  

I'd like to talk about rebalancing.


The items I mentioned before are true, and seem as though they add up to a perfect suite of scenario's for a trader to load up on downtrends midcycle before an earnings call. I wouldn't argue with that type of play, I think it'd probably make quite a bit of money. Especially if you were doing it with derivatives. That is a great strategy. There are many that could be applied. Today, we're going to explore a boring one: Re-balancing.
Selecting a basket.
This is no small feat. Many people would pull up a screener and begin going to town on fundamentals, reading news, and generally looking for data which would show a stock in our Biotech sector to either be developing "an un-fair advantage" or to "be significantly mispriced". That's ok. You SHOULD do that. Thats called research, and it should be the majority of what you do as a trader. It should be be even more-so as an investor. Today we cheated. Thats right.
We took a look at the Portfolio of Orbimed's top ten holdings, and decided to look at three stocks which in the last quarter Orbimed was bullish on. Orbimed chose to increase holdings of 3 companies. REGN, CI, VRTX, and we will use these 3 stocks as our basket today. Why? Because they're good stocks.
Prove it?
Done.

Now what is re-balancing and why does a trader care?
Rebalancing is a tool most commonly used by Investors. It is useful because it keeps an Investors Risk Management in correlation with their Risk Appetite. This is important, especially for long term holders. In a group as volatile as Biotech, it is even more important - as it lends well to to explosive compounding and can lead to wildly unbalanced portfolios in a relatively short time. One of my favorite examples of rebalancing (and the only one we will discuss here) is practiced by selling and buying based on risk thresholds. A threshold is set like so:

• Define a risk appetite (percentage of holdings to go into a given asset class)
  
• Define a risk factor (percentage of individual positions of a given sector of holdings)
  
• Manage risk (buy or sell from a position to meet the percentage guidance originally set)
  

I.E 33% REGN, 33% CI, 33% VRTX
Keep in mind you can overweight or underweight any position you choose. Afterall, it is your portfolio, and you are a trader!
Why do you care?
Following this set of principles gives the trader Long-term-guidance. This is one of the most overlooked portions of a traders strategy. There must be some form of long term guidance. This is why a trader should care. We looked at the stocks aforementioned and pointed out many points for which a trader could buy, or sell, to seemingly outperform the market. Likely, a good trader with good indicators trading in between earnings calls would indeed do well.
Now lets take a look at the long term.


To Be Continued....

2018년 1월 24일

노트

We now have a general-guidance to which we can trade with. The real question is what do we do with it?
Well this is where we put our trader hats on!

We know that we have times when we want to sell. We know that the INVESTOR would trigger his sells based on his portfolio growing to heavily in favor of a given asset. Thats fine, and that certainly applies to us as well - except, we are interested in timing our sales more than that.
So how do we define the timing? Well, if our threshhold is 27%-33% the Investor in us will be notified when any of the 3 stocks outperforms or underperforms the others. From there we have to make a decision. Do we trade our way out to reblance the portfolio to our percentage? Or do we begin plotting indicators?

Seen above... I have applied Fibonacci indicators using the rally local rally to decide when its time to sell or acquire. Now every trader must decide for themselves what to go by, but as you can see here if a trader were to initiate sells anytime the Fib crosses the 78.6% retrace, the portfolio owner would be VERY happy in the end.

The real trick is deciding when to buy right? ... well, whenever we are ripe with cash, and our portfolio is out of balance, one of our holdings will be below our risk appetite. It will REQUIRE a trade. From here, we can pick any strategy we want once again, to decide a strong time to acquire.

When to buy
This is probably the most difficult part of the whole thing. This is where traders often pull their hair out. Investors get scared at the top, and traders freak out at the bottoms. Why? Investors want to sell tops and hoard cash, and traders want to catch bottoms and ride the swing. This usually happens inversely - the Investor waits too long trying to find his top. The Trader pulls the trigger to early or too late looking for that absolute BEST buy-in. You could use fib-resistance arc's to look at the timing of getting back in :

Or various other methods.

My recommendation, is you let the Investor teach you about buying - and do it when you're sitting cash rich, and your portfolio needs to be rebalanced; by acquiring in the portion of your portfolio that is underweight for your risk appetite.

Thats a pretty boring trick, I know.


Thanks readers! I'll be taking this and applying it elsewhere soon!