I’ve been missing for a while from the blog; for that, I must apologize. For those of you on my unusual options alert service, we’ve been doing quite well I’d say.
But that’s beside the point. Tonight in my chat room I was reminded of a fun story that exemplifies what I’d call ‘designing’ a trade (or even engineering a trade).
Engineering a Trade
Last October, a good friend of mine was going for an interview to go work at a hedge fund. He wasn’t sure what to say at his interview so he straight up asked me if I had any advice.
Luckily for him, I was in the middle of engineering a trade that would shit a decent amount of my asset allocations towards a sector and out of a few currency trades. Talking about a prior trade prospect after it has come to fruition might seem like bragging.
I promise you that this is not an attempt at any sort of bragging. There are far better investors and traders than I am out there. I was just lucky enough to catch it earlier than most did.
Proof? It’s on StockTwits…somewhere.
But rather than bragging, which would require said ‘proof’, my goal with this article is to show you how I use narrative to pull-off successful trades.
The Trade: Health-Care in 2017; but why?
Well sure, Trump’s health care reforms could be said to be a catalyst. But he has also had a rhetoric of cutting drug prices.
So when my friend called me, I showed him and tried to explain the “engineered trade” that I thought was coming. I didn’t know if it would come through, but asset-wise…I got out of a good chunk of USD longs, including $UUP equity (beyond the forex and futures profit lock-ins). Then I stuck it in $XBI and a few of my favorite big pharma companies.
Here’s what I saw:
It’s a little cluttered, but the markings are there….and rather than fill this page with a ton of charts I’d figure I’d annotate and show you would what happened.
- The Mylan Epi-Pen pricing scandal begins, it starts dropping first.
- The pricing issues are aired out in Congress as drug pricing regulation spreads throughout the sector. Drug price slashing throws fear throughout the biotech sector.
- As the sector over-reacts, in-step with Mylan, the dollar hits one of the last surges of its super-bull run through 2016. For most drug companies, even if they have drugs manufactured outside of the U.S., most of them to sell their patented products require those sales to go through the U.S. or at least relative to the U.S. Dollar. This means that fewer people overseas can even afford to buy the brand-name drugs….reducing sales and thus earnings.
While $MYL is still greatly underperforming $XBI, the dollar has come down and $XBI has gone up. $MYL is no longer drawing eyes to drug pricing speculation. Trump is, with his opium crusade and general rhetoric about lowering the cost of healthcare…which include drug price cuts
The point is, building narrative around charts can be a very helpful thing. It adds in indicators that simply don’t exist.
It is the use of your mind to synthesize reasoning behind price-action beyond a game of pong. You don’t always need to do it, but I like to build narratives or look at the mainstream narrative and pick it apart before I take on a heavy position in my portfolio.
I’ve got a few more similar stories about narrative, including some ongoing narratives that I’m trying to decipher now. So stay tuned for those.
My friend claimed he explained the trade yet still didn’t the job; frankly, I think he pitched tickers which most fundies don’t to hear. As esoteric a pick as it may be, a good hedge fund manager has likely already been pitched that ticker 10 times. Tell them a narrative and you just might get some attention.
I hope he took the trade at-least.
You’ll be hearing from me a lot more here on out. Get ready. Hyped. Or stop reading my blog. Your choice…it all depends on how you like the narrative I guess.