Schaeffer's traders have timed the tech rally this summer perfectly
Subscribers to Chart of the Week received this commentary on Sunday, July 16.
The Hot Hand fallacy is a cognitive social bias that was highlighted in the Big Short, the cautionary tale about the 2008 financial crisis. While there can be a hot hand in sports, it’s certainly a fallacy in the investing world. Nevertheless, I thought of the hot hand fallacy after finding out that since May 15, 33 Schaeffer’s trades have been closed with a doubled profit or better. Is this recent string of successful trades just variance (hot hands), or a series of well-timed moves that when unpacked, can help educate an investor about the current state of the stock market?
Behavioral economics attribute the Hot Hand fallacy to the representative heuristic; a mental shortcut commonly used to simplify problems and avoid cognitive overload. Our Expectational Analysis (EA) pools fundamental and technical analysis with sentiment to identify contrarian angles. With EA, there doesn’t seem to be a lot of shortcut-taking in the researching of stock picks, even if the intended result is a ‘short-cut’ to profit with options.
The 29 winning trades highlight the variety of strategies options traders can deploy. There are straight buys, debit spreads, and straddles all a part of the month of gains. Most of the trades with the biggest returns were call options in the tech area, such as Netflix (NFLX), Taiwan Semiconductor (TSM), Oracle (ORCL), and Marvell Technology (MRVL). As referenced in this space repeatedly, tech was among the most hated sectors coming into 2023 and remains an underloved group with a lot of contrarian potential.
Consider what the Wall Street strategists and hedge fund gurus were saying about tech just a few months ago. Headlines like ‘BofA Says Investors Are Fleeing Tech Stocks After ‘Baby Bubble,’ ‘ and ‘Hedge funds slash bets on US stocks after tech-led rally and pivot to Europe’ look awfully silly as the tech sector continues to simmer. The graphic below is a screenshot of Wall Street commentary from some of the best and brightest big bank strategists.
We kept receipts from the start of 2023 as well. Per the Wall Street Journal in January, “Aggregate sales growth for megacap technology stocks is forecast to have risen 8% in 2022, below the 13% growth for the broader index. ‘I just don’t think the prior regime’s winners are going to be tomorrow’s winners,’ noted an chief investment officer of Eaton Vance Equity. ‘They’re still too expensive.’ ” That same article also noted November 2022 was the largest outflow of mutual and exchange-traded funds tracking tech since 1993.
Of those 33 trades, 15 were closed between 200% and 485%, implying the reward on those gains was double the maximum loss. Traders weren’t on a ‘hot-hand,’ they were on the right side of the tech rotation as ‘smart money’ were caught flat-footed or even betting against melt-up scenarios.
