29 Oct Ever been blindsided with a surprise announcement?
In Australia, we refer to this as being â€œKing hitâ€ from behind. Itâ€™s a cowards way of felling an enemy without facing them. And from time to time, thatâ€™s just how it feels in the markets when a surprise announcement hits. You get King Hit from behind!
Over 20 years, Iâ€™ve seen thousands of these events. Been on many myself too.
In fact, there has been a tragedy in Indonesia in the last 24 hours where Lion Air lost an aircraft shortly after take-off. There is no evidence just yet as to why. But the aircraft was a brand new Boeing 737 Max8. Less than a year old and with 800 hours of flying time. They donâ€™t get much newer than that.
This type of event, which is spectacularly tragic from the loss of human life, has also seen a dramatic drop in the share price of Boeing. Investor reactions have resulted in a 6.6% decline on Monday 29th Oct, over fears that this occurrence will result in cancellations for new orders and that there could be costly design problems with the aircraft.
Guess who recently entered a long (bought) position on Boeing (BA)? Yep, me!
The transport industry isnâ€™t my most highly traded sector. However, following their earnings announcement mid last week, and with the markets having declined approximately 10% over the previous two weeks, my analysis of BA suggested it was at a fair value (fundamentally and technically), and that with a positive report and outlook, a medium-term position to capitalize on a recovery was a sound position.
I entered a low risk approach, with a small position size. The outlook was for the next two months, with a price target towards $380.
Sure there are always concerns in the markets, and the position on BA was no exception. Some of the influences include;
- Trumps trade wars affecting Boeing exports
- Declining markets potentially affecting investor confidence
- Declining defence budget over several years
But the tragic announcement today is a blindside (king hit) that the most prudent of analysts/traders could never foresee.
So what action do you take when an extraordinary event like this occurs?
Each event needs to be considered on its own merit. In nearly all scenarios, we are referring to a sentimental market reaction. Not all the facts are out. New information will come to hand very quickly. Some will panic and sell (which has already pushed the price lower), while others will see this as a buying opportunity.
The questions you need to define answers for include:
- What is your management plan?
- Have you hit your predefined exit levels?
- How does this affect your portfolio management?
- Is this a short, medium or long-term position? Long-term you are most likely only going to react if this affects the fundamentals of the business
- Is there a fundamental shift in the company? Not just a sentimental market reaction.
- How severe has the market sentimental shift been?
Stocks tend to revert back to their â€˜averageâ€™ or normal price movement following large events. Unless there is a fundamental shift which forms a change in direction.
For the BA situation, it may take time for the evidence to be released and proper explanations to be provided. My course of action is to revise day by day. I am currently sitting just on the exit level. So tomorrows price movement will be critical in defining whether I continue to hold the position or exit.
It is reasonable to expect a sharp rebound in the stock price because this is a sentimental shift over a news event, and not yet evidence of a fundamental shift. We may not necessarily expect a recovery back to the previous price range. Not until the dust has settled and investors start to gain confidence again â€“ if at all. And that may not suit the time frame of the original trade. Hence, how I manage this position now is not with the same expectations as before.
Portfolio Management is also extremely important. A loss in a single position due to an extraordinary event, should not result in a massive decline in your portfolio. If it does, then you are not managing your available capital effectively.
If you are starting small and have little choice in how to distribute your funds, then there are strategies and methods to help reduce overexposure. If you would like to know more, be in contact as I have worked with many investors starting with smaller capital bases.