If you're going to dance among the hedge fund elephants you better be nimble. That's the basic thinking of Allstartcharts.com and founder of Eagle Bay Capital J.C. Parets as he tries to make money for his clients by trading shares of Herbalife (HLF).
A quick refresher course on Herbalife might be in order. Last December billionaire investor Bill Ackman announced he was shorting the shares of nutritional supplement (?) company Herbalife. Ackman maintains the company is a pyramid scheme and believes the stock will go to zero. Putting his money where his mouth is, Ackman announced that he was short 20% of HLF's float and wouldn't cover a single share.
Ackman has plenty of enemies on Wall Street and they were quick to pounce. Among those enemies is billionaire Carl Ichan who famously went on CNBC and suggested Ackman was exposing himself to "the mother of all short squeezes." With Ackman sitting on so many shares on the short side, Icahn and other Wall Street "whales" pounced, buying up Herbalife shares and "squeezing" Herbalife higher while Ackman squirmed.
Whether or not Herbalife is corrupt is debatable. For Parets what matters is that all those buyers create an upward pressure on the shares. As a technical trader Parets is indifferent to the fundamentals. "They sell vitamins?" he scoffs in the attached video. "Who cares what it is. It's a stock."
With the risk - reward equation skewed towards Herbalife moving higher, Parets wants to be long. That said there's a chance Ackman is right in which case Herbalife shares could plummet.
Parets' goal is to capture as much of Herbalife's gains without overstaying his welcome. "I just want to go along for the ride and be as big as possible while at the same time managing risk." He manages said risk by paying attention to technical levels, betting on when other traders could be looking to take profits or when the market is susceptible to a pullback.
By way of example Herbalife reached it's previous all-time high just before last week's FOMC meeting. Anticipating a rise, Parets bought both common stocks and calls up until the stock got to resistance. With the Fed meeting ahead Parets took gains, not wanting to be exposed to potential volatility unrelated to Herbalife itself.
The strategy worked big. He's still keying off those all-time highs in the $73 mark for Herbalife. If Herbalife can rise into the mid-70's for a sustained period, "the book" on technical trading suggests chartists will be buyers. Parets will be among that group.
Until then he waits. For a chartist it's all about the odds. Right now the mother of all short sqeezes is still playing out as a trade, but not an investment. Trading with the whales is about risk and reward. Getting out alive means staying nimble like Icahn instead of stuck like Ackman is, at least for now.
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