We all know that Washington gamesmanship over the budget and debt ceiling has dominated the financial headlines over the past two weeks. And though the market has seen an increase in volatility since the Oct. 1 partial shutdown began, traders have been remarkably calm in the face of some potentially very serious political uncertainty.
Yet while the broader market has been resilient, with both the Dow and S&P 500 in positive territory since the shutdown began, there are more than a handful of market-leading stocks that have come under selling pressure.
The decline in popular, widely held momentum stocks certainly is understandable. No respectable hedge fund or portfolio manager wants to take a chance on letting their biggest winners take a dive, especially due to some type of exogenous circumstances such as political dysfunction.
In the investment business we call this "performance protection," and it's a powerful force that can definitely influence a trader's strategy, and how he or she looks at their current winning positions.
So, what stocks appear to be suffering from the performance protection trade?
In recent trade, we've seen substantive selling in market leaders such as Netflix (NFLX), Google (GOOG), Facebook (FB), Priceline.com (PCLN) and Pandora Media (NYSE:P) to name a few of the highest profile examples. These are the stocks that were hit particularly hard early last week when the wider Washington-induced sell-off took place.
Interestingly, these leaders didn't really bounce all that much during Thursday's big rally. This is a classic sign of the performance protection trade at work, and it tells us that the big money is becoming much more interested in locking in gains for the year than they are at chasing a little more performance in stocks that have had big runs.
Here are a few data points to illustrate the performance protection trade in action.
NFLX: +238% YTD; -0.9% since Oct. 1 close
GOOG: +23% YTD; -0.6% since Oct. 1 close
FB: +80% YTD; -1.8% since Oct. 1 close
PCLN: +60% YTD; -1.6% since Oct. 1 close
P: +168% YTD; -1.4% since Oct. 1 close
As you can see, each of these stocks has enjoyed substantive gains in 2013, yet each has been bogged down by selling and relative underperformance since the government shutdown shenanigans got under way.
The bottom line here is that if you own any of these high-fliers, or if you own stocks in sectors such as biotech that have enjoyed a big run this year and that also have come under pressure of late, then now may be time to reorient your thinking more along the lines of performance protection than performance chasing.
Finally, during times like these when you are potentially sitting on big winning positions, often the best strategy to follow is an old adage I learned back when I began working at a hedge fund in 1997: "A man never went broke taking profits."
If this mindset is the operative one of hedge fund and portfolio managers on Wall Street right now, then selling market-leading momentum stocks might be a way to get yourself in step with the big money.
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