Ep. 305 Protect Your AI Bets From Destruction: Why Hedging Matters For All Traders
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Justin Nielsen, your host, and it is January 29th, 2025. It's a Wednesday. We're coming to you live on YouTube as we do every Wednesday, live at 5 Eastern. So it's going to be a very interesting discussion today because we had a little bit of a destruction happen on Monday, but helping us walk through it and some strategies that you might be employing in order to protect yourself and

This is kind of our protection episode. We've got Matt Caruso coming back on the show. Matt, of course, is the CEO of Caruso Insights, which has a lot of educational information and, yeah, really kind of walks people through how to...

do a lot of things in terms of investing. So welcome back to the show, Matt. Thanks so much for having me. It's always a pleasure, Justin, every time. Absolutely. A pleasure having you. I always say that you hold a special place in my heart because it seemed like a lot of times when it was like my first time doing the podcast on my own, you were the guest. And it was like, oh, this is easy. If all the guests are like this, this is going to be no problem. And then when we went live, you were the first one. It's like every time we're doing something interesting, we're

or new, you seem to be there. So we appreciate you always making it easy on me. You got it. That's what I'm here for. Okay. Well, let's get right into it. I'm going to go ahead and share my screen and we can talk a little bit about, you know, just to kind of open this up, that

Monday was ugly, you know, and look, we had we had this ugly day on December 18th, which, you know, was after the Fed. And, you know, we had a Fed day today. So maybe we can talk a little bit about that later. But the interesting thing about this one was how.

how quick and how ugly it got for certain segments of stocks. And I'm talking about some 20% losses in just a nanosecond. So let's talk a little bit, of course, you know, the news over the weekend. I mean, this actually came out Friday was about deep seek from China and

You know, AI has been the theme here. So a lot of people were looking at deep seek and, you know, some of the claims that they were making in terms of how they were able to do almost as good as chat GPT and open AI with a fraction of the cost. And for a lot of people that kind of shook them, you know, saying, oh, we have to change our models of how much people are going to need to spend on software.

the power grid, the energy efficiencies, the, the, you know, cooling, the chips, um, all of those things. It's like, maybe, maybe if it's really efficient, they're not going to need as much. So what was your take? Um, when you, uh, you know, we're, we're ready to start trading on Monday and things had shifted so violently.

Well, this was like just a good reminder where what the market's going to do and what's rational are two different things. So much in the market, this is from my kind of also my experience as a market maker for many years is when news hits, when something changes, so much depends on positioning more than what the fundamentals are. Because especially when everyone's very long, very concentrated, it's sell first, ask questions later. Everyone knows there's only so much liquidity to exit.

There's people who are going to actually even press on that to try and take advantage of people who are caught off guard. So it's going to be a fast move. So I think you have to kind of approach it in two different ways. One is what are the real implications of what's going on? I mean, like past 1030 a.m., like what should I think going forward into the future? And really, like, what's my battle plan going in at the market open? Those are the two different things.

So for myself, and I know we're going to get into that a little bit later, but especially when stocks start to get extended, this is also a really good reminder. It's not really the past earnings, past sales that matter. I mean, we use those to find companies that are doing well and performing. But so much of what's in the current stock price is all future assumptions based. And the more stock…

rips to the upside it keeps going and going and gets extended well they're they're cooking in some pretty you know um excited assumptions into that stock so if anything comes out that challenges those assumptions and not like just someone's opinion but something like this that can really rock the boat that really does have the potential for a dramatic move so that's what we saw it was just it was amazing i think i read somewhere that the drop on the on nvidia was the largest one day market cap drop of a stock in history obviously you know that's

Yeah, no, no. And again – It used to be, but it was a wild move. As you're getting multi-trillion dollar stocks – Yeah, exactly. A percentage – I mean, let's just put this in perspective. It was a – if I can get there – 17%, I think. Yeah. So almost 17%. And once you get to be a few trillion, yeah, that's going to leave a mark. Yeah.

Well, and, you know, before we get too far, you know, because you brought up extended and I also completely agree with you again. You know, some of this valuation and, you know, the speculation of what the future holds. I mean, this is a this is an issue with earnings reports, too, right? If people are looking at guidance and then you all of a sudden come out and you change your guidance or, you know, something shifts in the earnings report.

We get those four times a year for every company, and it can really kind of change how things look. So I guess there is this, you know, you mentioned especially being careful when things get extended. So can you define what extended means to you? So it's a couple of metrics, but I always like my work always centers around trying to simplify things. So one of my favorite tools is really just the distance from the 50-day average or the 10-week average.

What's interesting is every stock really has its own flavor of that. The more volatile stocks will get more extended, the less volatile stocks less extended. But in this case, it's interesting because NVIDIA had already been somewhat lagging compared to some other stocks. But if you bring up stocks like CLS or GEV, you have to look at your stock individually and you also have to look at the group that it's in. Because sometimes there's the pressure on the individual stock, but there'll also be the group pressure. So if

Even if your stock is not participating tremendously, like NVIDIA was kind of lagging, but it was part of that AI group. So if the group it's associated with is very extended on its own, that's something you also have to pay attention to. So for me, that's my favorite metric. I have some others. I like to use Keltner channels, which is a technical tool, which is similar to Bollinger Bands. That's another one of my favorites. But just to keep it simple, to highlight the important deviations, it's really that distance from the 50-day milestone.

is my primary way to do it. Yeah. And certainly one of the things about Keltner channels or Bollinger bands is you kind of have this, you know, this envelope of, of the norm, right? Standard deviation, you know, whatever you're using as your metric that kind of lets you know when you're at the, at the top of it. Yeah. You're a little bit, you know, extended from the norm. And when you're, you know, lower in that envelope, you're maybe a little bit, you know,

I guess that's more important for like mean reversion type trades, but I guess there's also the other, the other thing. Sometimes these stocks, if you, if you're just looking at those channels sometimes and you're like, Oh, it's at the top of this channel. Some of these can go well above where you think they can. And on the flip side, they can go well below some of these channels. So like, how do you, how do you kind of handle that when, when,

things, you know, are already beyond their norm and then they get even more so. That's something that was always, I think it's a struggle for most growth investors because, you know, we're really, we're investing in these companies because we think they're disruptive and they have all this potential. So as it's going up, it's kind of confirming what your thoughts were, but at the same time, it's becoming susceptible to these drops. So

you kind of put in this cash 22 situation if i sell the stock because it's extended i miss out on the upside but then i i can avoid the drops so for myself the way i've kind of gotten around it is there's really a couple of of questions i ask myself when i when i see a stock getting extended is one do i see a runway for for much more is the stock acting well or is this later is this showing like climactic top action or even like the valuations getting very extreme based on let's say there's no fundamentals like for example the quantum stocks and the rest yeah but

But also for me, the only way that I was able to kind of have my cake and eat it too was two options. So I'm not a big options trader. But in this case here, I like to keep it very simple. I think of buying a put as if buying insurance. And the good thing about the way a lot of these leading stocks act is

is it's you know it's always like the saying stairs up and elevator down right that lends itself very well to options because options you want to protect against a quick drop because because you only want to be in options when you feel you're susceptible to a drop because obviously like like any insurance it's expensive to have insurance for no reason and so that's the way i've been able to kind of mitigate that so for example like i had palantir you know uh in q4 last year and

I forget the price of sales that we finally got up to. It was like 70 times price of sales, which is a crazy number. And I eventually sold it into strength. But on that breakout, especially after earnings, when you have a catalyst, you want to give it chance, time to really work. So if you see November, we had that breakaway move. You know, it was really only once I started getting up near 70 plus dollars that I start to kind of decide to kind of take the money and run. But yeah.

Along the way, the way I mitigate that, if I feel there's really some extension, I'll buy some puts a little bit out of the money. That way the cost is not too expensive. But if we get a surprise drop like Monday, I can survive. One, it's not as painful. And two, it gives me time to kind of figure out what next steps are. Is what happened real? Is this just a short-term positioning? Is it a news event that's passing and we can go back the other way? So I've really...

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Right. And so let's kind of break this down a little bit because, again, this really does come to that protection side of things. A lot of people are so focused on offense and how can I get more money out of this stock? They don't think about the drawdown side. That can be –

That can be devastating sometimes where you're making all this money, but what good does it do you if you don't keep it? So you mentioned that you're using options, you're using puts. So are you just buying a straight put or are you doing spread trades or anything like that?

I like to keep it for me. It's more about the timing of when to put the options on because they didn't want to. So it's kind of a straight put buying. And I think it's important because I said a client call. We were talking about this subject actually just this past weekend. So it was unfortunately good timing. I was just saying like when when you're on the trading desk, when I was earlier in my career, a lot of desks focus on bar, which is no value at risk, which is a one day metric. Like what's what's a really one day bad event that can kind of come and hit you?

And that's something you need to think about because if it's a multi-day type of process, you have time to work off your positions. Like if let's say, you know, you think the trend is changing, you say, okay, you know, I can start to eliminate this stock. It's in those dramatic one day moves where you don't have a lot of time for positioning that it's just so dangerous. So that's why I like to just buy puts when things are extended because that's when you're at most risk for those very quick drops to come against you. Right. And so are you looking, you mentioned that

A lot of times you're looking at slightly in the money. So are you kind of going for like a 50 Delta? Do you have kind of a rule of thumb in terms of that? And then also what kind of time horizon are you giving yourself? Because of course, if you're, if you're going with a weekly option, that might be appropriate. If you just need short-term protection for an earnings announcement, but if it's like, Oh, this is extended. And I could see this having to do a base that lasts seven to eight weeks, then,

well, then you might need to get a little bit further out. So do you have any kind of set rules or are you just kind of going by feel and your knowledge of where the premiums are in relation to your size? So I think it's important. I primarily want to use this approach for a stock that I think has the capability of going for an extended advance, like a real typical IBD, like a leading type of stock. And so if you look back at a lot of some of the best advancers over time, they always have these very quick advances

five to 15 days steep pullbacks that will take place. They can be 10 to 25% is like a normal type of scary pullback that will come up from time to time. So that's kind of how I structured myself. So I like to buy puts that are about 10% out of the money, so a little bit lower, so it makes it cheaper. And about two to three weeks out because it's really about

It's not about protecting every downside dollar. We're in the market. The market's risky. That's what we're there for. Like you mentioned, if you're always, you know, we were talking before the call, if you're always hedged, there's no point in even being in stock anymore at a certain point. Right. But it's really about, OK, if I buy protection, I say 10 percent of the money.

There's a couple of situations that the stock kind of just consolidates calmly or comes down 5%. Everything is fine at a small cost of insurance. But if there's a more dramatic pullback, like we saw on Monday, that's really where a lot of the value comes in. And you can think clearly and then you can adapt to the situation.

Yeah. And I think that's a huge part because a lot of times it's, it's almost more about being able to think clearly, you know, because look, if you're, if you're very heavily invested and you have a situation like Monday, you know, on that opening bell, it's really hard to not be emotional and just say, Oh, here's how much I'm losing. Here's the dollar amount. And that's,

That's a lot. That was unexpected. And if it just kind of takes a little bit of that pressure off, then you don't feel like you have to fire sale. I started my career in 2008, like January 2008. So I was kind of, you know, after them by fire, like they say, how bad things can get, you know, and

In a way, it's a blessing because what I learned early on was like never freeze. Even if you're uncertain, do some selling, take some action because it kind of unlocks your nervousness or just that feeling to kind of I don't know what to do when you lock up and then you really miss the opportunities that you should be focused on. So I was even sending some pre-market client emails out saying like, hey, take action and breathe, think clearly, and then after take action and just make sure you keep moving and thinking clearly. That's...

It's almost like a combat scenario. You have to really keep your head about yourself so that you can keep moving because it's a very natural human reaction to freeze up. There was a great book I was reading from a trader turned, I think neurosurgeon or neuroscientist about just how all of...

There's so many physical elements and chemical reactions in our body. Cortisol gets released and stuff that really physically will work against us. And, you know, we don't want that to happen, but it's just a natural part of being in the market. So you really need a process to break that, you know, to fight against your natural instinct.

Yeah. And I mean, you know, to that point, this is why I think behavioral economics is so fascinating. The fact that you had Kahneman and Tversky do such groundbreaking work in economics when they were psychologists, you know, it was like, oh, OK, you got the way you're a psychologist, Kahneman, and he got the Nobel Prize for economics. How did that happen? But

But you read their stuff and it's like, oh, okay. Yeah, I see why. Because again, not only are you battling those chemicals, the cortisol and everything else, but just in the way that you frame things sometimes makes a difference. The math might be the same, but the way that you frame it hits a psychological chord. And what we do here is so unnatural from so much else we do in our day-to-day lives. You really need a...

A real process that's simple to use, that's pre-planned for what is some really unlikely scenarios that I've just found over my career happen a lot more often than statistics say they should happen. They happen pretty often. It's like I feel every –

two years or some kind of catastrophe that's only supposed to happen every once every hundred years. But yeah, right. Yeah. Yeah. I, I started, I started trading in 97. I was told that, you know, the.com, you know, bubble was a once in a lifetime thing. Then I was told that in 2008, Hey, don't, this is a once in a lifetime thing. And then of course, you know, COVID happened and it's like, you know, I've, I've had three once in a lifetime things at least here. Um,

Um, so I'm not sure what that means. Um, but, uh, you know, I, I want to get a little bit more into this kind of, you know, portfolio construction because, um, you know, on the one side you might get some positions that are, that are very heavy. Um, you know, but you know, are you looking at your, are you ever looking at protecting your portfolio as a whole with something like, um, you know,

SQQQ or something that's kind of index related or a little bit broader so that you're maybe getting some protection from not just a single stock, but more for your entire portfolio. So because I've always run more concentrated types of portfolios, I've never liked that because I've just time and time again, especially when

It's a specific group or theme that gets hit. It could be surprising how little – I mean in this case here, the NASDAQ fell just because of NVIDIA pretty much. It was a heavy weight that dragged it down.

But if not, if you just would have had some other component names like a Celestica or a Sienna and they're down 20, 25% and you're sitting in an SQQ and that is up 1%, it's really like an imperfect hedge. So especially like I said, early in my career, so many of the things were always very niche different strategies and things. So like the global hedge...

in that perspective doesn't work well unless you also have like an evenly broad portfolio so like the head always has to really match like what you know what you're trying to do so well you know the way i like to be difficult yeah it can be very difficult it can that's why you know so i mean so now there's a lot of these these kind of like individual stock inverse etf stocks that are listed like you know inverse tesla or whatever if you people can can do as well but um

For me, what I like to focus on is what's the risk for the stock? What's the risk for the theme? And what is just overall portfolio exposure? You know, like even if a stock is very risky, it's very extended, but I'm 70% in cash. Well, you know, the majority of assets are protected in cash. They're not exposed. It's kind of like the speed of a car. You know, the faster you go, the exponential the impact will be. It's not like a one-for-one relationship. So as you kind of get into concentration and exposure, you're

If you're on margin and you're concentrated, well, if something goes wrong, it's going to be like much, much more painful than if you just have, you know, an under-invested broad portfolio. So that's the way I like to always frame and look at the big picture along with the individual stocks. Yeah. And so let's talk a little bit about, you know, just so people kind of understand your mechanics here. Yeah.

You're very comfortable or at least you're comfortable mitigating the risk that comes with very concentrated positions. You've kind of I'm sure probably worked your way up to that. You know, sometimes that's that takes some some getting used to how how concentrated do you get in in a single stock?

it's definitely a tolerance thing and it's really not a one size fits all like for everyone, what may feel concentrated for one doesn't for someone else. Absolutely. Yeah. But for myself, once I get to about like, like 50% of the account in one stock, I start to feel the heat a little bit, you know, anything over that, I'm only going to be in, in excess of 50% if I have hedges on or there's like really like a very tight stop on it. Like I,

like recent ads that are working in my favor. So like most recently going into Monday, I had GEV, which was a big, because I'd been working on that since last August, I've been building that position. And so that was originally like about a 40% position. But then after through December, as we were so strong and I saw all the kind of the news building in favor of it, that became like a 70% plus position for me.

So that was like a really sizable position. But as we were getting into earnings season, I had to hedge for earnings. And after once earnings passed just a few days ago, fortunately I saw, Hey, this is now fairly extended. Um,

And earnings weren't like a blow out of the park type of earnings. So to me, this was susceptible for a move back down to the 50. Didn't think it was going to happen in one day. I did buy like about one month out. Again, I was using the model of how a lot of these stocks will tend to have this two to three week pullback down to a key average. And that's how I was able to kind of really protect what was a big position in

And I probably wouldn't have been – in this case here, being so aggressive kind of helped because if it was a smaller position, I probably would not have hedged to the same degree. It was really having that concentration really pushed me to make sure I had the protection in case of a worse case. So although Monday wasn't very nice, it wasn't as bad as maybe someone would have thought if they just saw the positioning. Yeah.

Yeah. And look, you know, just in full, full transparency here, I had GEV. I wasn't hedged. It was a little bit of a smaller position. So for me and I'm using a cash account, retirement accounts a lot. So for me, a lot of times it just makes a little bit more sense for me to just raise cash.

But, you know, I got whacked, you know, and not just from this, but I had VST as well. I had, you know, MTZ, which is in a, you know, heavy construction. But that was down, you know, however much it was down. So how much, again, a lot of times I kind of think of it as getting to my sleeping point, you know, where, oh, okay, this is...

you know, for, for a normal move, um, I'm going to be able to kind of withstand it. Of course, this was a very abnormal move down 20%. Um, but what level of hedge did you have to do to kind of get yourself to that, uh, level of comfort? Uh, did you hedge the whole thing or half? And that was enough, uh, especially for a, uh, a position that large.

So that's why. So a lot of things come into it that you want to start to think of as you're working your position. It seems like it is a very big position that built up only over time, slowly. But there was one reason for that as well as being a GEV, you know, $100 billion position.

It's a spinoff off of General Electric. It's a very institutional grade type of company. I would not have that positioning in a small cap that has a software with very little revenue. I think that makes a big difference because one is what is a worst case scenario is going to be much less. And also the cost to hedge, the cost to buy puts is much less expensive on a GE or Nova than it would be for one of these volatile small caps. So it makes it reasonable.

So, so one of the benefits sometimes, yeah, exactly. Through some of those spreads, uh, because there's, there's two elements, right? There's that implied volatility. That is one of the metrics that goes into the option premium, but there's also the liquidity. If you don't have much liquidity, uh, it's hard to get, you know, people to step up market makers to kind of take that risk. And so you can have a very wide spread because they're like, okay, I need to get paid if I'm going to be taking this risk. Uh,

as you well know as a former market maker. I think that's why it's a good example because...

you know, um, this is, this is an extreme example in terms of concentration for me, even for, by, by my, usually for me, what's comfortable is like a 20, 25% position in the stock. That's, that's like where I feel like I want to be heavily invested. And that there, I feel like, okay, let's let the stock work at this point. Like it's very abnormal for me to have this type of concentration. And, and one of the reasons was because of the profile of the company and to the cost of protection is very inexpensive. So, uh,

So this had gapped up to around 430 after earnings. I was long the 415 puts. And this is an interesting kind of benefit of hedging as well, where you could kind of turn around and be more aggressive, is after that big drop,

you know, I had a big profit on my puts. So I was able to kind of like harvest those and de facto lower the average cost basis of my trade. Right. But once that drop happens in this kind of a scenario, then you ask yourself, like, what do you think the future is of the stock? If you still like it, you basically get...

to lower your average cost and then sit in the same position and, you know, hopefully ride the stock higher a second time. So that big drop actually gave me like a really good opportunity because it kind of happened so quickly and I had that hedge on. So there's, you know, hedging, a lot of people think of it as kind of like, oh, it'll reduce profitability, you know,

You know, it goes against my stated goal, but done properly rather than panic when the pullback happens. I mean, how many times have you said like, oh, if it gets down to that 50 day, I'd love to buy the stock and then it gets to the 50 day. But so is every other stock. And you're in panic saying, wow, I have to start selling stocks. Yeah. And you sell the stock you want to buy it. And looking back, say, oh, why didn't I buy that stock? So.

I've found that hedging can oftentimes actually increase profitability because it has you do the right thing at the right time versus that negative emotional reaction at the wrong time. Yeah, absolutely. Now, let's talk a little bit also because –

Again, I think you addressed very well how you had a large position on this. It was extended. I mean, GE Vernova just looked extended, right? It had been kind of ramping up. I mean, we can take a look real quick at some of the metrics here. It was, what, 25% extended?

Yeah, for a utility rate company, that's very extended. Yeah. So yeah, 25% above that 50-day moving average line that you mentioned as one of your metrics. So yeah. But let's also kind of talk about we're in earnings season. So what's your kind of playbook for earnings? I mean, we had a whole host of them. I personally have a little bit of now, ServiceNow. Not

not down as much as it was. It was down like 10%, 11%. But, you know, I have a smaller position on this. So, 3% position. I,

I'm not going to cry to anyone, you know, a 10%, I can, I can withstand that. So with something like this, I mean, this was kind of looking, I mean, it was a strong move out here. Um, but how, how do you kind of do the earnings, um, protection, uh, especially since this is something that comes around again, four times a year for every stock. Um, and yeah,

What do you do? So you really need to, like you said, you can't ignore it because it's always going to be back. I mean, there's even stocks in between those four times. You're almost always dealing with some kind of an earnings report. And if you look actually at 2024, like Salesforce.com fell 21% on earnings, which was, I mean, Dow Jones components. If you look at, yeah, last May,

And even if you look at Palo Alto Networks, P-A-N-W, that had like almost a 30% drop last February. Yeah, this was right here. That was a one night overnight. And this was, again, like $100 billion plus company. If $100 billion plus company in a Dow component can drop 20% to 30% overnight…

you know, it really has to make you rethink what's possible. I think part of it is HFTs and algos are more violent than what it's ever been before and all that kind of thing. So again, HDFs, you mean like high frequency? High frequency trading. Yeah. That's right. So they really will kind of pounce on a stock of weakness and exaggerate moves in both directions. So yeah,

The first question I always look at is what percentage of my account does it represent? Like you said, if it's 3%, you can't get too hurt. It's not that big a deal. In that case, I'll ask myself, do I have enough of a profit to at least withstand the expected move? Like the options market will always show the expected move, whether it's 7% or 10% gives you an idea.

And do I have a profit to pay for that? So if I'm up only 3% and there's a 10% expected move, I kind of feel like I'm just like rolling the dice on this outcome. Right. And let's just real quickly define expected move. So again, you can use the options market to kind of say, okay, this is what the expectation is in terms of the implied volatility. You know, a lot of times it's the cost of the straddle. So you just take the at the money,

call, add the at the money put the premiums of both. And that kind of gives you a sense of the expected move. You go with the nearest expiration to your event, I guess. And so do you, you know, some people apply a factor to that. What do you do to kind of come up with your expected move?

I usually will rely on that. I figure the options market, they're pretty efficient. Their businesses, they're like the insurance underwriters. They have a better idea of how to do it than me. That's not my specialty, so I defer to them. But again, if they're going to be wrong, I need to know what my exposure to the stock is. How painful will it be for me? If it's a 5% position, it's not a big problem if they're wrong, but if

You're in Salesforce or Palo Alto and they fall many multiples of the expectation. It's a 25% position. It's a big problem. So whenever I get past really like the 10% of my portfolio, again, I want to buy puts like at the money puts before earnings if I have enough profit to cover it. The way I like to teach it is picture yourself as a business person running a business and you have this big risk event coming up. You're going to sit down, do the math. I mean no one –

taking an insurance on their home, like fire insurance or earth, which is because like, I don't feel like paying the, you know, you say, no, this is a valuable asset to me. I have this potential risk event that's coming up. I want to, I want to hedge against it. I want to make sure that I have insurance. That's the way I view earnings reports because it's just, you know, you have this big gap down and then again, there's, there's the capital loss. There's the mental frustration. So for me, it's every quarter, it's an opportunity to reassess my portfolio. If I have a stock that it costs 4%,

to insure it with a put. If I don't feel there's more than 4% upside in the next 90 days in this company, why would I be holding it through this risk event in the first place? And if I don't have more than a 4% or 5% profit to pay for that, why would I hold this position in the first place? So I try and take off my trader's hat and just put on a business person's hat and be like, okay, well, dealing with this uncertain situation, how do we look at these outcomes? And that's the way I approach it.

Well, and so one other aspect here, you know, I feel like especially in the last couple of years, we've seen, you know, and look, this has been really since regulation, fair disclosure came out in the aughts, you know, earnings, just sometimes the moves are just so much more. Yeah.

Now that we've got these trillion dollar companies, you know, you would think, oh, well, you know, you're not going to move a trillion dollar company. But I mean, we saw, you know, we've seen them like up 20 percent or more on earnings sometimes or down, you know, that much. And so I guess the you know, the question here is like for for some of these companies.

for some of these stocks, it seemed like the only time they moved was on earnings. It was almost like they would move on earnings and then not do anything much until the next earnings report. They're so frustrating. You know, they're so frustrating. Yeah. So if you're hedged, you know, and you kind of don't participate in the move as much, you know, then it is, does it become like, what, what's the point or how do you kind of avoid that situation where it's like, or is that just kind of knowing your stock, the personality? Yeah.

Yeah, well, it's like when I mean hedge, like if you buy a put, you're paying the cost of insurance, but you get the upside. You get the upside less the put. So if it's one of those like they gap up, do nothing, gap up, do nothing. Well, at least if you're just paying your insurance, you're getting the gap up less the cost of insurance. So there's that. But for me, that's part of also going into the report. If I don't have a profit, once you kind of put these small rules into your process and like they should be very simple. Once you have these small rules, like if you don't have enough –

to pay for the insurance for this company, probably it's one of those stocks that you just mentioned. It's just reacting to earnings. So then basically you're just taking on a lot of... You may think you know what's going to come, but really you're rolling the dice because no one really knows. Nothing good doesn't have consequences. Reg FD was great intention. Everyone gets the information at the same time, but now we have to deal with these 10% to 30% moves up and down. But it's a reality that we...

have to really address because it's just way too dangerous not to. Yeah, that's awesome. So any kind of closing thoughts on the protection side of things? I think you've covered, again, what you do when you do it. So again, whether it's extended or earnings related or just a size issue where you feel like you need that protection. Any kind of closing thoughts on the protection side of things?

I think it's just look at it again more from an insurance perspective. Keep it simple because options can be very overwhelming. Even if you look up education, it could be do we put on this spread and this calendar and diagonal. Or in the Greeks. Pay off charts. And you're like, what are they talking about? So I just really try and simplify it. Everything we should do should be as simple as possible and no simpler. And just really say, how can I protect myself against these events? Either I've got to scale down to an appropriate size or…

Or I need to just buy a simple put and then factor that cost into the cost of doing business. That's the way I do it. And keep it very simple. And that way you can sleep at night and not have to worry about those outliers that like Monday or just general earnings that can really knock in your portfolio. Yeah.

Yeah. I should also mention that you do have a seminar coming up or a workshop this weekend. So you're going to basically be talking about a lot of things in your hedging strategy. Where can people kind of get that information? Yeah, that's at carusoinsights.com. And again, the real point is kind of to teach it as a stock investor using options for protection rather than

Options and stock investors totally lost. So it's right. Yeah. Yeah. The implementation of everything we're talking about is really options for stock investors. Yeah, exactly. So let's go and shift gears.

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a little bit, because I do want to kind of cover a little bit more about the current market. And, you know, one of the first questions I have, again, when you see kind of this bad break here that we had on December 18th, kind of a fairly ugly day here on the beginning of January, and then again, another one. Does this ever give you a sense in terms of the market that we just might be –

in kind of a choppy period? And does that kind of influence how you're going to approach things? Or is it, you know, are you just more focused on your individual stocks versus the indexes?

So again, I think you know Ralph Acampora. You've had him on the show in the past. He called him the godfather of technical analysis. Early in my career, he would tell me, you know, Matt, people love these top-down tools. He's like, I'm a bottom-up guy. I like to look at all the individual stocks instead of just look at the index. And that was a big impression because up until that point, I hadn't looked at it that way. So,

I like to approach it both ways, but sometimes the index like this can look so choppy, so directionless, but underneath the surface, when you go stock by stock, it's really a matter of some groups are very strong, some groups are very weak. And so there's still opportunities. And other times there's a – the market that the indexes are choppy and just things just look awful everywhere. So it kind of depends the context of what you're doing. Yeah.

To dive in a little bit deeper, if you look at all the – IBD does a great job with Marketsmith. You can look by industry group. If you're looking at the top groups and there's many of them from different themes and there's a lot of great companies, well, there's opportunity out there. I mean like as bad as Monday was, it's like you instantly saw some new themes take center stage, some new stocks pushed to new highs. If it was a breaking down of the market, let's say like COVID and COVID,

March of 2020, like everything was breaking down together. It wasn't there wasn't a rotation that was running for the exits. But, you know, suddenly we saw here a lot of stocks doing well. So to me, this is a market that's adjusting. There's a lot of uncertainties with inflation in the Fed still, you know, President Trump with tariffs and AI. It's just people rotating, not sure where to go. But it still seems very much like a positive risk on environment. Just need to be in the right places.

Yeah, to that point, I mean, you know, XLP on Monday, the consumer staples was up, you know, tremendously, which, again, you would normally expect that, okay, there's fear, people go hide in kind of the staples that are a little bit more stable and everything. But then, you know, the next day it was down pretty considerably. It was kind of like, oh, I guess maybe they weren't interested in that. And then you also had...

You know, just one of the things we've been talking about on IBD Live is, I mean, RSP, which is the equal weighted S&P 500. Well, first of all, the S&P 500 just came down to its 50-day moving average line. And then RSP...

really held up well. I mean, this just looks like a run-of-the-mill kind of tight area. You don't even see the drop on the equal-weighted S&P 500, kind of telling you how this was very targeted. In fact, on Monday, advancers outnumbered decliners on the NYSE. So it was very strange how, again, this

The heavyweights, the trillion-dollar companies of NVIDIA were targeted and really kind of brought the indexes down. But there were a lot of stocks out there that looked just fine. I agree. I mean, if you look at MDY, which is like mid-caps, IWM, which are small caps, if it was a really bad break of the market in general, I mean, they're not doing phenomenally, but you didn't see bad breaks in the broader groups. Right.

So for me, it was more of a people said, oh, we have this concern about NVIDIA. Where can I put my money? Where else in the market? I want to be invested. I just maybe want to rethink NVIDIA at this moment. So to me, that's a very, I think, strong. I mean, to withstand a hit to what was kind of like the general for the past couple of years and the market bounce back. To me, that's a tremendous amount of strength. So I think the market's positioning very strongly here. And it's just a matter of just, you know,

being able to move around with these rotations. Yeah. Very different. Like again, December 18th, you know,

All of these indexes were, you know, were down a lot more. It was kind of a universal break on these as opposed to this where it was very, very fractured and bifurcated. You know, like if you can avoid the if you can avoid or minimize, you know, the losses on those drops, they are the best time to analyze the market because all the next key themes are going to show up during those week periods. Like if we go back to GEV just real quick.

Like the reason like I was already long from last, what was it, August, September as it was coming out of that first base. If you look through that like December period when the market was getting whacked, like this was starting to work itself already back to 52-week highs. Like that end of December, early January. So this was very strong when the rest of the market was very weak in the middle to late December. So just so, you know, looking at…

What happened on Monday in the past couple of days, one day doesn't make a new trend, but you really want to be attentive to who can push to new highs because if you can stay strong when the market's weak...

That is the – I would say it doesn't matter what opinions are. If a stock doesn't sell off when the market sells off over a persistent period of time, that's a tremendously strong stock. There's either just no one wants to sell or there's tremendous demand. There's no way to hide that. One of the other things that we were kind of talking about in terms of stocks is –

Again, with the whole AI thing, look, if you make it cheaper, if you're more efficient, there are a lot of those stocks that are going to benefit from that, the downstream use cases of AI, which...

A lot of a lot of companies are still trying to figure that out. You know, how do we monetize this? How do we make money off of it? And we certainly saw a lot of software companies hold up very nicely. Any in particular that kind of you mentioned CRM already as one example, again, a Dow component, you know, Monday.

I mean, this thing is up tremendously because, again, this is a potential beneficiary. But any other stocks in the software space that kind of really caught your eye? Yeah, it was interesting. So that whole kind of marketing world. So to me, again, you can always pick your poison how aggressive you want to be. I think Salesforce is the more conservative answer. The midway answer would be HubSpot, H-U-B-S, which was also very strong. It's kind of a competitor to –

You'll see that's a similar amount of strength that came through. I mean, this broke to new highs. Imagine the market's down 3%. This is pushing to new highs. And also Klaviyo, K-V-Y-O, is a recent IPO. They're kind of in the marketing business, you know,

communications business to clients and all. And they also have a very, very strong stock, but it's a little jumpier, younger, maybe less liquid, but also just great action going into responding from that weak market. And then also another area, again, that just seemed like

it was, it was a shrug, like nothing's affecting us here. The, the retail space just really seemed, um, overall unaffected. I, I, I haven't looked at XRT, but yeah, I mean, XRT, the spider S and P retail, um, you know, doesn't show anything. And we've had a lot of different retail. I mean, Walmart, I do have a position in Walmart. I mean, this, this broke out on Monday. Um, you've, you've got Costco, uh,

You know, another retailer that, you know, had a very strong Monday got back above its 50 day moving average line. Any any others that kind of caught your eye in the retail space? Yeah. And I think also, you know, looking at who's surviving well during a market sell off is a good sign. I think this the reason the market is holding well with retail being strong is showing you that, you know, the consumer is strong and there's that's a good sign for the economy. But there's a GLBE is an interesting company. Again, younger company. I always prefer kind of the higher growth type names.

But they facilitate like cross-border payments and all the rest. And they're doing great and good volume on that breakout. Interestingly, Shopify is a part owner of GLBE and they also look good. Very broad-based. Right. And that was a very strong move on Monday as well. And individual retailers like ONON has been very, very strong. What I like about ONON is this is strong as Nike has been very weak. So it's not so much that like, hey, we're just –

Going up because it's a strong footwear market, the biggest player in the room has been under tremendous pressure, and ONON has been able to win in that environment. So now with maybe the industry strengthening as well, we'll finally see ONON stretch to the upside. So it's been some really nice, interesting rotations. Yeah, I couldn't help myself. I got a little bit of this myself. But I didn't go too heavy on holdings because I have...

deckers that I've been holding for a while. So again, you know, this kind of comes back to that whole concentration side. You have to be careful, not just your concentration in a single stock, but if you own a bunch of shoe, you know, shoemakers or a bunch of, you know, Chinese stocks, or again, name your name, your theme there, there is that kind of risk. And one of the things you and I were talking about, again,

Part of diversification is that whole uncorrelated assets. There were a lot of things that broke their normal correlations. You had utilities. Here's a utility ETF, Utes. This was going along with the market as opposed to how utilities are usually that defensive play. So how is it that you kind of make sure that your assets, your stocks aren't too correlated with each other?

I think it's really important to watch the day-to-day action of your stocks and how they react with each other. I mean, to your point, there could be linkages between your stocks that you would never expect. So, you know, if you're, for example, like, you know, the retails you said were strong, like, you know, recently, like, air conditioning type companies, like, you know, ventilation type companies have been very strong. It's all been tied around this AI theme and infrastructure. So,

If the regular movement of the company doesn't make sense, instead of before patting yourself on the back saying like, oh, I found this needle in the haystack, there's probably something that you're not aware of that's actually driving the company. If you bring up CLS, Celestica is a good example. They have a couple of divisions. Actually, you reported well tonight. They're up strongly. But they have a couple of divisions. And their smaller division, the smaller part of their business was components for data centers.

And so up until recently, there hasn't been a lot of growth at Celestica for many years. But now growth has been surging because that what was the smaller business unit is suddenly surging. So if you look at a quick overview of what they do, you know, contract, you know, manufacturer of electronic products. OK, for health care, industrial aerospace, it doesn't sound very AI related. But then, you know, so even just looking at the surface of what your company is, if it's not acting what you would expect for its group or for its character, you know,

You've got to dig in deep a little bit. And usually investors are going to be really focusing on the key drivers. So this is because what was a small division has become a big division in the main driving force for the company. How do you kind of do that?

deeper dive there? You know, what kind of sources do you use to kind of understand a little bit? And I love that. I love how you kind of use the chart to kind of tell you, oh, something different is happening here. Now, let me go look at the fundamental side and see, you know, if I can answer the question why. Well, especially when these big group moves happen,

Sometimes it's really like a lot of times the companies are going to want you to know. Like, you know, sometimes they have a stodgy business, but like they want a better multiple. So they'll be like, you know, suddenly, hey, we're servicing AI companies. If you just go to the investor relations site, there should be an investor deck at most, you know, well-run investor relation sites.

And just going through that deck, the first five slides, you should probably get a good idea. If they can't articulate it well to you, they're probably not going to articulate it well to other investors. And so you should probably move on to something else unless you're great at digging into the SEC filings. But I always like to really just go to the deck and figure it out. And if I'm really lost, honestly, Google's like, why is Celestica up so much? You'll probably find an article about, oh, okay, it's AI components they didn't realize. Then you can dig in deeper. Yeah.

investor relations sites, usually the best place to start. Yeah. I, I do find those investor decks fascinating sometimes. Uh, I, I, I,

it's fun reading sometimes just to kind of learn about, you know, get carried away because they always spin things. So like, you know, everything looks so great. That's, that's the thing is, you know, in some ways they're kind of painting a story and you're like, Oh, if you kind of buy into their narrative. And I mean, you know, even, even algos were kind of going crazy because it was like, you had all these companies on their earnings reports for a while that were just seeing how many times they could throw AI into, you know,

I mean, it reminded me of the 90s where it was, oh, let's just throw dot com at the end of our company and then we'll call that our business model. So maybe we can kind of end here with this idea of the projection because, I mean, you have talked a little bit about how this does remind you of the internet boom of the 90s and how a lot of people are looking at this as,

Look, you will have these downturns, these blips, this volatility sometimes for a new technology that people are still figuring out how are we going to use it? How are we going to – what are the use cases? I think that isn't clear yet for a lot of these things. Yeah, but that's the interesting thing about –

about a lot of when something is new. It's so easy to be cynical on a lot of new things. And, you know, with reason, you have to make sure that it's not just all like hot air, but...

If you go back to the 90s, could you have ever imagined what an iPhone would be? I mean, what is even possible to have data streaming through the sky now? I mean, was it an unthinkable thing? Or, I mean, like now, Musk is going to have soon, you know, autonomous – Waymo is already driving autonomous vehicles. Like think of all – every time this technology comes out that is a new platform –

It enables so much innovation on top of it. It's unbelievable. So you have to have a healthy dose of skepticism, but you also have to have a healthy dose of

almost looking at how the chessboard can move in multiple steps. You want to listen to what management's saying, and then you also want to look at the numbers. And the chart is always the final decision maker. If management's promising the world that it's breaking down, something's off. But maybe you don't have to forget about it, and it can come back a little bit later once uncertainties are resolved. So I think the 90s is a great playbook. Everyone should be looking at all the leading stocks, how it unfolded, and all the different technologies built because –

I think we're probably like inning one or two of what is a very similar amazing cycle. Right. Yeah. And again, um, it doesn't mean it's going to go straight up. You know, there's going to be a lot of blips and, uh, things like this where some new technology comes out and it shifts the players. I mean, you and I, before the show started, we were talking about, um, there's, you know, when was the last time you looked at like Netscape navigator or, you know, uh,

I mean, my dad still has an AOL.com email, you know, and every time I look at it, I'm saying, oh, yeah, that's right. I remember AOL. So, yeah, it's very, very interesting. But, Matt, it was great having you on the show. Really appreciate it. Again, for folks that want a little bit more information on some of Matt's hedging strategies, he's got that. How long is your workshop going to be on this weekend? Yeah.

Options can get a little bit tricky, but I'm aiming for about four to five hour workshop. So it's going to really from the basics right up to like really practical strategies to coming up this Saturday. So also for folks that maybe aren't following you on X, what's the what's your handle?

It's a trader underscore M Caruso. And I'm also on YouTube with quite a bit of content as well. Yeah. Some great videos there. You've been on here a number of times, so people can kind of check, check that out. You know, you're talking about, you know, the adaptive relative strength, a lot of things that are very interesting. I really like your take on the market. So appreciate you coming on the show again, Matt. It was great talking to you. Thank you so much, Justin. Always a pleasure.

And that's going to wrap up our show for this week. Please join us next week because we're going to have Jeff Hirsch back on the show. This is kind of our annual tradition to have Jeff Hirsch, editor of the Stock Traders' Almanac on the show because he goes through the trifecta between the Santa Claus rally, the first five days of January, and the January effect to kind of see what's going on.

what projections and decisions we can kind of make based on the January time period for the rest of the year. So he's going to share his thoughts on that, some of the data that he's compiled in that Stock Traders Almanac, and we'll hope to see you next week. Thanks a lot for watching. We'll see you next time. Bye now.