I’m Betting Against This Blue-Chip

Healthcare got taken apart yesterday and Merck (MRK) didn’t move.

Some people look at that and think, well, Merck’s impervious. It’s the quality name, the big money’s defending it, whatever story you want.

I disagree.

I went and bought downside in Merck this morning.

Why A Holdout Isn’t A Hiding Place

Selling doesn’t show up everywhere at once. It hits where the pain is worst, works through the names everybody’s watching, and the stuff nobody’s paying attention to gets it last.

So the thing that didn’t move on day one is further down the list, and that’s a completely different animal from strong.

And it ends up on that list eventually, because if the money is leaving a sector, the money is leaving the sector. 

Nobody’s sitting at a desk going, yeah, I’ll dump these four, but I’m hanging onto this one because I admire the management team so much.

Now Look At What Merck Has Done

Up almost 40% on the year. It’s freaking Merck.

Pull up 15 years on it and tell me what you see. 40 to 60 took a few years, 60 to 80 took another two or three, and here’s a company that hasn’t done anything, like, ever.

Then this year it explodes from 109 to almost 150. Biggest move by far in the whole product.

So you’ve got a stock that has never moved in its life having the run of its existence, carrying a 40% gain, in a sector that just started cracking, and it sat out the selloff entirely.

That ain’t strength. That’s a pile of profit sitting there waiting for somebody to give people a reason to take it.

And yesterday gave them one.

How I’m Playing It

Not with a 37 day option. Not a chance.

I have no idea when this catches up, and neither does anybody else. Could be next week, could be six weeks from now when some fund finally gets around to rebalancing.

So I bought duration. I shopped 72 days and 100 days, way out of the money, because I’m not paying up for a move that might not start for a month.

And the implied vol on it is relatively low, which is exactly what I want. Stock’s been quiet, so the options are cheap, and cheap options are what you buy when your whole thesis is that the quiet ends.

And people get this next part wrong constantly. I have to make 100% on this trade, minimum, and if it can’t do that it isn’t worth putting on.

Because I’m going to strike out on plenty of them. I’ve got one on right now that’s dead meat, fell flat on its face, and there’s nothing I can do about it. So the ones that work have got to count for something, or the math doesn’t work at all.

Go Do This Yourself

Next time a sector gets taken behind the woodshed, don’t go looking for the survivor.

Go find it, sure, then ask yourself why it survived. If there’s a real answer, fine, leave it alone.

If the only answer is that the selling hasn’t reached it yet, you’ve found yourself a candidate and not a safe haven.

And before you decide anything, check what it’s done this year. 

A stock sitting on 40% of gains behaves nothing like a flat one when the tape turns, because the flat one has nothing to protect and the other one has everything to lose.