Samwise Quick Reference Handbook
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Hey Sam,
given your expectations for the rally to continue to ATH and beyond – if you had to allocate funds for another (model) portfolio, would the next near-term pull-back to the low ~$500 area make sense as an entry point? Or would it be wiser to wait for the next intermediate pull-back or even the next correction? How would you handle the opportunity risk?
And asking more generally, is your strategy to allocate new funds (from your monthly cash flow or other sources) ONLY during market corrections, e.g. always as a standalone/new portfolio?
Would it make sense to have a model portfolio that accounts for regular fund allocation? For example, starting with $100K and adding $5K in new funds each month?
We wait for corrections. That’s out strategy and we’ve developed it that way for a reason. It’s to avoid buying near the top and to effectively hedge.
Buying as the market climbs is a viable strategy. People do it all the time. In fact, it may even be the predominate strategy.
We avoid it only because it guarantees we’re buying at a significant discount when buying on correction and it generally guarantees we’ll end up with big gains in a relatively short period of time.
For example, I know we just went through a major correction and it felt like forever. But it really wasn’t all that long ago. We launched Stark on January 1, 2025 – though we didn’t make a first purchase until January 13. It’s now May 14. It’s only been 5-months. And Stark is up 30% in that time. We’ve produced that result by simply waiting for a correction instead of buying as stocks climb. If we had done the latter, we could have easily put on entires at $530 on the QQQ or higher.
Strategically, also, you want to wait to hedge. But that’s near impossible to do when buying after a surge like this because the risk of a peak is extremely high here.
On a percentage basis, this rally has gone on for nearly 30% now. While the overall trend and momentum look really strong and point to all-time highs, there’s still the risk of a peak and reversal here since the market has run 30%.
It wouldn’t be and shouldn’t be surprising if we had a correction right here. While everything points to higher prices, the fact that we’ve rallied 30% increases the overall risk that a correction can strike at any time now.
So buying and then waiting to hedge isn’t really an option when buying on the way up. That’s because you need to create a wide difference in entries for hte hedge to be effective. If you buy a long position and immediately hedge it out, that hedge won’t be anywhere near as effective as one where you hedged after a 60-70 rally first. .
And when we buy in the depths of a massive correction, there’s generally either a massive rebound or a full fledged bottom which allows us to hedge after a considerable move higher. That’s what we’ve done in EVERY SINGLE LT portfolio we have. We’ve purchased QQQ longs, waited for a big move of $40-$80, and then purchased a hedge for the position.
For example, Stark was launched during the first initial pull-back of the 25% crash we just witnessed. Stark was able to hedge because we bought when the QQQ was extremely oversold. The QQQ rebounded 35-40 points from where we bought. This gave us the opening we needed to hedge.
That hedge saved the portfolio as we were able to use the capital to transition to a long position when the QQQ had reached its lows near $400 a share. We bought the June 2027 $400 calls at $86 near $410 a share! And before doing that, we sold our put hedge for $17000 which allowed us to buy that long position in the first place. We purchased a hedge for $8k and it produced $9k in returns giving us the $17k needed to buy the June 2027 calls which has thus far produced an additional $15k (90%) in gains.
So the strategy really does call for waiting for a correction to get long. And particularly when the QQQ reaches a 30-RSi. At that point, the downside risk is limited and the eventual rebound/rally will far surpass that entry point anyway.
In that vein, we can’t really use cash flow to run the strategy. If we did, we’d keep the cash in reserves and add to positions during corrections or major pull-backs.
Interesting, I never realized this was such a potential risk at the moment
So anytime the market goes up by a significant percentage return the risk of a correction increases
They go hand-in-hand. At a 30% rally we’re at the extreme far end of the curve in terms of percentage gain in between corrections.
That indicator doesn’t consider what’s going on in the market and the overall circumstances
By itself, all it says is the market tends to have a correction after it has a certain percentage return.
We are there right now at 30%. At 30% this rally has gone beyond the vast majority of rallies of the last 15 years.
At the same time, the market is also recovering from a major 25% correction so a 30% rally makes sense
Still, it’s important to recognize that there is an inherent risk anytime the market goes up by such a high degree
Like as of right now, this is something like the third largest post correction rally going back to 2010 out of 46 other rallies.
Would the most likely chance for a correction be if the upcoming pullback goes for longer and larger than expected?
Sam, When you say “correction”, do you simply mean a pullback (like you are expecting in NVDA), or do you mean the textbook definition, which is a 10% drop?
So a correction can be anything that is 6-13%. Something a little larger than a typical 3-4% pull-back.
We’ve seen a big move up from $427. Really the QQQ has rallied non-stop from $427 to $520 when you think about it. There has been very little in terms of pull-backs between those two price-points. So we could see something larger like 30-points of downside. At the moment, the market’s general momentum says otherwise.
But anytime the market rallies 30%, there’s a risk of that happening entirely unexpectedly.
It’s a general risk that goes hand in hand with a big rally/recovery. They go together irrespective of market environment. Just like a 25% decline in and of itself points toward a massive rally. Regardless of whatever is going on.
Sam, you’ve talked in the past how NVDA can ignore overbought conditions and just keep running, like it did last may and January 2024.
Just curious with its strong rally if it might just keep going and not pull back at all?
Good question. Feels like this is the earnings action, triggered by the China tariff and Saudi investment news. That said, I wouldn’t be surprised if we drop into earnings to the degree Sam has mentioned.
It could. But 2024 is a solitary example during its high growth phrase. Not sure we’ll see something like again. Nvidia just isn’t growing at that level from the current base if that makes sense.
Also, even in the Jan 2024 to April 2024 rally, we did see some big pull-backs. We had an 11% correction in February 2024 — just a month into the rally. We also saw a smaller 6-7% pull-back in early March and a major correction in March – April.
So even in a parabolic rally like we saw in 2024 where the Nvidia rallied from $50 to $96, there were some big pull-backs.
We’re going to see a pull-back here. It won’t be like 2024. And even if it is, remember, Nvidia has already rallied about 42.5% straight up. $95 to $111 down to $104 up to where we are right now. We’re due. In fact, just this rally from its previous pull-back lows is 30% already. That means 30% without a near-term pull-back.
We’re way overdue. Nivida will pull-back and probably down to the low $120’s. It will then rocket on another big move up afterward.
Isn’t the probability of seeing NVIDIA exceed $140 before declining “timidly” higher? Do you also see a sharp decline from $135-$140 to $120 in 2 to 4 sessions, or rather a creeping decline over several sessions? NVIDIA’s earnings releases are on May 28th, and the stock often drops slightly before and afterward, but I believe the strong results will accelerate the rally?
Sam ?
It’s possible. But ultimately I think Nvidia has ran too far too fast. It’s deeply overbought after running 40%. $123 is a major line of resistance. So it makes sense to stop and test that before running back to all-time highs.
This is nearly impossible to predict. How exactly the pull-back plays out is hard to say. You can look at the chart for yourself and make some predictions. In many cases, it’s sharp and lasts a few days. Sometimes you get consolidation first and then a decline. Look at the hourly chart and consider what happens in the past when Nvidia reaches overbought. There’s a pattern there.
I think Nvidia is likely to pull-back like next week, bottom and then rally into earnings. That makes the most sense.
It’s already done today and tomorrow no ?
Or it’s a trap ?
Sam, are you looking to see oversold on the hourly when the pullback happens?
Not sure. it depends on how aggressive the market pulls back. It doesn’t have to be. In many or even most cases, we do get oversold. Nvidai will go from overbought to oversold and that sets up the buy. But there are instances where Nviida falls just short of oversold conditions.
Really, if Nivida pulls back $10, is trading near $125-$126 and we can buy back our spread at like $4.30 or lower, we may just buy it back even if it’s at a 35-RSI.
The market sort of showed its hand here. Given the benefit of hindsight, if I knew Nvidia would run to $136 and the QQQ would run to $521, I wouldn’t have sold and would sell here.
Mostly because that move is a clear indication that the rally is substantially stronger than we first assessed. Yeah, it’s all parabolic, but now the confidence of going back to all-time highs is a lot stronger with the move up to $521 (QQQ) and $536 (Nvidia) and $350 (Tesla) than it was when we expected nvidia to peak at $130 and when we thought Tesla was struggling with the $323 area. The QQQ was still trading under $510.
So if we can buy back at $4.20-$4.40, we’ll do that happily and just wait.
Sam, any chance NVDA runs to $142 then pulls back $12 to $130?
Yeah. That’s possible. Though I think increasingly less likely right now.
Sam, thanks for all the great explanations.
Thanks Todd. Appreciate the feedback.
https://www.reuters.com/business/finance/us-close-letting-uae-import-millions-nvidias-ai-chips-sources-say-2025-05-14
Wonder if this will raise NVDA even higher or if it’s too overbought that it pulls back anyways
Sam, Stark has a SHORT position in Sept 2025 QQQ 520 call, I believe as some form of hedge. Since the bear market is toast, do you plan to cover this position soon? Perhaps at RSIh(QQQ) < 50 ?
we’re going to hold that for now and we contemplated that scenario. We sold the call for $16.35 giving us an effective exit at $536.35 if the QQQ manages to close nothing of $520 at September expiration. We own 7 contracts in various QQQ leaps. we’re good closing 1 contract if it comes to that.
Otherwise we’re going to continue to hold that position until such time we feel like there’s a good opportunity to exit.
For example, if the QQQ sustains a minor correction in mid-summer causing the calls to drop to $7.00 or something like that, we might cover it.
We’re certainly not interested in covering it after the QQq has just rallied 30% and is sitting at deeply overbought territory.
For now, we’re doing nothing. Just waiting. If it goes north of $536, that’s fine with us. That’s a good forced exit of 1/7 contracts. We’ll take it.
QQQ got all the way to 521.93, just 1.07 less than your predicted price, and started going lower afterwards. Seems like the pullback may have started?
Still way too early to tell. Also, we don’t have negative divergence just yet. It’s still in process. That $523 number can easily get pushed out to $526 or higher. The key is to drift higher on lower momentum. We’ve had a little of that go on so far. The RSI peaked at $515. So $523 is still pretty decent. I’d say $523-$526. Somewhere in that range would make sense. If the RSi makes a new high, that starts over the entire process though. The key is that the RSI drifts lower as the QQQ moves higher.