As the election nears I expect to see more volatility in stocks, bonds, and commodities. Once the election is over the new president’s agenda will be fairly easy to discern, assuming (perhaps dangerously) that the election promises that Mr. Trump and Mrs. Clinton have made are a realistic guide as to what their policies might be. 

As that point approaches the price action in the markets will most likely indicate the types of portfolio actions required and where opportunities lie. Indeed, the most important factor about the next four weeks is what we don’t know about what the world will be like in the next six to twelve months.

These are key questions to ponder: Will there be a significant shift in the polls? Will there be another “October Surprise” that shocks the market? And what will be the effect of any unexpected event on the markets? I sincerely hope that the way the Brexit vote has worked so far out is a good indication of what lies ahead for the U.S. after the election. But the truth is no one knows what lies ahead, other than the election is coming and the next month is likely to be full of surprises.

I am not totally bearish at this point but at the same time I don’t like the current uncertainty in the economy, the general trends in geopolitics, and the overall dynamic of the U.S. election. I also don’t like a market that has wild swings with rising frequency while not following the traditional rules of engagement, such as the way prices respond to company fundamentals over the longer term and the general tendency of prices to skirt technical support and resistance levels. As a result, I am taking a wait and see approach over the next few weeks.

To be clear, I am still looking for opportunities while simultaneously working on risk management. If it’s apparent that we should own a stock, then I will recommend it; but if it’s time to sell, I will also act accordingly. So instead of currently positioning the Applied Science and Biotech portfolio section of BTP for aggressive growth, I am focusing on maintaining the portfolio’s current value while concentrating some of our strategies on short term trends such as earnings.

That’s why I am using options more frequently, and why I am currently recommending the ProShares Ultrashort Biotech ETF (ETF) as a way to protect the potential down side in the market. Think of my current stance as that of a mutual fund or hedge fund manager trying to preserve gains while making contingency plans for what the future may deliver during a difficult period where risk is clearly outpacing reward. I hope that in a month or so things will be clearer.

Ambarella Breaks Out

Shares of Ambarella (Nasdaq: AMBA), a leading maker of high definition video processing semiconductors used in security cameras, drones and broadcasting equipment broke out to a marginal new high on September 30. The stock is up nearly 40% since I first recommended it in June less than four months ago. I like this company, but I want to preserve our profits. Thus, I am raising the sell stop limit to $63 because the stock has come a long way and it seems investors are once again getting ahead of themselves with their expectations about Ambarella’s future, as exemplified by this past week’s breakout without any news directly related to the company.

When I first recommended Ambarella, I noted that it was not so much a semiconductor designer and manufacturer but more of a security company given that its high definition video chips are the brains in drones and security cameras. And so far I’ve been proven correct, as the recent increase in violence in Charlotte, NC as well as in other areas of the U.S. where police interactions with protestors and civil disobedience are on the rise seem to have influenced the positive tone to the shares. I think this will continue, and as the election approaches we may see even more social unrest. As a result, I see police body cameras as the next potential growth area for the company, although there is a fair amount of competition in that sector as exemplified by Taser’s loss of its NYC police contract this past week.

But perception and reality eventually meet. Although Ambarella is in solid shape, its growth prospects are still not likely to be as grand as some on the street that are buying the stock on momentum may think. To summarize: I like Ambarella; I think it can go higher, but it will be a volatile path to higher prices.  At this point it is no longer a buy, yet it is definitely not a sell.   

Hold Ambarella.  Raise sell stop to $63.

Roll Amgen October Call Option

I recommended the purchase of the Amgen October 21, 2016 $175 Call option in a Flash Alert based on a seasonal tendency of the company’s shares to rise during the month that precedes the release of earnings that are due out on October 26. Since then, the option has quickly lost value and recently traded at $0.50.  Clearly this is not what I had in mind when I recommended the trade, especially since I own the option.

That being said, it’s important to understand what led to this situation, to put it in its current perspective, and to manage the trade.  The big picture is that Amgen (Nasdaq: AMGN) remains the world’s largest biotech company, and the odds are that it will remain profitable over the long term.

The big picture for biotech is somewhat uncertain due to the reluctance of insurance companies to pay high prices for biotech drugs, and the introduction of biosimilars (generic equivalent- copycat- drugs) for biotech companies.  The overall trend in the industry is for lower revenues and possibly lower earnings in the future.  But that is not the present and the past quarter’s earnings are not as likely to be affected by this dynamic as the future earnings.

Amgen is fighting on both sides of this war as it is facing competition for its arthritis blockbuster Enbrel and its infection fighter Neupogen. At the same time, the company recently had its own biosimilar approved by the FDA for Humira, a competing arthritis drug manufactured by Abbvie. But as is common these days, it is in a court battle over the drug, and there are questions as to when and how it will make its way to the market. So, if this trade is going to work out, the market will have to decide that current earnings prospects are more important in the short term than the potential long term questions facing the company and the biotech sector.

What about the trade? Given that Amgen stock’s tendency for rising into earnings is fairly solid, the only real alternative is to roll the option in order to give the pattern a chance to pay off without the decaying time clock ticking on the October option. As a result I am recommending rolling the October 21 Call $175 Option into the November $170 Call (AMGN_121616C170) which closed at $4.90 on September 30. I also recommend placing a hard sell stop of $3 on the trade.

Sell to Close:  Amgen October 21, 2016 175 Call Option (AMGN_121616C170).

Buy to Open: Amgen November $170 Call (AMGN_121616C170) up to $6. Hard Sell Stop at $3.