Simplifying My Cybersecurity Trade in a Complex World

Most readers know that I get to my desk pretty early. I am at my desk, sucking down caffeinated tar, taking in business media and reading on most market days by 03:30 ET. At around 04:30, I bring up my social media pages, see what's trending and say hello to my peeps on X and start putting pen to paper. It's a morning ritual that I have more or less followed ever since I decided to go into business for myself in 2016 and stopped commuting.

I miss constant human contact with smart people who are always thinking about the markets, but I do not miss the 5 to 6 hours a day of commuting, which is normal in NY.

After I decided to lay my head upon that greasy thing I call a pillow late last night, I thought the news cycle might revolve around former President Donald Trump's speech at the RNC that started out strong and then ran forever, or current President Joe Biden's immediate future, or Netflix NFLX earnings. But nooooooo ... something far nastier for businesses around the globe had permeated the news cycle and would continue to dominate the news all morning.

Inter-connectivity ... and Disconnections ...

It's all so efficient, until it's not. Airlines, banks, news outlets, and even stock exchanges around the world, as well as Sarge's morning routine, ran into a series of brick walls early Friday that turned into a labyrinth as services that had been down overnight were brought back up sporadically. The problems for many were first noticed after having issues with Microsoft's MSFT 365 suite of apps as well as its Azure cloud computing platform. On top of that, and maybe because of that, cybersecurity leader CrowdStrike CRWD had told media sources that at least some of these outages and issues were related to kinks in its Falcon Sensor.

Microsoft had announced very early this morning that its Azure service had been at least partially restored, then word spread back and forth that perhaps this bringing of the service back online had been spotty. It appears that CrowdStrike, whose issues appear to have started with a software update, is still having significant problems as we meander into the mid-morning hours. At one point overnight. I saw CrowdStrike shares trading 14% lower with Microsoft down about 2.5%. As we approached the opening bell, both stocks have moved off of those lows, but not by all that much.

Long-time readers know that these are both Sarge favorites. MSFT is my book's most heavily weighted long position as it has usually been for years. CRWD had become my most heavily weighted long position after its run in response to first quarter earnings. I had told readers that I had been working towards right-sizing that position ever since. I had gotten myself about half-way to where I wanted to be, having sold a tranche at $370 the week prior to last and another tranche at an average of $354,09 earlier this week. The pounding being dished out would have on its own further reduced this name's weighting on my book.

That would be if I had not indeed bought the dip. I know. I wrote this morning that I was not sure if I would. I did... I pulled that trigger. I have left MSFT alone so far. In addition, as I watched other cybersecurity stocks rally in response to CrowdStrike's problem, I added to an existing long position in SentinelOne S, rather than initiating Zscaler ZS or Palo Alto Networks PANW.

Complexity Theory, Explained

Readers who have been with me going back to such items as the "flash crash" and the great financial crisis, have heard me warn every few years about the dangers inherent to what we know as "complexity theory" or "complexity science. "

What this is in a nutshell (because I would never be published if I tried to go into this in detail), is the idea that systems open to and reliant upon one another may interact in any number of ways. The more complex the systems and the more complex systems involved, the modeling of potential outcomes becomes quite difficult as technical relationships and misunderstood dependencies increase potential for both linear and non-linear results of less than precisely quantifiable scale. This creates risks, both known and by implication, unknown, and even perhaps unknowable. As open systems become networks and networks become dynamic, these unknown risks can multiply either in number or in magnitude. This theory or these theories create fertile ground for a "black swan" (sizable, unpredictable) kind of event.

Now, this morning's problems that appear to have been created by a software update, is but a tiny example of complexity theory in action. Add something new, the systems, being complex, shut down, and then the shutdowns multiplied. This was a baby version of what can happen when the possibilities of complexity theory are explored. Think it can't get worse? Get more complex? Involve more symptoms? What if bad actors seek an oversized, complex outcome? What will the revolution in generative AI do to complexity? How far can generative AI push a network, and its dynamism? What if "it" becomes self-aware? Just some food for thought. Should scare the snot out of you.

CrowdStrike: Getting Ahead

Readers will see that CrowdStrike CRWD had been running within an ascending price channel since early 2023. As of late, the shares had developed the first shoulder and head of what was likely to end up looking like a head-and-shoulders pattern. Hence, why I was starting to roll out of my long position.

Now, due to this news event, Relative Strength has rolled out of bed, as has the stock daily MACD. The shares have gapped lower and found what looks like it could be support for today at the stock's 200-day simple moving average (red line).

That is why I added to my stake. In fact, I bought quite a few shares down there, doubling for the moment, my share count. The idea for this trade is just to buy back those shares that I had sold much higher and then resell them probably ahead of the close, making money twice on really the same tranches of shares already sold. I do intend to go into the weekend, wearing the same sized position that I went out with on Thursday evening. This is just a trade that Intend to make some lunch money on. The core position will stand a while longer, probably into earnings still more than a month away.

SentinelOne Strength

This stock has experienced some recent strengthening of its reading for relative strength as well as its daily moving average convergence divergence indicator. The shares sold off into late May, bottomed and have been on the rise since.

The shares have hit some resistance this morning at the half-way back point of that first half of the year sell-off, which happens to be running close to the stock's 200-day SMA. That is the pivot. My opinion? Take and hold that pivot, the door could open to prices as high as $26.50.

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At the time of publication, Guilfoyle was long MSFT, CRWD, S equity.