Trading 201

1.  Be independent in your analysis.  Don't be influenced by what the market "experts" say on TV or Twitter.  Many are pumping their book or are just parrots that repeat what they hear.  They are usually wrong more often than they are right. 

2.  In the equities market, there is a lot more competition on the long side than there is on the short side.   Less competition means more opportunity.  There is a huge army of traders and investors looking for long opportunities.  A much smaller army of those looking for short opportunities.  A lot of investors and traders just don't like going short.  It feels unnatural.  Awkward.  That's why they'd rather buy an inverse ETF to get short exposure than outright short an ETF.  They'd rather buy put options than go short stock or sell call options.  

3.  Shorting individual stocks is not like shorting the SPX.  For example, the behavior of small cap pump and dumps is totally different than the SPX.  Too many think that because the stock market goes up over the long term, that shorting individual stocks is a losing game in the long run.  But there are a huge number of stocks that are long term losers, even during a bull market.  Many companies use the stock market as a piggy bank and raise capital, regularly issuing stock and diluting because they need to 1. keep the company alive  2. pay themselves.  

4.  Why do you have an edge?  Are you a step ahead of institutional and/or retail flows?  Are you good at pattern recognition and recognizing a past market that is similar to the current market?   Are you good at reading SEC filings of speculative small cap stocks and predicting future dilution? 

If you can't logically and objectively state the reason, then you probably don't have a real edge.  Trading and investing are a mixture of skill and luck.  In the long run, skill is much more important.  But in the short run, luck is a bigger factor.  Its hard to tell whether you are lucky or skillful unless you've traded for years.

5.  Trading is lonely.  Humans are social animals.  It makes traders flock towards groups: subscription services, Twitter/Stocktwits, message boards, etc.  There is nothing wrong with joining a group, but do it for social reasons.  Not financial reasons.  Joining a group can make you fall into group think, which is often counterproductive.

6.  All things being equal, you want to be in positive carry trades.  They provide you a margin for error on your trades, where you can win even if prices stay the same or slightly go against you.  The most obvious example is being long Treasuries.  Since the yield curve is positively sloping most of the time, you collect carry on your position, and over time, it can add up to be more than any losses from higher yields.  And if yields go down, you get the carry + price appreciation.  Other examples are short EURUSD, short VIX, and long SPX.  

Starting to see some of the retail traders chase meme stocks again, echoes of what happened earlier this year, although much less broad based.  Traders are less worried about interest rates, and have put inflation on the back burner after seeing the market shrug off a hot CPI number 2 weeks ago.  Complacency is building.  Market looks set up for another pullback if we see the bond market weaken again.  Still over extended, although working off the overbought condition by going sideways for the last 6 weeks. 

The New Gilded Age

It takes money to make money.  Capital is more valuable than labor.  Labor is just not that valuable when there such an excess supply.  You can argue that there is an excess of cheap capital, but most people cannot access that cheap capital.  Banks lend money to people with collateral, people who have money, not people who need money.

We are living in an age where managing your money is much more important to wealth creation than having a good job.  Most jobs just don't pay enough to allow for a lot of savings.  Not many people get wealthy anymore from saving part of their salary.  Interest rates are too low and wages haven't kept up with inflation.  

The lower and middle class is in a difficult situation, where most labor is becoming less and less valued.  In order to raise money to buy a house or a nice car, or just to keep up with their friends who brag about making 500% in 2020, they are resorting to rampant speculation, lotto tickets like YOLO calls, buying volatile and overvalued meme stocks, EV bubble stocks, and arguably worthless cryptocurrencies.  

They are starting to feel some pain, as the big move higher in those momo stocks earlier this year have all been given back, even as the SPX keeps going higher and higher.  They will probably feel more pain in the years to come if they insist on having diamond hands.  I'll have the paper hands to live to fight another day when I am wrong than stubborn diamond hands that take you out of the game with 1 bad investment. 

The sudden explosion in stock and crypto investing among retail changes the dynamics of this bubble.  Even a mere 2 years ago, you didn't have too many newer investors looking to put money into EV, biotech, big cap tech stocks, or crypto.  Now it seems more unusual to find someone who doesn't have money in those assets.  

A popping of this bubble will now have devastating effects on the economy.  Unlike a few years ago, now almost everyone has jumped into the pool, with the latest people being the ones who are putting blood money in there, less wealthy individuals who are buying the worst companies following message board advice, following the herd.  When this bubble pops, there will be blood. 

What's so sad about this environment is that a lot of these newer investors, who are in some of the worst stock investments imaginable, are completely delusional, while the assets that are most likely to appreciate in value over the next 5 years in the US is housing, making it even harder for them to buy a house after their portfolios get crushed when this bubble pops.

I hear talk about the US housing market being red hot, a lack of supply, houses selling within days of being listed, selling for above listed prices, etc.  Many see this and think this is another bubble like 2005-2006.  They think it will end badly like 2008.  What I see is smart investors, selling overvalued stocks, getting liquid, and putting some of that money in a better investment to protect against inflation, which is real estate.  

So after the dust settles from this giant bubble, the rich will get richer, and the poor will get poorer.  

The supply demand fundamentals are much more favorable for US real estate than US stocks.  You are not seeing much new supply coming on to the market, and if you've seen how homebuilders build new houses in the US these days, with tiny front and back yards, houses right next to each other, then you can see why existing home prices would go much higher.  And these newer homes are way out in the suburbs, making a commute to downtown a nightmare.  Whether it be lumber shortages, lack of housing permits, or lack of desirable land to build houses, you are not seeing much increase in supply coming on line. 

On the other hand, in the stock market, the demand for speculative stocks, is being met with tons of supply, in money losing companies doing IPOs or getting bought by SPACs.

All of this is very reminiscent of 1999, when the stock market was in a raging bull market, a bubble was getting closer to its peak, and real estate prices were also going up, as the economy was booming.  After the dotcom bubble popped in 2000, real estate prices held steady despite the recession in 2001-2002.  And then you saw a huge increase in house prices during the recovery from 2003 to 2006.  

On the market.  After the volatility of the last 2 weeks, SPX is back near 4200 and getting boring again.  Trading some individual stocks but staying away from index trading. 

Dip Buyers Win Again

You would think that such a simple strategy, buying a pullback in the SPX, could not possibly have such a high risk/reward and an amazing win rate.  The market has done it again.  Another V bottom, frustrating bears looking for a more substantial pullback, and too much too fast fund managers who can't fathom buying up here, after such a strong rally and already up 450 points, which is12% on the year with more than 7 months remaining.  

The bubble keeps getting bigger.  And it is a resilient bubble.  Very calm uptrend, the dips are brief and not even that scary, if you look at the daily chart.  Of course, if you are a minute to minute daytrader trading with $500 margins on ES, the volatility will blow you up easily.  But for a position trader with proper risk sizing, the volatility is rather tame, especially relative to a VIX that has been trading between 20 to 30 for most of the year.

I saw a chart on Twitter yesterday showing the current inflows into equity funds.  The pace would put it at the most since 2000.  And although earlier this year, a lot of that demand was met with new supply, recently, there haven't been so many IPOs/SPACs, and stock buyback announcements are already back towards the previous huge amounts.  So supply/demand from money flows have been providing upward pressure for the stock indices.  

Bitcoin has bounced back strongly again off the dip towards the $30K level, and risk appetite comes back quickly in this environment.  Investors will occasionally get scared, but they don't stay scared for long.  Thus the V bottom patterns. 

My forecast for more choppiness, and another move towards 4060 this week has been completely wrong.  I have no edge here, with the SPX back above 4200.  Too early to short, and too late to buy. 

SPX Longs: The Forgiven

The pullback down towards SPX 4060 was ravenously bought by the dip buyers and the sellers had no follow through.  And just like that, in less than 30 hours, you get a 100 point rally in the SPX.  I thought I made a good escape by selling before that sharp drop from Tuesday afternoon to Wednesday morning, only to see it go back towards levels I sold at by Thursday afternoon.  

There is a big difference between the short and long side in this environment.  And in most strong uptrend environments.  The dips are fleeting, but the rallies can be fleeting, but are usually long lasting.  That has a massive effect on trade profitably.  

For example, let's say you are exclusively selling short, and you short rallies towards what you believe is the top of the range, for example from January 1 to March 31, the SPX was trading in a 300 point range, from 3690 to 3990.  If you sold near the top of the range, let's say around 3950, with a 150 point price target, and a 150 point stop loss, here are your results:  3 trades:  February 16, March 11, March 26.  1 winner and 2 losers.  Net 150 point loss, even though you were picking the top, or near the top, all 3 times.  

Let's look at what would happen if you did the opposite, and bought the dips, rather than short the rallies.  If you bought near the bottom of the range, let's say around 3750, with a 150 point price target and 150 point stop loss.  You have 3 trades:  January 4, January 27, March 4.  3 winners.  Net 450 point gain.  

And its not just the loss, but the time spent near the entries and exits.  Look at the chart above, and see how much time the SPX spent between 3900 and 3950 and between 3700 and 3750.  On the short side, the market spent a lot more time near the target entry prices than near the target exit prices.  And the opposite for the long side.  That is what you call a margin for error.  The more time a market spends near your target entry prices than your target exit prices, the more likely you will screw up the trade.  And vice versa.  

So you have a 600 point difference in outcome, which is about 15% of the price of the index.  15% difference in 1 quarter.  Plus less likely to mess up the trade if you are long than if you are short because of the margin for error from the time spent at the top vs bottom of the range. 

This is just examining 1 quarter during this bull market.  There are countless other examples.  Sure in a bear market, the results will be much different.  But the stock market spends a lot more time in bull markets than bear markets. 

That being said, I don't expect these market conditions to last for more than a year.  In 2022, I expect a much different environment:  less fiscal and monetary stimulus, upcoming mid term elections where Republicans will likely either win the House or Senate, or both, squashing any hopes of further stimulus in 2023 and 2024, and peak of the bubble cycle where prices get too high and investors too heavily invested in stocks and risky assets (already there, but expect it to get more extreme later this year). 

Short term, expect more choppy trade between SPX 4050 and 4200, so I don't think the double bottom at 4060 on the charts, will lead to new all time highs right away, as the paper napkin chartists are thinking.  Sold the remainder of my long SPX position yesterday.   Not playing the short even though my view is for downside next week.  Only in dip buying mode here.  

Bond market has quieted down a lot after the CPI panic subsided, trading a very narrow range between 1.62-1.68% on the 10 yr. since last Friday.  Not much opportunity, expecting a grind lower in yields into month end, as it trades very resilient as the dip on taper talk news in Fed minutes was all taken back in less than 24 hours. 

Bitcoin Contagion

Cryptos have reached critical mass.  It is now so heavily owned among investors, including hedge funds, that a big correction has contagion effects on stocks.  Its not big enough yet to cause lasting effects, but it has enough influence to affect the market for a few days if there is heavy selling, like we saw from the weekend to Wednesday.  At $1.5T for total crypto market cap, with this kind of volatility, it will cause forced selling not only of bitcoin, but of the other assets these funds hold.  It was $2.5T just a couple of weeks ago.  So a 40% drawdown in 2 weeks, yes, that will cause some reverberations in the stock market. 

Most of these bitcoin investors with deep pockets (not talking about the odd lot YOLO and HODL Bitcoin maximists) are long both stocks and bitcoin, most are not hedged enough with shorts to make up for the carnage of a margin call induced liquidation type market, which we got a short preview of in the morning.  

 

 The BTCUSD chart looks awful, but this morning, 5/19, it held the psychological $30K level, which is roughly a 50% drawdown from the top.  Also, $30K is the level where the first deep pullback in January held that level.  It could very easily go right back towards that $50K level once the panic selling subsides and the dust settles.  Its reached enough critical mass where it won't go out like an ARKK or the various speculative EV/biotech/meme stocks where the supply is growing much more quickly than the supply of cryptos.  

 

I have no skin in the game, except potential opportunity cost.   I don't have much interest in getting long, except for occasional knife catching opportunities like in the morning when it plunged on forced liquidation down towards $30K.  

 

The big trade I am waiting for is a big blowoff top to get short.   I missed the latest short sell opportunity because it wasn't a clean blowoff top situation that could be easier to game.  I see potential for the last up wave in the coming fall/winter which could take it towards the $90K-$100K zone.  I am just an interested observer for now.  

 

The SPX is turning into an interesting market now.  The uptrend has reached a level where there is resistance for investors to just blindly take it higher.  It is no longer lingering at the highs and giving investors a lot of time to sell up there.  Its testing the top of the range and getting right back down.  It spent very little time around 4180 on Friday and in the overnight session yesterday.  A change of character from the previous 2 months.  Still believe that BTFD is the best strategy to use, but now you have to be better at timing exits as yesterday's big drop in the afternoon and follow through selling in overnight markets shows.

 

There is some caution out there, although I see very little fear, except in BTC.  Even in those stocks that are down 60-70% that all the momo traders piled into in January and February are mostly clinging on with their diamond hands and rock for brains.  

On the topic of diamond hands, and Reddit wallstreetbets traders, I find it funny how they want others to not sell so that they can later sell at a higher price.  They somehow think that trading and investing is a team game, and if they join a "team", they will be more successful traders.  Trading is not charity work.  You don't get a medal for losing money by holding the bag so that insiders and other traders can get out at higher prices.  

Millennials may be the dumbest generation in the past 100 years.  At least the baby boomers speculated in higher quality stuff: real estate, tech stocks, etc.  The millennials somehow think they've found the key to making money by buying things with no intrinsic value (cryptos) or massively overvalued stocks of companies that don't make any money and have almost no prospect of ever making money.  And somehow they are proud of showing that they have diamond hands in the face of big losses, when in reality, they are just holding bags in some of the worst stocks out there.  

 

Lots of negativity today, with the big drop in bitcoin, and the taper talk coming from the Fed minutes.  Monthly opex is this Friday, so that could keep the market under pressure until then from all the negative gamma exposure. 

 

Luckily was able to sell most of my long SPX position yesterday before the big swoon, still had some left over, which I just decided not to sell in the hole this morning.  I will be looking to buy dips around last week's lows, SPX 4040-4050 area.  Basic view on this market is that its range bound, with SPX range of roughly 4050 to 4200. 

Trading and Risk

Trading reveals the truth.  Unlike other occupations, there is no politics.  Measuring performance is objective, not subjective.  There are no referees that can decide the winner.  There are no teammates to blame.  A psychological game.  Like golf or tennis.  You are out there on your own,  you are the one who is swinging.  How do you handle the risk?  That is all up to you. 

The most important aspect of trading is risk.  Its a risk business.  Trading is based off on risk and reward.  Here are the 3 types of traders based on risk. 

Type 1:  Low risk tolerance, low pain threshold, hate uncertainty.  Conservative about money.  

These are people who can't take the uncertainty and the ups and downs of the P&L.  The fear of the unknown.  I know a friend who started trading and within 6 months, he got panic attacks out of the blue.  Needless to say, he was someone who physically couldn't take the risk.  A lot of these poeple are the type who can't sleep when they hold a big position overnight. 

If you can't take the uncertainty, then most styles of trading probably won't work.  Maybe scalping or daytrading lower volatility stocks, but that's probably the most difficult way to make money in this business and the most competitive.  All the money that HFT firms and hedge funds like Renaissance Tech. pour in for research make them the apex predators in the shortest time frames. 

In order to get beyond the safer stuff, this type of person will need to size way down and make small enough bets to the point that the risk is tolerable and there are no sleeping problems while holding positions.  Most suited for conservative long term buy and hold investing.  

Type 2:  Medium risk tolerance, moderate pain threshold.  Somewhat aggressive with money.  

These are you moderates.  They don't have extreme views about investing or money, mostly practical.  Try to treat trading like a normal 9 to 5 job, want and expect steady income.  They can take moderately big positions without sweating it, but if they go all in, they feel the stress and have trouble going to sleep. 

They can be flexible and choose all different styles, but probably best suited for swing trading stocks.  Could be suitable for trading futures if they only use a small portion of their available margin.  

The best level of risk tolerance for longevity in this business. 

 

Type 3:  High risk tolerance, high pain threshold.  Gambler type, aggressive.  Risk seeker when it comes to money.  

This is the most dangerous type of person to enter trading.  They are the most likely to blow up and get taken out of the game before they know what they're doing.  Big wins and big losses.  Usually have poor risk management, and don't have a long term view about the business.  No patience, always in a rush to make money.

These are your degenerate gamblers in the market.  The YOLO traders.  The options punters.  The WSB crowd.  The ones that want $500 margins to trade ES.  The ones who treat the market like a casino.  These are your free swingers.  Don't like getting walks.  Don't mind striking out.  They hate taking pitches, always looking to swing and hit the ball out of the park. 

Usually very stubborn and unwilling to take a loss.  Diamond hands.  Charcoal brains.  

Probably best suited for daytrading at a prop firm where they aren't allowed to take overnight risk.  At least when they blow up, its other people's money and not theirs.

 

Used to be a type 3 trader when I was young and dumb, a risk seeking trader, but as I've gotten older, and my testosterone has declined, I'm probably half way between type 2 and type 3.  Probably more risk tolerant than most traders except the WSB/Yolo/diamond hands/$500 ES margins crowd.   What type of trader are you? 

Sold most of my SPX long this morning, will sell the remainder either later today or tomorrow.  Was expecting a thrust higher on Monday, but that down day changes the picture.  Got a little bit too excited about the long side on Friday, thinking V bottom and straight line towards SPX 4200.  Expecting a tight consolidation of this bounce for the next few days and then another pullback to retest the SPX 4060 level, the closing low on 5/12. 

Already Back to Pre-CPI Levels

The VIX got jumpy, going over 28 on Wednesday.  The put/call ratios hit levels that was last seen at the end of February, when the market was worried about rising bond yields.  This time, the market is worried about inflation after the big CPI number.  And this uptrend is so strong, that even with the VIX spike and the inflation fears, the SPX wasn't able to touch the 50 day moving average which is rising fast. 

Yesterday, we saw the indices go up over 1%, and the CBOE equity put/call ratio was exactly the same as it was on Wednesday, when the SPX went down over 2%.  That is not common.  Usually you get a significant move down in equity put volume after a rally day like yesterday.  

There is still a lingering fear of the "pullback", the one that master armchair QB Tony Dwyer has been harping on for months.  I keep hearing all this talk about the market being overextended, needing a pullback.   Even from myself! That tells you how deeply ingrained it is into the psyche of investors these days.  And fear of inflation that is NOT transitory is the current excuse for the weakness.  

Watching the price action, the market is quite resilient considering the buzz around inflation.  I put on a long SPX position yesterday morning, I was initially thinking of a price target of SPX 4140 but we're almost there just 1 day after my entry.  I am not selling yet.  I want to give this trade more time to play out and see how far the bounce off the pullback goes.  I've seen so many V bottoms that its much more common for dip buyers to sell too early, not too late. 

With the strong bounce back in Treasuries yesterday and this morning, now to pre CPI levels for both stocks and bonds, in less than 48 hours, yet with the lingering inflation fears still with us, it feels like stocks want to go higher.  

I made the mistake of sticking strictly to my price target when I bought the SPX dip in late January and I sold way too early.  It might not be as good of a setup, but I don't want to make the same mistake again.  Sticking with the long side and letting it play out for a few more days. 

Blockbuster CPI print

 CPI came out hot today.  Even with the government lies and manipulation of the inflation number, the inflation number was big.  The Fed will say that its transitory.  You have enough lemmings on Wall St. who soak up all the drivel that the Fed spews out that a lot of people still think inflation is transitory.  If this kind of inflation is transitory, then by extension, and logic, life is transitory.  If inflation goes up in a staircase fashion, 20% one year, and then flat for 3 years, its the same as if it went up 5% per year for 4 years.  But in the first case, a 20% jump would be considered transitory, even though prices never went back down.  But in the second case, it would be considered 5% inflation.

These prices aren't coming back down.  Prices are sticky on the upside, and transient on the downside.  Transitory is an excuse for Powell to suck up to Biden.  To give Biden what he wants.  An overheating economy that will boost wage inflation and cause businesses to raise prices to stay afloat.

Jerome Powell is looking more and more political and less believable by the day, as the inflation keeps running hot, wages keep going higher, and his easy money policy is starting to backfire.  The main concern of the market is inflation, and its looking for any kind of action or even talk from the Fed to put out the fire before it turns into a raging inferno.   

I covered shorts into the selloff today and will look to get long any further dips from here.  After a very strong rally with no significant dips for several weeks, the first dip is usually bought.  This is that first dip.  The fact that market is selling off because of the CPI makes it less durable.   This fear based on inflation should not last for long.  Powell will not react to a hot CPI number, so its effect on Fed policy is basically zero.

5-30s Steepener

The nonfarm payrolls numbers disappointed the jobs data optimists with a huge miss from consensus.  You can expect more of the same until the crowd catches up with the elephant in the room:  people are choosing to be unemployed.  When you get a $600-$700 unemployment check ($300 federal + another $300-400 state unemployment benefits) every week for pretending to look for a job and you only make marginally more working 40 hours per week doing menial, tedious jobs, its an easy choice.  You have freedom, no Rona risk, no stress, and $600/week for watching Netflix, Youtube, ESPN, playing video games, trading stocks on Robinhood and Ameritrade, etc.  

There is an abundance of workers.  And they will start taking up jobs once the federal unemployment bonuses expire.  But not until then.  Don't blame the workers and call them lazy, they are making rational decisions based on government policies.  Blame the government.  This isn't just Democrats.  This also applies for Republicans, who signed off on everything last year, including the $600/week federal unemployment bonuses which were even more egregious. 

The US government is incompetent and inefficient.  There is so much waste that the only way the government can get any kind of economic results is to just throw trillions at it.  Brute force money.  So that's what's happening with unemployment benefits.  They are throwing money at the problem, and all it is doing is making it harder for businesses to find workers, especially lower skilled labor. 

So the knee jerk reaction to the big NFP miss was to assume that the economy isn't as strong as we thought it was, and to aggressively bid up bonds, especially short duration Treasuries.   You get a lot of information on days like Friday because you see what trades the hedge funds are clamoring to when they add risk.  The 5-30s curve steepener is the most popular fixed income trade among the hedge funds.  You can see this clearly when the funds, usually waiting for an event (FOMC meeting, NFP) to finish before adding to their position.  And the funds going to work on Friday managed to push the long end to the negative even after such a big NFP miss and a spike higher in bonds afterwards. 

Basic theory goes like this:  bad jobs number ---> dovish Fed ---> further delay of rate hikes ---> more inflation.  So buy the 5 year Treasuries, which are more sensitive to rate expectations, and sell the 30 year Treasuries, which are more sensitive to inflation.   

The hole in this theory is that the fixed income market isn't worried about jobs, its focused on inflation.  And even though the Fed is supposed to focus on employment and inflation, their 2 mandates, they really only have 1 mandate.  Let's get real.  Its to please the financial markets.  

So at some point, and we are getting closer and closer to that point, being dovish is not what the market wants, because the market doesn't want high inflation, and that is what the Fed is causing with their easy money policies.  And soon the Fed will get in tune with what the market really wants, which is tighter policy, because let's face it, the Fed are just slaves to the financial markets.  Both stocks and bonds.  That's probably when the short end of the yield curve will start to price in rate hikes more aggressively as the Fed starts to talk taper which in turn will get the market projecting a timeline for rate hikes. Probably starts happening later summer/early fall.

That is the fixed income pain trade.  A flattening of the yield curve, as the 5 year Treasuries start pricing in tighter monetary policy, with inflation expectations coming under control, keeping a bid to 30 year Treasuries.  Looking at the eurodollars futures speculator positioning, they've barely gotten started in putting on rate hike bets.  The positioning is neutral.  Based on how short speculators got in 2018, or even back in 2014 during the taper, the speculators (light blue line) aren't positioned for a eurodollars selloff.  

Eurodollars Futures COT positioning data

We are getting close to the infection point for the 5-30s yield spread.  I think its coming within the next 3 months, as the Fed gets closer to the taper.

SPX hit another all time high as the stock market expects the Fed easy money policy to go on even longer with the weak jobs number.  Bad news is good news forever.  It is the reality of the current financial markets.  The economy is of very little importance because it has no dynamicism.  Its moribund on its own so a static variable.  The only things that matter are fiscal and monetary policy.  So any data that increases the chances of easier fiscal and monetary policy is considered a positive for the stock market.  People are still unable to adjust to that reality, which has been ongoing for the last 10 years.  

I am still short SPX, small size, and looking to add when the time is right. 

SPX Beach Ball

You can't keep the sucker down.  Trying to keep the stock market down is like trying to keep a beach ball under water.  You had a selloff day yesterday, on no news, and then Yellen comes out and talks about overheating and rate hikes, and there you go, your mini me panic bottom at SPX 4130, and grind higher to close with just a small loss and then a decent gap up for the FU to the short sellers.

Hedge funds are selling, as shown by the BofA hedge fund client flows data. 

Surprising to see hedge funds selling so much. pic.twitter.com/A8Ix1ygffl

— Market Owl (@MarketOwls) May 5, 2021

 

I watch CNBC, I listen to podcasts, there are still a lot of people looking for that pullback.  And now the hedge fund data provides the reasoning behind the anecdotes.  The hedge funds have been selling the rally.  

So who's buying?   Its all the stimulus money.  That's the only logical answer.  We are talking about trillions of dollars printed out of thin air that is looking for a home.  $4 trillion is a lot of money!  Liquidity is overflowing, and Powell has his head stuck in the sand, in denial, trying not to rock the boat and crash this market so he can get reappointed.  The Fed is way behind and clueless, as usual. 

Since bonds are out of favor, that means funds going into money markets, stocks, and real estate.  And stocks and real estate are on fire.  Its just money that is out there, excess capital, looking for a place to invest.  This capital doesn't care if they are buying at all time high valuations, they want to invest, no matter what.  

The devaluation of the dollar from all this money printing is pushing the commodities index to the highest level since 2011.  Inflation is back with a vengeance, and it will be sticky, just because of the overflowing liquidity, rising wages, and lack of productivity gains. 

Shorting is just too tough.  You can't catch more than small pullbacks in this market.  Its still a BTFD market.  Amazing, considering we are on year 13 of the bull cycle since the bottom in 2009. 

The charts are still very overextended, as the SPX is way above its 100 and 200 day moving averages.  There is complacency, but top picking is hard.  Its actually easier to pick bottoms, even though it feels scarier.  

I still have a small short position, but definitely not going to be increasing my position, and will look to exit on the next pullback. Its still much better to buy dips than it is to sell rallies.  I just can't make myself buy this market when its SO overextended. 

Trading 102

1.  Take only as much risk as your body can handle.  Sell down to the sleeping point.  I remember taking risk like a madman several years ago, and I would wake up in the middle of the night after sleeping just 3-4 hours because my subconscious mind was thinking about what the market was doing.  Chest pain.  Insomnia.  Your body will let you know when you go over your risk tolerance level.  Its better to be healthy and poor than sick and rich.  

2.  Have a view.  There is that trading cliche:  Don't predict.  Trade what you see.  What does that even mean?  Its vague nonsense.  Every trade that you take is based on a belief that the price will go in a certain direction.  If you don't have enough conviction to make a prediction, you shouldn't even be thinking about putting on a trade.  Without conviction, you are just a sitting duck for stop hunting HFT algos looking to flush out weak hands.

3.  You don't learn how to trade by reading books.  Market Wizards will not make you a good trader or investor.  People have this bias that books are educational.  Trading is the worst business to learn from reading books.  Most of the stuff is outdated and no longer working or just snake oil.  I enjoyed reading Market Wizards and Reminiscence of a Stock Operator, they were entertaining, not educational.  Nothing I read in those books apply to my current trading.  

4.  Experience is the best teacher.  You learn by doing in this business, putting serious money on the line.  Not by reading trading books, or joining some trading subscription service.  Occasionally I will pick up ideas off of Twitter, reading blogs or articles, listening to podcasts, but most of my ideas come from watching and trading the markets.

5.  Tops are a process, bottoms are events.  Indices can linger for weeks at the top and then suddenly drop in a hurry.  But indices usually only stay at the bottom for a day or two.  

6.  Investors extrapolate trends well into the future, without regards for sustainability.  Trend following used to work in the old days when prices didn't adjust quickly to new information.  But with so many trend followers and market watchers, prices adjust quickly, and often overadjust and shoot past fundamental value.  Trend following late in a trend is like picking up dimes in front of a bulldozer.  

7.  Daytrading provides an illusion of risk control because there is no overnight risk.  But the more trading decisions you have to make, the more likely that you will screw up.  And most daytrading edges are small in the bigger markets because you are competing with HFTs and predatory algos.  

On this market:  We got the 1st day of the month inflows into equities like clockwork, so letting the flows do their work and push up prices to levels where it is profitable to short.  Have a small short position, will be careful adding here, want to have dry powder for an even better short setup.