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.