Learning from Mistakes

2021 was a golden opportunity to be long US stocks for anyone who had a solid big picture view of how a bubble plays out.  Going into 2021, I was too enamored with not being caught long at the top of a massive bubble instead of recognizing that less than 1 year removed from the Covid "bear" market, it was highly unlikely a meaningful top would be made so quickly after such a huge flush out.  Even if you had a repeat of the brief Dec. 2018 to Feb. 2020 bottom to top cycle, that still gave you 14 months from the March 2020 lows, or until May 2021. 

The biggest clue that this bubble would be extended was how the Fed reacted to the growing bubble in 2021.  Powell remaining over the top dovish as the stock market kept going higher and higher and the economy was heating up was the most obvious sign that the bubble would get a lot bigger in 2021.  

February 2020 was the only meaningful top that was made while the Fed was not in a tightening mode, and it probably wouldn't have happened if not for a black swan event.  The only other instance of a big stock market drop without a tightening central bank was in the summer of 2011, when it was the tightening of the European financial system as sovereign yields for the PIIGS skyrocketed, a market driven tightening, not a central bank policy driven one.  A tightening nonetheless, the most important ingredient to form a meaningful stock market top. 

In hindsight, everything looks clear and obvious.  In the heat of the moment, in the middle of the battle, its never that easy.  Its much easier to make the right decisions as a Monday morning quarterback than trying to make the right reads while 300 pound linemen are trying to pummel you into the ground.   

The market was there offering loads of money and I was content with being short term focused and conservative, taking 5 dollar bills when I should have been collecting 100 dollar bills.  Finally in September/October, there was another golden opportunity, even though at the time, there was a lot of chop that made it "feel" scary to get long.  The disgust from my previous poor exits was enough motivation to make the right play.  The key was not getting in too early in buying the dip, which allowed me to hang on and not getting shaken out in late Sep./early Oct. as the market chopped violently from SPX 4300 to 4400.  

The first thing on my mind was to not sell if the trade went in my favor.  On my mind was those previous well-timed dip buys that didn't amount to much because I sold way too early, afraid of giving it back on another pullback.  This time, I gave the long trade plenty of time to work.  Even then, I sold a portion way too early, but thankfully, rode most of it to the 4650-4700 range.  The key was resisting the urge to microtrade, the bane of my existence, even as I thought that a quick 1 day pullback was imminent (it didn't happen until October 27).  Losing the arrogance of thinking that I was smart enough to time and predict every little move made me do nothing but just stay in the trade and let it play out.   

To this day, even after seeing the SPX go way higher after I sell so many times in my career, I still get that urge to sell after that quick profit on the initial portion of the V bounce.  It has to be the psychological crutch of aiming for steady, consistent moderate gains, instead of less common, but much bigger gains.  Even as I thought that I got rid of the salaryman mentality a long time ago, there is a seed deep inside my psyche that still wants to make consistent gains on my terms, instead of taking what the market gives me, whether it be big or small, plus or minus.  

There are zen like aspects to surfing the markets, if you try to force your will and style on the market, you limit yourself and close off the enormous potential that is out there.  Its like taking a boat out only to stay near the shore, content with catching little fish in quick daily trips, instead of going out into deep waters, looking for the big fish, going for the big catch in long multiday trips.  

I am all out of my SPX longs.  I could probably eek out a few more points but I just see too much call buying and complacency, as well as the upcoming options expiration and ensuing post-opex risk.  Also, the time window from the early October lows has played out, as we are 5 weeks from the blastoff point, and 6 weeks from the lows of early October.  Also the renewed weakness in Treasuries is another headwind.  Its a seasonally strong period, so not really interested in going short, but the risk/reward seems neutral to slightly favoring shorts.