Risk Management and Bet Sizing

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. - Warren Buffett

When I was young, I used to think more was better.  Big bets and big gains.  Trying to hit home runs.  Not focusing much on the downside, and the long run path.  It was always short term thinking, impatience.  Trying to make money quickly, without thinking about the long term implications of my strategy.  I've learned over the years at how flawed that strategy is.  Experience is a stern teacher in the market, especially for those that are stubborn and hesitant to change.  If you don't learn lessons from losing lots of money, you won't last in this business.

Managing risk is the most underrated aspect of trading and investing.  In a game where you will lose often, you have to be able to handle the ups and downs that come.  Being too conservative is much, much better than being too aggressive.  Those that are too conservative may not make a fortune but they stick around, survive, and have a chance to learn and get better.  And slowly accumulate.  Those that are too aggressive can have big runs but they can't dance around the raindrops and stay dry forever.  Those that push the limit don't survive and eventually have to get a real job.  

Being too conservative is a sign of fear.  That can be a good or bad thing.  It limits bet size which keeps you in the game.  But it also minimizes opportunities when more could have been made.  The financial markets don't attract too many of these types of people.  These types usually just put their money in equity index funds or bond funds.  Most of the types that are attracted to actually making their own investment decisions are usually too aggressive.  

The reason most traders fail is not because of bad stock picks or bad trading decisions.  Its because they bet too big and lose too much when they are wrong.  Traders usually think about how much they will make when they make a trade.  Not how much they could lose.  Its that eternal optimist in all of us where we cling to hopes and dreams.  Hoping and dreaming is a killer in the markets.   Even if you don't blow up trading too big, you will dramatically underperform a less risky trader.  Consider 2 traders:  

Trader A:  Makes or loses 50% of his account per trade.  Wins 60% of the time.  

Trader B:  Makes or loses 10% of his account per trade.  Wins 50% of the time.  

Who performs better over the long run?  

Let's do this exercise:  

Trader A and B both start with 100.  

Trader A:  wins 6 and loses 4.  100 -> 150 -> 75 -> 113 -> 169 -> 85 -> 128 -> 192 -> 96 -> 144 -> 72.  60% win rate but loses 28% after 10 trades.   

Trader B: wins 5 and loses 5.  100 - 90 - 99 - 89 - 98 - 108 - 97 - 87 - 96 - 106 - 95.  50% win rate but loses 5% after 10 trades. 

Imagine if both trader A and B both had the same win rates.  It would be an absolute disaster for trader A.  Even with a 10% higher win rate, trader A massively underperforms trader B.

Excessive volatility in the account balance is a huge drag on performance. 

Another big negative for traders that are too aggressive is that big bet sizes force unwanted decisions at bad times.  Forced selling is the worst way to sell (when long).  Forced buying is the worst way to buy (when short).  Proper bet size allows you to weather the storm, stay with trades through short term drawdowns to their ultimate destination.  It gives your trades time to work, which is half the battle.  Being forced to push the eject button because of short term market volatility destroys returns.  Closing out trades because you are wrong instead of because you are losing money is a big difference.  Its hard enough to make money playing on your own terms.  If you are forced to play on the market's terms, you will be chopped up and whipped around and left in tatters.  

There is a reason that Warren Buffett says the most important rule is never lose money.  He doesn't mean it literally, because that's an impossible task, but states that rule to emphasize the importance of limiting losses to growing wealth. 

The last week of the year, and for the past few trading days, you have seen tax loss selling and a cleaning up of portfolios for window dressing purposes.  That has led to weakness in tech stocks and bonds.  Its been a terrible year for most fund managers.  And amidst hopes for a Santa Claus rally, the firepower was lacking for buyers to push the market much higher.  I remain neutral on stocks, and did miss a potentially very profitable short a couple of weeks ago post CPI, but missed trades happen.  I overestimated the willingness of investors to chase stocks and make bad decisions while fundamentals remain terrible.  Although the price action is weak, I remain bullish on bonds as I expect the fundamentals of a weakening economy and falling inflation will supersede central banks' hawkish rhetoric.  

My New Year's resolution for 2023 is to trade less by betting smaller and having wider price targets.  By betting smaller, I will achieve 2 important things:  1) be less affected by short term price movements, leading to better decision making and less forced trades (stops/liquidations). 2) have a better quality of life with less stress.  

Here's to a great 2023.  Happy New Year.

When the Fed Pauses

We are very close to the end of the tightening cycle.  The LEIs and PMIs are both showing an economy that is at the beginning of an economic downturn.  While the labor market still hasn't cracked, its not as strong as the nonfarm payrolls have shown, due to inaccuracies and double counting part-time jobs held by one person.  The divergence between the household survey and the establishment survey is huge, which tells you that 2nd jobs have been a big part of the strength in the nonfarm payrolls number.  Also, the birth-death model underestimates job losses when the economy suddenly starts to weaken, as businesses unlikely to respond when they are about to go out of business or are out of business.  

Inflation is trending lower but people are still spooked by the trauma of higher than expected CPI prints for most of 2022.  On the housing side, the end of eviction moratoriums and the increase in supply in 2023 will ensure that rent inflation is subdued.  If layoffs blowup like I expect it to next year, a lot of Millenials will be moving back to their parents' basement rather than staying in an apartment.  The only fly in the ointment to my disinflation thesis for 2023 are commodities.  Commodity prices could go back up again as China comes back on to the market for their "reopening".  I don't think it will be as big as people expect, but the anticipation of it could boost energy prices in the first half of 2023.  But overall, even if oil prices go back up, the year over year comparisons will be favorable, so higher oil prices won't feed too much into the CPI.  

I know they say that Powell doesn't want to stop hiking and then start hiking again if inflation stays sticky, like they did in the 1970s, but he's deluding himself if he thinks this economy is anything like that of the 1970s.  You have to remember that in the early 1970s, the US went off the gold standard, and that ushered in an inflationary wave, exacerbated by the oil embargo.  You had a fast growing younger population, with a much higher demand for goods, while not having the mass globalization as you do now to be able to meet the demand.  The money supply was growing faster than it is now.  And there was much less household debt.  The household debt to gdp ratio is almost double that of the 1970s.  

Households cannot handle high interest rates when they hold so much more debt.  Not only that, the wages adjusted for inflation were much higher in the 1970s than they are now.  A lot of people are buying into the sticky inflation/deglobalization/1970s theme but the data just doesn't support it.  

I don't know what Powell is thinking, although many are saying that he wants to be revered like Paul Volcker.  But Volcker was just a person who was in the right place at the right time.  He wasn't the one who killed inflation.  Commodity deflation, productivity growth from technology leading to deflationary forces, and the dollar going on a massive appreciation cycle as it became the clear global reserve currency were the inflation killers.  

The bond market is the biggest beneficiary of a Fed that finishes its rate hiking cycle.  In the last 4 rate hiking cycles (1994, 1999-2000, 2004-2006, 2017-2018), 10 year yields fell rapidly after the last rate hike.  While stocks also did well right after the Fed finished hiking, the strength was temporary in 2 of 4 cases, as stocks dropped bigly in 2000-2002, and in 2007-2008.  But all 4 cases saw bond yields trend lower for years after the final hike.  

Here is what happened to 10 year yields after the last rate hike and during the subsequent pause in 1994, 2000, 2006, and 2018-2019.  

Here is what typically happens after the last rate hike by the Fed.  They never signal a future rate cut, they either signal more rate hikes which they can't execute due to economic weakness, or they signal that they will keep rates at current levels for an extended period.  They NEVER signal a rate cut right after their last rate hike.  So don't expect one.  Just expect the bond market to start rallying after the dark cloud of future rate hikes is lifted and the sunny skies of future rate cuts is on the horizon.  

People like to look in the rear view mirrow when forecasting, which is why you see a lot of fears of another bond market liquidity squeeze like you saw in September/October or hawkish central banks.  Central banks ALWAYS fight the last battle.  They have no foresight.  They are always in CYA mode (cover your ass), which means they take the politically safe route, which is to fight the last battle.  The last battle was inflation.  The next battle will be a deep recession.  I don't buy the shallow recession reasoning at all.  When you have secular stagnation and central banks still fighting the last battle and not coming to the rescue, you will get a deep recession and lots of job losses.  They are the firemen who always come an hour late, when the house is already burned down.  Expect the same result this time.  The house is burning now, and they are just adding more gasoline to the fire.  When they figure out their policy error, they'll act like nothing bad happened, they will just push their mistakes under the rug, and go back to what they always do: fight the last battle.  

Neutral on the stock market.  After this dip, leaning bullish on bonds.   The BOJ yield curve control tweak scared some weak hands, but it doesn't change anything.  Japan isn't really that relevant anymore in the big scheme of things, the big current account surpluses from their heyday are over.  The yield differentials are still huge so their won't be much repatriation unless they follow the ECB and get really aggressive.  Doubtful that happens before the global economy is in a deep recession, at which point they will stop whatever minor tightening they have done.  It appears that too many are jumping on the weak dollar bandwagon as the ECB and BOJ have suprised on the hawkish side.  Fundamentally, the dollar is still the cleanest dirty shirt out there.  Europe's energy policy is terrible.  Japan just isn't printing enough money to sustain big inflation numbers.  And after a big dip, I expect a return to a strong dollar in early 2023 as fundamentals reassert themselves. 

Cookie Cutter

First it was a hawkish Powell, then it was a hawkish Lagarde.  A very hawkish Lagarde who seems to be acting with a 3 month lag on Powell.  Apparently she didn't get the memo that inflation has peaked and is coming down.  Is she communicating by letter via sea mail with Powell and just received the letter in the mail about his hawkish Jackson Hole speech?  

Central banking is the embodiment of government work: easy, no accountability, and lots of incompetence.  No wonder you get such bad monetary policy.  The US had a demand side problem from too much fiscal stimulus and can fix it with demand side solutions.  That is why you are seeing some traction in fighting inflation with monetary tightening in the US.  But the EU has mostly a supply side problem(due to Russian gas cutoff and horrible energy policy) that they are trying to solve with demand side solutions.  Lagarde can't hike her way to more natural gas.  Raising rates to restrictive levels will just kill the economy and keep energy prices high.  The worst of both worlds.  Stagflation.  

These central bankers are such herd creatures.  They don't have an ounce of independent thought.  The only one sticking to their guns is the BOJ.  They are doing nothing.  Its comatose central banking 101.  Same old, same old.  These central bankers are straight out of a cookie factory.  Cookie cutter.  If you've heard one, you know what the next one will say.  They are always looking firmly in the rearview mirror and have no foresight.  They are constantly in CYA (cover your ass) mode.  They are basically politicians who no one can vote on.  

I wonder if Powell believes his own bullshit.  5%+ Fed funds rate and keeping them there for longer in 2023.  Does he think the US is the same economy that it was in the 1990s?  Or even the 1970s-1980s?  From the articles I read, he seems obsessed with being the next Volcker and being revered as an inflation fighter.  The US population in the 1970s was much younger and growing faster.  There was little globalization to keep wages in check.  There was no wage arbitrage.  Much less debt.  

Keeping rates above 5% for an extended time will guarantee a very weak housing market, and by extension, a deep recession.  Its not a matter of if, but when things blow up.  And we all know that when things blow up, the Fed will go back to their usual playbook of cutting in huge chunks, quickly, getting to the zero lower bound and then doing QE.  Same thing for the ECB.  By looking in the rear view mirror, they will ensure that the bond market will go back to the last regime of ZIRP and QE.  

High inflation isn't suddenly this new structural regime, its a function of massive money printing and handouts in 2020 and 2021.  Once again, the market is extrapolating a black swan event which caused inflation to spike as the new normal.  It is confusing cyclical with structural factors.  We have cyclically high inflation.  There is structurally low growth.  Structural low growth doesn't go away by having a crack up boom for 2 years.  The population is basically flatlining.  There is no productivity growth.  All future growth in the US, Europe, and East Asia will come from fiscal stimulus.  That's the only growth driver.  The developed economies have reached their end game in capitalism. Capitalism depends on continuous growth to function properly.  The inability to growth without fiscal largesse is a sign of secular stagnation.  

The Fed and ECB provided the 1-2 punch which is inflicting a lot of pain on the stock indices.  I didn't expect this reaction, but I also didn't go long.  It is days like Thursday which make me avoid the long side.  Going long in a bear market (unless after a deep pullback) is picking up quarters in front of a bulldozer.  Chasing strength in a bear market is asking the market to take your money.  Now that SPX has cracked wide open below 3900, I am staying on the sidelines.  I have levels where I am comfortable shorting, and at this juncture, not comfortable shorting under 3900.  That doesn't mean I won't get short if it goes under 3900, because that's exactly what I did in September.  I just need the right setup to do it.  And things aren't lined up yet.  With bond yields trending lower, its going to take a bit longer to build up the energy to make another sharp move lower like you saw from August 15 (SPX 4300) to September 30 (3600).  In investing, you don't have to swing.  You can wait for your pitch.  There are no called strikes, as Buffett says.  Its a time to wait.  No need to rush into a position with the low liquidity and usually boring environment of the final 2 weeks of the year. 

Recession Consensus

Almost everyone seems to realize that a recession is coming, but they are not selling stocks.  You are seeing some equity fund outflows after some inflows, but not a continuous trend of outflows.  They are also not buying bonds.  Instead, they are just adding to cash, and waiting.  If stock valuations were much lower and we weren't in a post-bubble environment, my natural inclination would be to lean bullish stocks.  But that's not the case.  Less than 12 months have passed since the top of the biggest bubble in US stock market history.  Stocks are still historically overvalued.  US stocks are considered a "good" asset class.  The big picture is very bearish.  Even without a potential recession and future earnings downgrades.   

If you zoom in and focus on light hedge fund/systematic positioning and somewhat bearish investor psychology, you can figure out a way to be bullish, but its a bit of a stretch.  I am not willing to undergo contrarian mental gymnastics to rationalize a bullish equity position in this environment.  Even if most people are expecting a tough 1st half of 2023 and a mild recession, which is the base case for most investors.  

As I have said in the past, overall, the institutional investor base is wiser than they were in the past.  They now put less focus on economic fundamentals and more focus on monetary and fiscal policy.  That's a better way to invest than to focus on the cyclical swings in the economy.   That is why studying past historical patterns of stock market behavior and reaction to monetary policy could lead to faulty conclusions.  In the past, earnings projections and current economic conditions had a much bigger impact on stock price movements than they do now.  Investors have wisened up.  They now view loose monetary policy with the corresponding weak economic conditions as an overall benefit to the stock market.  That's why you didn't get that big flush out of panicked investors selling on earnings disappointments that you saw in Q3 in October, because they are willing to look past the current downturn if monetary policy becomes more favorable.  

Yesterday's cooler than expected CPI number doesn't change much.  It may change your view if you thought that inflation was going to be stickier than expected.  But I've been of the view that disinflation is here and all the high frequency price data for housing, goods, and transportation costs are pointing to the same thing.  It was just a matter of time when the high frequency data would flow through to the CPI.  Since government data is lagging and often inaccurate, putting too much weight on is asking for trouble. There were so many ludicrous price targets from the sellside if the CPI was lower than expected or higher than expected, and with IVs juiced way too high, the market quickly faded after the initial spike higher.  I didn't expect a fade so big, otherwise I would have gotten short, but I suspected that it was not going to play out like it did after the November CPI.  With FOMC today, it seems like there is some leftover trauma from the past 2 cliff drops after the FOMC in September and November.  

Some may disagree with this view, but Powell is a natural dove.  He sounds mealy mouth and noncommittal if you listen to him.  That's what the Fed chair position does to people.  They get scared of spooking the markets.  So it took him some time to have the balls to spook the market to tighten financial conditions and raise rate expectations.  His Jackson Hole speech, and the past 2 FOMC meetings did that job.  With Fed funds rates projected to top out close to 5% in the spring of 2023, there is no need to act hawkish when the rate expectations are already so high.  It was a different story when the inflation data was not going down and the market was still pricing in a less hawkish Fed.  Who knows, maybe Powell flip flops from his November 30 speech and puts on his full hawk act again, but the economic data is trending much weaker now than it was 3 months ago when he went on a rampage.  The Angry Powell phase is over.  He may still try to sound tough, but he's lost his edge.  Even if he tries to fight the bond market this time, I don't expect it to gain much traction.  The data is showing weakness and with it, the more frequent recession calls for 2023.  

All the fund flows data for 2022 has shown a stubborn willingness to buy the dip in stocks and a fear that bonds will keep going lower.  After the first quarter where you saw hefty equity inflows, you went sideways with no meaningful net flows from April to November.  During that time, bond outflows accelerated and the household percentage of bond assets is historically low.  With an aging demographic and higher yields than almost anytime since 2008, bonds will attract inflows in 2023.  There is a notable sentiment shift from outright hate and fear to gradual acceptance.  It will take time from investors to fully get back on board the bond bus.   The supply/demand picture is not optimal with such huge budget deficits and QT for Treasuries, so I don't expect a huge rally from bonds right away.  But with the economic weakness and the secular stagnation thesis still very much alive, rates at these levels are not sustainable.  When the economy gets really weak and the shit hits the fan, they will cut big and fast.  The bond market is telling you as much.  Take a look at this inverted SOFR yield curve.  Its pricing in a drop to 2.75% Fed funds by 2025. 

Its almost the exact opposite of what investors were expecting in late 2021, with the SOFR curve quite steep, yet many expecting just gradual rate hikes for the next 2 years.  The bond market isn't always right, but it is more often right than Fed forecasts.  The Fed forecast of higher for longer is dubious.  Its what they say to try to tighten financial conditions, but it has no bearing on future monetary policy.  Forward guidance is just empty promises to try to trick the market to do its work for them.  Those who believe Fed forward guidance for 2023 are making the same mistake, the other way around as they did in 2021, when the Fed said lower for longer.  

Missed the short after the big gap up on the cool CPI, as my base case was shorting after the FOMC today.  It looks more apparent that there is a somewhat soft ceiling above SPX 4100 and soft support at SPX 3900.  Dare I say that we'll be range bound for the next month?  Its not flashy, but that's my projection.  If we get a rally after the FOMC that takes the SPX toward 4100, will enter shorts.  Although I am leaning towards a rally post FOMC, if there is no rally, I'll wait on the sidelines.  Definitely not interested in the long side.  This is still a hit and run market.  Seasonally, its not a favorable time for the bears.  I usually ignore seasonality, but the end of the year when liquidity is light is one of the few times that seasonal influences are strong.  Its not a market to bear down and take long term positions.  There are no great short term setups here.  Let the market come to you.

Sun Rises in the Bond Market

The positive correlation between stocks and bonds is weakening as the focus shifts from inflation to economic weakness.  The CPI report in November was the game changer.  It gave bond investors the green light to start buying as the fear of an inflationary price spiral and a possible UK like bond vigilante led squeeze higher in yields was put off the table.  As most bond fund managers have been afraid to add duration ahead of this freight train bear market, there was a lot of pent up demand that was building as 10 year yields broke the 2022 highs of 3.50% and squeezed mercilessly higher into late October, only to be saved by a nervous Fed using their loudspeaker, Nick Timiraos of the WSJ to calm down the market.  The day that Timiraos came to the rescue on October 21 was the top in 10 year yields at 4.33%.  

Since the CPI release with the softer than expected inflation print, bond investors have come out of their bunkers and looked at the charred landscape as 10 yr yields have gone from 1.51% at the start of 2022 to the mid 3s.  People forget in times of distress what they are buying and selling.  A 10 year Treasury note is pricing in the average of the Fed funds rate over the next 10 years + term premium.  It is a world where developed world population growth is approximately zero, and productivity is also around zero (maybe negative given the work from home trends, lack of meaningful technological advances, and increasing labor power = lazier workers).  Nominal GDP growth will be driven by inflation, not economic growth.  Expect a return to secular stagnation until the next big stimulus package (2025 story?).  2020-2021 was an anomaly.  You had a convenient excuse for politicians to go full bore populist and spew out tons of fiscal stimulus for individuals, state and local governments, and corporations.  

That is something that will happen again, but the stars have to align to get that kind of scale of coordinated, global fiscal pump priming.  The right mix of Republican and Democrat control of White House and Congress, either total control for one party or a Republican president.  Republicans will obstruct fiscal stimulus if there is a Democrat president in power, but not if its a Republican president.  And Democrats always believe in moar fiscal stimulus, no matter who the president is.  So in most cases, a Republican president leads to more fiscal stimulus than a Democrat president because its not common for Democrats to control both the White House and both Houses.  

Back to the bond market.  Its has been in a 26 month downtrend from August 2020 before it finally bottomed in October.  That is a LONG downtrend.  You have flushed out a lot of weak hands during that process, while offering much more attractive yields for long term investors.  Yields that are high enough where bonds can now provide a risk off hedge to equities once the rate hike cycle is done, which looks to be less than 3 months away.  Due to my pessimistic view on global growth, and even US growth, I lean towards the bullish side on bonds in most situations.  I definitely underestimated the inflationary effects of all that Covid stimulus but its looking like most of that has worked its way through the system.  With prices already having gone up a lot in 2021 and 2022, the base effects for inflation prints will favor disinflationary views over those who think inflation remains sticky in 2023.  The M2 money supply has been dropping steadily in 2022, which is rare to see.  I don't see a wage price spiral happening when the supply of money is no longer increasing and when the demand for workers is dropping as the economy gets weaker.  When the economy weakens, workers have to worry about potentially getting fired, which reduces their wage bargain power, and you have fewer workers switching firms, another source of wage growth.  

Lately, the yield curve has gone into a super inversion.  2-10s are trading -83 bps.  Look at the move in 1-10s, historically extreme:

Take a look at when the 1-10s spread went into negative territory, a sign that the Fed is overtightening and about to push the economy into a recession.  1989, 2000, 2007,2019.  They all resulted in sharp curve steepenings as the Fed aggressively cut rates in all 4 cases.  I expect a similar outcome this time around.  In fact, with the curve that much more inverted now, the curve steepening move will be vicious.  I am still seeing most fixed income analysts call for the Fed to keep rates high and not cut in 2023.  So betting on aggressive Fed rate cuts for the 2nd half of 2023 is both an out of consensus view, and also not priced into the SOFR futures curve as Dec 2023 is trading at 4.38%, which is only 52 bps lower than the 4.90% terminal rate pricing in Mar/June 2023.  The risk reward is quite good in the short end of the curve at current levels, although timing it will be important.  The roll up in yields is extreme at the short end of the curve, so the negative carry for being long 2s and short 10s is almost 40 bps/year.  That is a big chunk to pay out for a curve bet, but it should pay off big when the Fed enters a rate cutting cycle.

From the daily headlines, CNBC, and Bloomberg, slowly more are becoming aligned to the recession view, and that's part of the reason you are seeing the big rout in crude oil even as US inventories keep going lower and China loosens it Covid policies.  There has been heavy liquidation of long positions in Brent and WTI futures over the past couple of weeks.  With the curve going from backwardation to slight contango, systematic commodity traders are reducing longs and adding shorts. 

In trading, sometimes the market just induces you to take a position which you never thought about taking so soon.  The big drop in crude oil this week is piquing my interest.  Even with the short term cyclical headwinds and demand weakness that is sure to come down the pike, at a certain price, the risk reward turns positive for buyers.  We are probably already at that point, but I will wait for an even better level.  This is a seasonally weak time of year for crude oil, and there are still residual bagholders who still cling on to hopes of $100, $150, $200 oil.  There are plenty of barrel counters who are besides themselves trying to figure out why crude keeps going lower as crude inventory levels go lower, amidst China reopening hopes.  That has kept me away from the long side.  But I'm noticing that some of the permabulls are softening their bullish rhetoric.  Oil stocks have massively outperformed the commodity in 2022, so if I play for a long, it would be in oil itself, not oil stocks.  Something that is on the radar.  

Closed out part of the NDX short yesterday in the premarket, and will look to close out the rest today.  Finally got that big spike in put/call ratio to 1.17 yesterday, and noticed that the fear was building up watching CNBC.  After today, probably will not play the short side in NDX or SPX until after Christmas, as I see little edge shorting during a seasonally strong period of the year, and ahead of CPI and FOMC, which probably will result in a relief rally.  Even though I think SPX will go up next week after the big events are behind us, I will not play the long side.  The levels just aren't attractive and there is rug pull risk in the unlikely case that Powell puts back on his hawk costume or you get a hot CPI.  I will let others fight those battles.  Its still a swing trader's market in SPX.  If we get a big rally after the CPI and FOMC, then we can talk about taking longer term short positions later in the month.  Especially in tech.  Until then, letting the market come to my buy or sell levels to put on positions.  They need to induce me to take a position by getting to an extreme, because there is nothing that's really attractive at current levels.

Retail Getting Bagged

The post bubble environment is playing out and the winners and losers are becoming clear.  The winners:  energy, pharma, healthcare, utilities.  The losers: mega cap tech (GOOG, AMZN, META, TSLA) software, semiconductors, speculative tech (EVs, ARKK favorites).  The worse performing names:  AMZN, GOOG, TSLA, NVDA, ARKK, etc. are heavily owned by retail investors.  The best performing names are not:  XOM, OXY, MRK, LLY, XLV, etc.  

The stock market has managed to do what it always does:  punish the uninformed who come late to the party and crowd into the most popular and overvalued names.  Let's take a look at 2 of retail favorite ETFs:  TQQQ (3x leveraged Nasdaq 100) and ARKK, vs 2 of the best performing ETFs: XLE and XOP.  

Inflows into QQQ, TQQQ, and ARKK, and outflows from XLE and XOP.  Yet, the performance is the complete opposite of the investor flows.

While you've seen a big rally off the October lows for the SPX, you haven't much of a bounce in ARKK or even in TQQQ.  

The most overowned stock among retail, TSLA, is acting the weakest among the megacap tech names.  It still hasn't even been able to get back above the October lows, when the overall market bottomed.  Its quite clear that there is a drastic reduction in demand for concept stocks that are massively overvalued with weakening earnings outlooks.  About the worst combination you can get for a stock.  Would not be surprised to see TSLA perform even worse in 2023 than in 2022.  Look at the low institutional ownership, which means that retail ownership is huge, uncommon for a stock with a market cap so big. 

 The heavy participation of retail investors, who are still heavily invested (they got diamond hands!) is a classic symptom of a market that is saturated and likely heading lower.  From 2008 to mid 2020, retail investors stayed away from the stock market, as equity fund outflows were the norm.  Only in the past 2 years has that changed.  The millenials, probably the dumbest generation of investors, finally had enough of sitting on the sidelines and finally piled into the bubble stocks (FANG, EVs, ARKK, meme garbage) en masse in 2021 to catch up.  Not only that, they also piled into cryptos, looking to get rich quick.  The end result is a bubble that's now popped, with retail bagholders littering the landscape.  The wealth effect is real for these millenials.  They are the ones with the most propensity to consume yet have been hit with the biggest losses.  This is not going to help with household formation in the coming years.  Add to the much higher mortgage rates and house prices that still haven't come down much and you have a shit sandwich for the millenials.  

Last Wednesday, Powell dropped his hawk act and showed his true colors.  Its not easy putting on act all the time, especially when the incoming econ. data doesn't support it.  Powell either had to lie through his teeth to try to forward guide a much higher terminal rate to keep the stock market down, or just be honest and admit that looking at lagged data to keep hiking rates is asking for trouble.  Powell seems to be over the  hawk phase of his act, and finally telling people what he really thinks.  He's afraid of overtightening, and is still going for that soft landing.  Although its highly unlikely that there is a soft landing, he'll probably soften his tone for none other than political reasons.  

He is already feeling some heat from the Dems for being too hawkish, and he's a guy who tries to please politicians.  He's the farthest thing from Volcker, no matter how much he wants to be revered like him.  The sooner he drops his infatuation with being the next Volcker, the less pain the economy will feel in 2023 and 2024.  But its probably already too late.  This is nothing like the late 70s, early 80s.  The secular stagnation and debt dynamics are total opposites of that time period.  The yield curve inversion and the leading indicators have already baked in a mild recession.  I can't picture Powell getting ahead of the curve, and he'll probably just be reactionary as always and be late as a result, panic cutting in big chunks in the summer/fall of 2023 to try to stave off a huge rise in unemployment and a big economic slowdown.  

I put on a small short NDX position on Thursday, and am looking to add to the position on Monday.  The market seems to be struggling here as we approach that much talked about SPX 4100 level, which seems to be the target for a lot of short term bulls.  With CPI and FOMC, along with a bunch of central bank meetings next week, it would fit the pattern of a pullback ahead of the events, and then probably a rally after the events are behind us.  So looking for a pullback later this week.  Not sure about levels, but probably the best time to cover will be Thursday/Friday.