Feast or Famine Business

Trading is not a steady income business.  Those that try to make it a source of steady income like a normal 9 to 5 job usually go the daytrading/scalping route.  Without a doubt daytrading has the highest failure rate of all forms of speculation.  There just aren't many edges out there on a day to day basis.  The edges which do come regularly are dominated by HFT firms which easily beat out retail traders.  If you are a retail trader, its an act of supreme overconfidence and hubris to think that you can outscalp these HFTs which specialize in front running and being the first in line on the bid and offer queue.  Not to mention the slippage and transaction costs add up quickly the more often you trade.  

Trading is a feast and famine business.  Its usually long periods of famine with brief periods of feast.  Those that try to make steady income during the long periods of famine are trying to squeeze water out a rock.  Those that are satisfied with making a steady income during feasting periods are minimizing the opportunity set available during those good times, making a little when they could make a lot.  If you have been in this business long enough, you get better at recognizing what are tough trading markets and what are good trading markets.  

Usually, the more volatile the markets get, the better it is for trading.  The main reason for this is because markets often get volatile when investors are losing money and panicking out of positions.  Predictability correlates with volatility but not always.  Sometimes you get volatile markets that are unpredictable.   For example, the bond market in 2023 was quite volatile but were hard to predict (Silicon Valley Bank going bust in March, long end panic in September/October).  I remember seeing rampant call buying in TLT into a strong downtrend, thinking that it was unlikely so many options punters would make money buying in a market so weak.  But they were right, which is uncommon.  

Right now, people are making money, volatility is calm, and investors are not panicking. Its a tough trading market.  But I stay in the game, keep watching the markets, put on trades, not trying to hit home runs or make steady income, but to get a feel for when its about to get good again.  What trades I make during these tough times are probably slightly negative expected value (EV).  But observing the market and making trades helps with timing the next big trade, the time when the markets get good again, when there are many positive EV trades.  

Usually the longer the famine, the bigger the feast on the other side.  While 2023 was a good market for investors, it wasn't a great trading market.  Especially for those with a bearish lean.  For those natural born bears out there, its about to be your time again.  We have the ingredients for a bear market lining up.  

1.  High valuations and large asset allocations towards equities among individual investors.

2.  Investor optimism and complacency about the economy.  Soft landing consensus.

3.  A bubble in AI with greedy investors bidding up other high beta assets like bitcoin.

The rally off the late October low is now 3.5 months old.  Looking at past strong rallies like this off of V bottoms, the average length of the rally is from 4 to 5 months.  So we are getting close to the end of this bull run.  From a price perspective, this rally has exceeded my expectations.  But that just makes for a even more lucrative short setup in the coming weeks.  This is opex week, and with how relentless the uptrend has been, you are setting up for a Friday opex day climax top.  I don't expect that to be the final top of this rally, but a 3 to 5 day post opex selloff coming off that climax top would not surprise.  Something similar to what happened after June 16 2023 opex. 

The goal now is to keep a close eye on the market and participate but not lose too much money while waiting for the good times to arrive.  Still long bonds and waiting for a climax top to short SPX.  The AI bubble keeps growing, but its still too strong and too early to short.  We have NVDA earnings next week, which could serve as a catalyst for the final blowoff top in the name.  The sharpest moves occur at the late stages of a rally, so timing is everything when it comes to trying to pick tops in bubbles.  I would like to see more 2nd tier and 3rd tier AI bubble plays flying higher to get more confidence that a top is near.  We haven't seen that yet, so holding my fire for now.  The AI skeptics are mostly gone, and nearly everyone believes is will be a huge breakthrough technology, almost like the 2nd coming of the internet.  This usually the parabolic phase of the bubble where the sharpest moves higher happen.  Probably in the 7th or 8th inning of this AI bubble, so not much time left for those playing that game.