Fast Money is Short Term Bearish

The market was looking for any reason to selloff and GME and the big short squeeze in highly shorted names was used as the excuse.  Do I believe that to actually to be the case?  No.  What you had was an overextended long position among the hedge funds, with high net long exposure.  In those situations, a pullback is always imminent.  And this looks to be the pullback.  I don't expect anything nefarious, and there is a good chance that its just a 2-3 day pullback that goes right back towards all time highs.

On GME.  This has become a cult stock.  Like TSLA, the stock is more famous than the company itself.  No one could give a rat's a$$ about GME the company or how the stores are doing.  Same with TSLA.  Its all about the stock.  GME is now famous for its stock, and that itself means there is a lot of future sticky demand for its stock, from both retail and institutions trying to play for short squeezes and momentum.  The mean reversion to more reasonable valuations will take a very long time.  Just like it will with TSLA.

I've been on the sidelines for most of the month but I did come in to buy the weakness on Wednesday near the close and also on Thursday in pre-market trading.  Its amazing to me how quickly the Fast Money crowd goes from super optimistic to looking for a pullback, just because of GME and the domino effect of short squeezes and forced liquidation in highly shorted stocks?  LOL.  You can't make this stuff up.  

Tony Dwyer, the permabull who comes on CNBC quite often, is a great contrarian indicator when he becomes short term bearish, because it doesn't happen that often.  He was short term bearish in December, looking for a short term pullback, and the market kept going higher.  There are a few other cases where his short term bearishness was wrong.  And one of the talking heads on CNBC Fast Money agreed him.  So a double contrarian indicator.  Anyway, he starts talking about 2010, the flash crash, and how he's short term bearish, and to cover all the bases just in case he's wrong, he says he's long term bullish because of the Fed and Powell.  

No one trades on their long term views.  Almost everyone trades on their short term views, because the people who come on TV to express market views are not long term thinkers.  Almost all of them are trying to catch the next move, not the next BIG move.  So if someone is long term bullish and is optimistic but is looking for a pullback, then they are bearish.  That's how most of these permabulls, of which there are plenty, express their bearishness.  

The market has gone nowhere for the past month, so its making a base near all time highs, and a less than 3% dip gets the "experts" bearish on the short term.  To me, the market looks like its basing near all time highs set to grind even higher.  It is a bubble, after all.  And bubbles usually get bigger until they go parabolic and pop.  What I've seen in January is nothing like a parabolic move higher and a popping of the bubble.  Sure, the momentum names and highly shorted stocks have done well in January, but overall, SPX has gone nowhere this month.  And it appears that pension funds have been rebalancing by selling equities and buying bonds this week, putting some pressure on the stock market.  That should be done by today, the last day of the month.  

On another note, the VIX going to 37 on Wednesday is amazing to me.  That is almost as high as it was before the election in October as the market was making its final big dip before the relentless post election rally.  Realized vol is nowhere close to the implied vol levels shown by VIX.  That is a longer term worrisome sign, that market makers are not willing to sell put protection at reasonable prices.  There doesn't seem to be a lot of hedge funds coming in looking to sell puts to generate income.  Maybe all the put sellers got taken out in March 2020 and are no longer there to sell SPX puts to keep VIX lower.  Instead, they've been busy rotating from big tech to the cyclicals and small cap names.   And the intraday air pockets and plunges lower are a sign of a lack of excess cash to buy the dips and buffer the volatility intraday.  

 
Market does feel saturated with longs but with positive stimulus and re-opening catalysts still ahead, I expect a much bigger move higher, and more optimism before you get that 10% correction. 

Pullback Looks Imminent

Yeah, these days everyone is talking about GME and other short squeezes (AMC, BYND, etc) on heavily short stocks.  So I don't have much to add on the topic, short term, I am not playing those names, and long term, well, let's put it this way:  I see at least 300 individual stocks that I have about 80% downside in a year, on average.  So GME just joined the club, with another 299 members.  This is no exaggeration, it is just the ridiculous bubble that we are in, and its at a very late stage, so 1 year is definitely enough time to catch an 80% down move, even if there is a few more months of this bubble left.   At this point, I am looking at the short borrow rate, the average cost to maintain a short for one year in many of these names, to see which ones to short and hold for the ride down lower.  

Barring any fireworks in the final 3 days of the month, January will be the 3rd straight month without more than a 2.5% correction (daily basis) since end of October.  That wouldn't be a big deal if the VIX was ranging from 12 to 16, but its been between 20 to 30.  So you have had a high VIX for 3 straight months, even though you haven't had a  move of more than 2.5% down on a closing basis.  That is the kind of market that makes put options buyers feel like suckers.  And when investors start feeling like put protection is a waste of money, a correction is usually coming soon.

The intense intraday volatility lately even as the SPX stays near all time highs is a warning signal that for the short term, the SPX has reached the saturation point, where most investors are nearly fully invested, and aren't looking to aggressively add more equity exposure.  Hedge fund positioning data from prime brokers all point to hedgies being the most net long since 2007.   

For me, positioning data is much more important than sentiment data which changes  frequently, often based on whether the market went up or down that day. Commitment of traders data is confirming that asset manager long exposure is near the top of the range for the last 20 years, although they are still not as net long as a % of open interest as in February 2020.  And considering how strong the market has been over the last 3 months, that's not a sign of an imminent top. 

We haven't seen the broader market go parabolic like the Russell 2000 and the bubble stocks, so the SPX isn't really that overbought.  With the gap down today, SPX is up only about 1.5% on the month, which is nothing compared to what you see in other bubbles in their final stages.  So that gives me more conviction that the stock market still has considerable upside left, so after a February pullback, there is perhaps another 10%-15% higher, before you can short on a longer time frame to catch a monster move down.  

I still haven't pulled the trigger to get short, just playing it very cautiously on the short side, but another rally to an all time high next week would be enough to tempt me to put on a short.  I wouldn't be looking for a big move lower, maybe 100 SPX points of downside.   

I am also looking at possibly shorting bonds during the next stock market dip, I am more optimistic on the economy than most of Wall St.  There are lots of negative catalysts for bonds in the coming months: fiscal stimulus negotiations, increased supply from the stimulus bills, reopening of the economy after widespread vaccination, increasing commodity prices.  

FOMC meeting today, expect Powell to say the SOS and kick the can down the road.  The Fed are experts at looking at the rear view mirror, so don't expect them to do anything forward looking like bubble mitigation for financial stability or anything else useful.  

The ARK Bubble

You might not notice looking at the SPX or the Nasdaq, but there is a huge bubble going on.  It is showing up a bit in the Russell 2000, but not to the extent that you saw it like in the Nasdaq in 2000.  The speculative fervor has moved on from AAPL, AMZN, GOOG, FB, MSFT, to an even more overvalued group of almost everything in the ARK ETFs (ARKK, ARKG, ARKQ, ARKF, ARKW), the largest holding being TSLA.  Its not as if ARKK is just holding a few stocks, it hold 52 stocks with none of them with a weighting greater than 10%.  It is a broad representation of the mid to large cap speculative space.  Add in ARKG, ARKQ, ARKF, and ARKW to round out to various other sectors and you have a good representation of a newer version of the 1999-2000 dotcom bubble. 

The divergence between the S&P 500 and ARKK are reminiscent of the divergence between the SPX and Nasdaq in 1999-2000.   

The above chart shows Nasdaq vs SPY from late 98 to the top in March 2000.  

And let's not forget the smaller cap stocks like a BNGO, GEVO, BLNK, or UAVS not represented in those ARK ETFs that are up between 500 to 1500% over the past few months.  Oh, and also the SPACs, which aren't in any of those ETFs.  

The US stock market has turned into a giant, crowded casino, with the players euphroric over their winnings and looking to bet more.  Of course, the main source of funds for these rampant gamblers is the US government, via the continuous stimulus and unemployment checks that are pumping up the stock market but not doing so much for the real economy.  

It is a state sponsored bubble, with one stimulus package after another.  The US is debasing its currency to feed a stock market bubble of gigantic proportions.  Of course, all under the pretext of the Rona, the greatest excuse ever made for pork spending and handouts.  

And the Fed has such a huge rear view mirror that whatever happened in the economy a few months ago is what they use to determine monetary policy.  They have no foresight, no vision, its pump a bubble if the economy is weak, and when the economy is recovering, keeping putting more air in the bubble, until its so obvious that the economy is too hot, and then do something minor to pretend like they want to cool it down.  

It is tough to fight a bubble like this when the Fed has its heads in the sand regarding inflation and financial stability.  Its as if Greenspan years of the stock bubble in the late 1990s to 2000 and the real estate bubble from 2004 to 2007 are anomalies, something the Fed could do nothing about.  

All this bubble will do is exacerbate wealth inequality even more, as its the newbie retail investors that are the most fervent buyers of the hot garbage being passed off as ESG investing.  Lots of wealth will be transferred from retail and late to the game institutions to SPAC sponsors (20% cut for finding steaming hot turds loved by retail), corporate insiders who cash out during the bubble, and corporations wise enough to sell as much of their ridiculously overvalued stock　as they can．

Then you will have minted a fresh new batch of bitter bagholders who are too stubborn and hard headed to realize that they bought stock in a company that will just bleed all that cash they raised and never make a profit.  

It looks like you had a fair amount of "scared" money that was waiting for the all-clear from a riot free inauguration before buying more stocks, even if they had to pay up to do so.  In the stock market, with certainty comes a higher price tag

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My initial plan to short around 3800 at the beginnig of the year is thrown out the window.  Market is just too strong, the stimulus that is coming is just too big.  If $600 stimulus checks to the bubble heads can cause this much buying, imagine what an increase in unemployment payouts and a $1400 stimulus check will do.  Plus the perfect storm of a re-opening of the economy after the vaccine rollout along with the wealth effect and you have the makings of the hottest economy since the late 90s.

I don't recommend shorting this market unless you reach totally egregious overbought levels in SPX.  And if you look at the SPX over the last 2 months, it has gone up ~200 points, a bit less than 6%, which is a lot, but not so much that a selloff is imminent. Considering how much investing fervor there is, it can continue at that pace for a few more months.  

I think its going higher, but I don't want to buy unless you get a washout and stop run to clear out some of the bold speculators buying calls and penny stocks that go up 100% a week.  It probably comes sometime in the next 2 months, and I want to have a lot of dry powder to be able to buy the dip aggressively instead of defensively.  With that comes missing out on potential upside if the bubble keeps getting bigger without any significant pullbacks along the way.  

I don't mind missing out on more upside since this market is already so overvalued so remaining on the sidelines, playing some individual stocks here and there, but not too big.  

If the SPX does squeeze even higher from here towards 3900-3920 area by next week, I will probably put on a small short. 

Playing the Long Game

In the gambling world, the vast majority of players have a negative expected value (EV) on their bets.  They should either not play, or if they must, in order to maximize their chance of winning, they should bet just once.  That would give them almost 50% odds of winning on most even money payout games.  But for the positive EV gambler, you can maximize your equity growth by following the Kelly formula.  For example, if you win about 60% of your even money bets, you should bet 20% of your capital on each trade to maximize the growth rate of your bankroll.  

Now 20% on each trade sounds ridiculous and too risky but that's what the math says.  If you want to be more conservative and bet with half Kelly, so 10% on each trade, that's still going to cause a lot of fluctuations in your account equity.  Even with a 60% win rate, the odds of losing 5 in a row, are 0.4 x 0.4 x 0.4 x 0.4 x 0.4 = 0.01.  So on average, after 100 trades, you will have had one losing streak of 5 trades.  Even at half Kelly, that's a 41% loss after 5 trades.  A lot of traders would consider losing 40% almost like blowing up, but that would just be a standard, normal losing streak for the half Kelly bettor.  It would also take a stubborn and unflappable mentality to withstand that kind of loss and stick with the same strategy.  Those are uncommon traits. 

In trading, if you have an edge, just like in gambling, you have to bet big to win big.  But you can't be out of control and start betting bigger and bigger to make up for past losses, you have to do the opposite.  And if you are winning, you have to bet bigger and bigger to maximize your growth rate.  Its not natural for most people to bet that way.  Most want to bet smaller and less often after wins to protect their winnings, and bet bigger and more often to turn a loss into a win.  

In this business, there is no pre-determined income.  No guarantees. You don't know when the opportunities will come, and usually, the best opportunities come all at once.  Trying to make money every day, every week, or even every month just leads to a lot of overtrading, betting too big, and forcing trades when the probability is not that favorable.

That's why when you have a good market for your style, you've got to be a pig.  You can't be satisfied with singles and doubles, you need to go for home runs when things are running hot.  That is to make up for the majority of the time when the markets are tough and you have to just grind for small wins, or to break even, and stay disciplined to avoid those big losses that are account killers.  

This brings me back to the current market.  My bread and butter pump and dump setups are just not working in this small cap HODL environment.  The parabolas are extended and go on for longer than in a typical market.  It has been a painful time to be a short seller who holds longer term positions, because so much junk is flying higher, and staying high.  I know that in a year, almost all of them will be down 60-90%.  

Fundamentals aren't important right now, its all about finding the hot sector and piling in and chasing momentum.  I've been fighting that momentum, so its been a grind for the last few weeks. 

The bears that have survived so far are the ones who have been quick to cut losses, and avoid taking a stand on companies, even if they look fraudulent or are just a lot of hype.  It is one of those rare, extended time periods when the negative EV players are on a hot streak.  Retail investors are making a lot doing all the wrong things, ignoring long term fundamentals, chasing hot story stocks, buying stocks in companies with low share prices, thinking they are cheap.  Its working for them for the last 2 months of 2020, and even better during the first 2 weeks this year.  

The overall short interest as a % of S&P 500 market cap is now at the lowest levels in the last 20 years.  There aren't really many shorts left in this market, most of them have gotten run over and have thrown in the towel.  The short interest in TSLA has gone down huge over the last 12 months.  This week, GME, a stock with over 200% of its float shorted, squeezed up 100% on air.  Shorts got absolutely destroyed on that stock, and a lot of other heavyily short names also had big short squeezes.

its a very difficult time for the short sellers, and with record high valuations and excitement among retail investors, it probably means that a very good period for short sellers is just around the corner.  The US stock market hasn't had a proper bear market in 13 years.  The last one, from October 2007 to March 2009, laid a great foundation for a long bull market.  Those big drops in 2011, 2015/2016, 2018, and 2020 were too brief to reset the stock market to a more long term sustainable path. 

Now we're seeing what happens after so many years of big gains and quick recoveries.  Rampant greed, Wall Street feeding the ducks with lots of SPAC IPOs which will end up being albatrosses considering how much money is chasing the EV, Solar, Biotech, and other hot sectors.  Since most IPOs have a 180 lock up period, you will start to see a lot more supply being unlocked and free trading later this year.  I think that's what kills the momentum in these go go names, just the sheer supply of hot SPAC garbage that will come public in the coming months.  

On Friday, we got the post Biden stimulus selloff, exacerbated by a big opex Friday.  I was waiting for a bit higher to short, so missed the short entry on Thursday, but I don't see much downside after Friday's selloff.  Post 2008 modern markets have a tendency to keep trending up and maintaining very overbought levels for an extended period of time.  And bubbles usually top out with a parabolic blowoff phase, and I don't think we've seen that yet.  

I am still in buy the dip mode, sell the rip mode is still a bit risky unless they are nearly perfect setups.  And Thursday was not close to being a perfect sell setup.  I might even go long on this small dip on Tuesday, as I expect another all time high after inauguration and the Biden stimulus talks get more serious. 

 

Adjusting to the Insanity

This isn't an easy market to trade from the short side.  Even during the craziness of the EV parabolic rise in November or the biotechs in December, the pumpers still dumped a decent amount.  Starting from late December, the pumpers just didn't dump.  They went up, had a very small pullback, based, and blasted off again.  And these blast off moves aren't off of small up moves.  Some of these stocks were already up 300% in a month, and then it would go up another 150-200% in a few days.  

These are breathtaking moves, no wonder the retail investors are in a frenzy, because most of the ones driving these stocks higher aren't used to winning so much.  Its like the casino gambler who is on a hot streak, winning over and over again, completely different than what would normally happen to him.  That feeling of euphoria you get at a casino as you win on almost all of your bets is what these retail traders trading these $1 and $2 stocks are feeling now.

This probably keeps these retail traders in the markets for the long term, turning into post bubble bagholders, but that's a bridge to cross in the future.  That will be bring on another set of opportunties later.

With the insanity of the parabolic rise of so many of these crappy, speculative penny stocks, on top of the multi billion institutional darlings have made it tough to hang on for longer term shorts.  There are so many names right now that are grossly overextended and ripe for a sharp pullback that it is hard to choose the right ones.  I am sure most of them will all go back down together, as they mostly went up together.  The plan for swing trades is to stay away from the heavily institution owned pumpers (PLUG, FCEL) and focus on the heavily retail owned pumpers (BNGO, FTFT, etc). 

With the coming $2000 stimmy checks coming soon, I am sure a lot of that money will pour into these crappy stocks.  Rumors are that the Biden stimulus package will be $2T, which is absurd, since its on top of the already $1T spent just in the December stimulus bill that passed.  And I am almost completely sure that even if the economy gets hot, there will be no desire or ability to raise taxes.  With just a 50-50 split in the Senate, its highly doubtful that all Democrats will be on board for a tax increase, especially since some of the moderates will vote down any meaningful tax hike. 

So most of the Rona stimulus will end up in pork pet projects solely for the benefit of campaign donors and those with politiical connections.   It is a huge transfer of wealth from every holder of US dollar assets (not taxpayer, since none of this will be paid for with taxes) whose dollar holdings will be debased through money printing to fatten up the leeches in Washington DC. 

The reason gold is not keeping up with all the other weak dollar plays (energy/commodity plays, foreign stocks, bitcoin, etc) is because it has gone up quite a bit over the past 2 years due to the Fed rate cuts and QE.  And gold which used to primarily be an inflation trade (from 1970s to 2000s) is now mostly a monetary stimulus trade.  Monetary stimulus doesn't really help the economy much, but it does help boost gold, but fiscal stimulus actually will boost the economy, albeit a sugar high from stimmy cash raining down on Main St. and partially due to the pork trickle down effect.  And a hot economy leads to so many winners that gold ends up going out of favor, even with rising inflation.  

Bitcoin is basically a high beta play on a weakening dollar + rising stock market, so its more of a fiscal stimulus trade than a monetary stimulus trade.  Also, with so much retail involved in bitcoin, a lot of stimulus cash will end up going into further bitcoin speculation.  

It is no longer Rona stimulus.  These pork filled stimulus packages are now Russell 2000, SPAC, and Bitcoin stimulus packages.  

Biden will be announcing his pork package today.  It is rumored to be around $2 trillion, so anything less will be a disappointment.  I am sure when the dust settles, it will be even bigger than forecast as more pet projects get added on in order to win votes.  

We're getting close to a good short opportunity, have been waiting for that one last push higher to all time highs before going into an SPX short.  Thought there would be a run up to the Biden stimulus announcement, but the bitcoin correction's contagion effect kep the stock market in check this week.  So not easy to short here, although I still may take on a very small starter short position with plans on adding higher if we get that extra push higher after inauguration.  Not that exciting to short here, you almost need a perfect pitch to get short this market profitably so being careful. 

Pork: No Pain All Gain

Biden is going to give them what they want.  More pork.  More money from heaven.  Infrastructure.  Probably even some student debt cancellation.  Looks like Kamala is the one in charge, Biden is just the puppet.  The moderate puppet, palatable for the masses, doing whatever Kamala wants.  Pork is now called stimulus.  In the old days, they would just call it deficit spending on whatever pet projects politicians wanted to fund.  The euphemism is stimulus. 

Why work in 2021 when you can just stay unemployed, collect unemployment checks,  and daytrade the latest hot stocks and bitcoin with the gov't handouts.  Where are they going to find the workers to do infrastructure? Mexico?  Guatemala?  El Salvador? Sure won't find them in the US.  I guess that's what the immigration bill will be for.  To find people who actually are looking to work.  

If the Fed doesn't increase QE, there will be a revolt in the bond market with how much issuance is coming down the pike.   I am sure the chirping dove Powell will find an excuse to ignore or deny the higher inflation and give the bond market what it wants.   At least until it's so obvious that economy is too hot and he'll announce a turtle taper, would probably take 20 years to get to zero purchases, and probably won't even get started before he caves to the market again in the coming taper tantrum.  
 
This taper tantrum will be so much worse than the one in 2013, when stocks were actually fairly valued on a historical basis.  I know the excuses about why this time is different, that bond yields were never this low when valuations were cheaper, and that the Fed has your back.  But that is a bogus excuse when Europe and Japan have even lower yields and their stock markets are still way below those in the US over the past year.  
 
In the end,  after Powell caves again, the Fed will be printing the money to pay for the stimulus.  US government doesn't need taxes when you have the Fed covering the tab.  No Pain All Gain.

No wonder bitcoin is going through the roof.  And stocks are surging higher.  And dollar is weak.  With this kind of profligate fiscal and monetary policy, the US is daring the market to selloff the dollar as much as it wants.  Of course, Yellen will repeat her strong dollar policy.  

The US has become an absolute joke.  And its not as if Republicans are any different than Democrats.  They spend almost as much and cut taxes as well.  And demand low rates from the Fed.  

The US fiscal and monetary policy has become a mix of Argentina and Zimbabwe.   Who knows where this will lead in the long run when the world's reserve currency turns to toilet paper.  It won't be pretty once the hangover kicks in.   Sure, everything will be higher in price, including stocks.   For the politicians, if the SPX keeps going up, its all ok. Zimbabwe's stock market is through the roof over the past 10 years as well.  

Bottom line, US is now an MMT country following in Zimbabwe's footsteps, with high inflation (will be denied by Fed) coming, and most of the population too dumb to realize it.  

A commodity bull market in the 2020s will make the 2000s bull market look like child's play.
 
Yesterday we got the big bitcoin correction , down over 20% to 32K, is that the buy of a lifetime?   LOL.  Still waiting to see more excitement and complacency showing up in put/call ratios and news flow.  Could come with Biden's big bazooka stimulus announcement on Thursday, or after the inauguration, when riot risk is over.   

On the individual stock front, the greed and froth is reaching astronomical levels.  The pumps are hardly dumping and retail investors are feeling invincible.  When it gets this hot, it doesn't last for long.

Melting Up

 The markets are super hot.  Bitcoin going supernova parabolic.  SPX making all time highs day after day, Russell 2000 surging higher to shatter all time highs.  TSLA relentless marching higher breaking 800 with ease.  EV stocks ramping higher again with their related SPAC bros coming along.  Biotech staying hot.  This is the hottest market since 2000.  January 2018 isn't even close.  

The parabolic moves increase my confidence that we are a bit closer to the peak of this bubble than I thought a few days ago.   Still a few months away from the peak, but the enthusiasm and fervor to speculate is front loading some of the bubble gains.  

I was thinking about a short at SPX 3800 but the sheer strength of the buying on Wednesday and Thursday after the Georgia runoff and shrugging off the "scary" riots kept me from pulling the trigger.  And we have another gap up this morning.  Wednesday close at all time highs, but well off intraday highs due to the riots was a buying opportunity!  It once again proves that what you see in the news that triggers fear in a subset of investors usually doesn't last.  Riots, protests, civil unrest don't matter.  What matters now is stimulus.  PORK stimulus.  

It is a tricky time for those unwilling to ride the bubble higher, its a bit too early to aggressively short, although tactical shorts at over optimistic moments and after a parabolic rise are ok opportunities, but the better opportunities are buying SPX and Russell 2000 dips on short term stop hunts and shakeouts of weak hands.  

That is why I would only short this market at half my normal position size during those tactical opportunities, but would be willing to go full size on decent size dips in the indices.  

It is clear that Russell 2000 will be outperforming the SPX during this final blowoff phase of the bubble, which should last into the late spring/early summer. With a 50-50 Senate and Dem VP, you have enough votes to pass another big fiscal stimulus package, stimulus checks, infrastructure, and all the goodies that the market wants.  But not enough votes to pass any kind of tax increase or extra regulation that are unpopular among non-Democrats.  So the best of both worlds for stocks, and a nightmare for bonds.  

The market immediately sniffed this out on Wednesday, selling off Treasuries aggressively and the 10 year finally breaking above 1%.  The weakness in Treasuries will be with us for a while, the economy should be roaring by the summer as all the savings and wealth effect from the stock market will drive consumer spending through the roof, along with the re-opening of the economy.   

This will be the hottest economy since 2000.  Hotter than the real estate bubble in 2006-2007, and hotter than the tax cut boost in 2017-2018.  That expectation is fueling the move into the Russell 2000, which have the most economically sensitive names in the market. 

When all is said and done, after the bubble, there will be an immense transfer of wealth from one group of investors to another.  

No need to try to hit home runs now, just play for singles until the truly great opportunities arise later this year.  There will be plenty of chances to hit home runs on the other side of the mountain.  

I am holding off on the short for now, but next week, a potential gamma squeeze higher in the indices ahead of opex Friday, Jan. 15 could provide a premium short entry point to fade this super hot market.  Just watching and waiting until then.

Forecast for an Insane 2021

 You are seeing some truly amazing charts in some of these small cap names.  The latest one is BNGO, a biotech company that diluted their shares several hundred percent over the course of 2020, lingering around 50 cents and out of the blue, the stock goes up over 1300% in a few days to over 7, gaining nearly $1 billion in market cap.  On nothing.  Then you had the copycat sympathy plays as the retail investor piled into other low dollar biotech stocks like CHEK and SYN, expecting the same thing.  

There is so much new and dumb money in this market, that it is infecting even the more experienced money that are trying to get in front of their buying in a game of musical chairs.  The volume is through the roof on these plays.  BNGO traded 579 million shares on Monday.  

The Robinhood herd goes from one pump and dump to another, gifting some of these companies with a tremendous opportunity to raise capital at bloated stock prices, some who are doing it aggressively, like SNDL, IDEX, KNDI, NNDM, while others just sit on their hands, being short sighted by not taking advantage when their stock becomes way overvalued due to daytraders.  

Just like bitcoin, the action is a sign of the times.   Bubbles don't happen in isolation.  They happen in bunches, one after the other, or simultaneously.  The sports card bubble in the late 1980s happened after a big bull market in stocks.  The Beanie Babies bubble in the late 1990s got huge during the beginning of the dotcom bubble.  The bitcoin bubble in 2017 coincided with a big rally in global stock markets at the time.  And again in 2020. 

The animal spirits are flowing freely on Wall Street.  When it gets this hot, and this widespread, with near record stock valuations, its not sustainable for the long term.  As in more than 1 year.  Let's generously say that the insanity started after the big move higher last November post election, with the EV craze going into hyper drive.  IMO, we have at most another 10 months of this craziness before hitting the peak and crashing lower.  At most 10 months.  At a minimum?  Probably until the majority of the population has gotten the Rona vaccine, side effects be damned, so probably 6 months.  So my ball park estimate for the top of the bubble is 6 to 10 months.  

During those 6-10 months, I'm guessing SPX goes up another 10-15%, so SPX 4100-4300. Then, like most bubbles, after they pop, there will be an extended bear market, probably taking back all the gains made in 2020 and 2021, so at least down to 3250, but more likely down to 3000.  Unlike the previous 2 bubbles, this one will be aggressively defended by the Fed, who probably will bring out their biggest bazooka yet:  equity ETF purchases, taking a page from the QE trailblazer, the BOJ. 

That doesn't seem too bad, and I don't expect a dotcom or financial crisis 50% bear market drop from high to low.  But a move from 4200 to 3000 would be extremely painful, especially for those who got into the money game late in the bubble. 

The results are out for the Georgia runoff:  it will be a 50-50 split in the Senate, meaning that VP is the tiebreaker.  This means that legislation will be determined by the moderates, both Democrats and Republicans, as they will be the swing voters.  That means big stimulus but no tax increases.  Most moderate politicians in the middle have no backbone, they pick and choose policies by looking at the polls, so they will choose the popular aspects of the Democrat agenda:  big stimulus checks, big government spending, and oppose the unpopular aspects of the agenda:  tax hikes.  So in the end, you will end up with a truly monstrous budget deficit, putting a huge amount of pressure on the bond market.  

That will put the ball in Powell's hands.  Will he try to keep rates low and thus increase bond purchases even as the SPX bubbles higher?  Or will he just go with the current rate of purchases and accept higher long end rates?  

I believe he'll try to accept rates going higher up to a certain point, maybe up to 2% on the 30 year, but if it gets higher than that and the stock market revolts and demands more QE, expect him to fold like a cheap lawn chair and give the market what it wants.  The guy has no backbone, he was scared shitless back in December 2018 when the market went down and didn't like his final rate hike, and he won't do that again.  

He is a caver.  A folder.   The free money will continue until the market self combusts on its own, which will be from a torrential flood of SPAC issued POS equity jammed down the throat of TINA investors who eventually suffer huge losses as the fair value for most of these private but soon to be public companies is a goose egg.  When these new investors realize that they've been had, they'll sour on the stock market and say its a rigged game and stay away for another 10 years like last time.   

For the first half of the year, expecting a weak bond market, a weaker dollar, and a strong stock market, especially small cap stocks.

Omen for 2021: Bitcoin Bubble

On November 23, I wrote about the EV bubble and how that was a sign of a massive bull market top in 2021.  At the time, the EV stocks were going parabolic, and since then, they have consolidated their gains, a few making new highs, but most are way below those November highs.  

After that, we've had rolling speculative waves, going from biotech to renewable energy plays and most recently bitcoin.  Most bitcoin investors consider it an alternative currency and a store of value, but regularly throw out ridiculous price targets like $100K, $500K, $1M.   I remember back in 2011-2012 when institutional investors, with a straight face, said that gold would go to $5000.  And not in 30 years, but more like 3 to 5 years.  And the thing is they said it matter of factly, not with a lot of enthusiasm, but more as if it was a fait accompli.  Gold went from 1300 to 1900 in 2011, and was still hovering around 1600 to 1800 in 2012, before the big downturn in 2013.  

Does this chart look like an alternative currency to you?  Something that is stable, that will maintain its value?  It looks more like a speculative plaything to me.  A momentum stock.  Value is in the eye of the beholder type of asset.  Like gold.  Like a piece of art.  Like a Beanie Baby.  All of those assets have no cash flows supporting its value.  

From 1995-1999, there was a huge Beanie Babies bubble.  It was a sign of the animal spirits of the time.  

The thing is that those who make the most money off of things like bitcoin and Beanie Babies are the true believers, because they hold on during the parabolic rise.  But the true believers are also the ones who lose the most money as they hold on during the post bubble crash.  Very few can ride the bubble most of the way to the top and get out before the big down move lower.  

I actually think bitcoin will go significantly higher than current prices, but do not believe it will go to $100K like a lot of these bitcoin believers.   I recognize its a bubble, a sign of the times, when SPX is in a big bull market and speculative fever is rampant.  

Bitcoin has some value as a money laundering tool and way to get around capital controls in many countries, but that value is limited, because if that becomes widespread, then governments will do whatever it takes to undermine bitcoin, making it illegal to own. 

What has sustained the value of gold through history was that aside from being used to back fiat currency, it had value as jewelry.  

In order for bitcoin to sustain its value over the long term, it can't just be based on speculative investors inflows.  There has to be a real world use for it, and the only use I can imagine is for underground transactions that are illegal and if it becomes widespread, could cause governments to outlaw bitcoin.

We are off to a strong start in 2021.  Big gap ups in gold, oil, and stocks.  Probably a bit more upside and then I expect a choppy consolidation for SPX from this week's highs (3790-3800?) down to 3630-3650 for the rest of the month. 

The Other Side of the Trade

Whenever you enter a trade, there is somebody who wants to take the other side.  People forget that for every buyer there is a seller.  And it matters what type of person is on the other side. 

Let’s say you sell short a blue chip tech stock like AAPL.  Who is on the other side?  Most likely the person on the other side of the trade is an institutional investor, because for such a huge stock like AAPL, most of the end user volume is coming from funds managers or investment banks.   Sure you have the HFTs skimming profits, but they aren’t a long term factor. 

Now let’s say you short a low float, small cap stock that is up 100% on PR hype, or even a chat room pump.  There are so many of these kinds of stocks that I won’t even mention the name.  Basically your typical pump and dump play.  Who is on the other side of that trade?   Probably retail investors.  There may be a few hedge funds and quant shops that specialize in short term trading on the other side,  but the majority of the volume will be retail.  

Who do you want on the other side of your trade?  Institutions are far from being great investors, but they are much better informed than retail investors.  Retail investors make a lot of mistakes, which become magnified when trading volatile stocks.  Here is a list of some of the most common retail mistakes:

1.  Chasing the latest hot stock, buying into a PR or chat room pump believing the hype.  
2.  Minimal knowledge of fundamentals, don’t read or understand the SEC filings.  
3.  Looking for fast, quick gains, playing on much shorter time frames.
4.  A good trade is  a trade.  A bad trade becomes an investment.  Holding on to losers and becoming bagholders after the pump.  
5.  Poor at risk management.  Not cutting losers, liable to get margin calls and blow up.

Compare this to the most common institutional investor mistakes:

1.  Herd behavior and group think, but on a much longer time frame than retail investors, which makes it tough to fade.
2.  Can’t take excess downside volatility, due to client/bank demands.  Often stop out of positions when they go against them, even if fundamentals of stock haven’t changed.

Retail investor mistakes are much more common and more fatal when they happen.  Trading is about taking advantage of opportunities.  Opportunity comes when the other side makes a mistake.   That is why its easier to make money trading small caps than big caps.   And definitely much easier than trading macro like stock indexes, bonds, and FX. 

In macro, its dominated by the institutions.  That is why its much harder to beat that game.  The biggest advantage of trading futures vs small cap stocks  is leverage.   The next biggest advantage is liquidity.  You can trade more size and get in and out much more easily without moving the price.

When retail investor numbers are low, like they were from 2008 to 2016, then its better to trade futures.  But when retail investor numbers are high, like it is right now, its better to trade small cap stocks.  

We made an all time high yesterday and quickly sold off intraday, and gapping up strongly again today.   I sold longs on Monday and have been on the sidelines, mainly focused on individual stocks.  I don't expect to do much unless we get a big move either way from current levels, either an overextension move higher towards SPX 3800, or a dip down to SPX 3620. 

SPAC Boom

When the ducks are quacking, Wall Street comes to feed them.  And they are happily feeding them.

That chart was made 3 weeks ago, showing 208 SPAC IPOs YTD, it is 248 now.  so 40 SPAC IPOs have come out during that time.  Those 3 weeks, had more SPAC IPOs than any year from 2009 to 2017!   That is an average of 1 SPAC IPO per trading day in 2020, with the vast majority coming in the 2nd half.  

And why are they excited to buy these IPOs?  Here is the IPO performance over the past 10 years vs. the S&P 500.  The outperformance in 2020 is 1999-esque. 

And these SPACs, with their "blank checks", have to buy something to justify their existence.  And when you have so many SPACs competing to buy up companies that are the most popular on Wall Street, that probably means one thing:  overpaying for a lot of horrible EV related companies.   The counterargument could be that they could just not find a suitable company to buy so they'll return the money to investors if they can't find anything worth it.  Are you kidding me?  They'll buy any two-bit EV company, even if its run out of a garage.   Just like in 1999, when you have a sector that is suddenly hot and in demand by investors, supply is created one way or the other.  Either through SPAC acquisitions (now) or IPOs (1999).  

The important thing to remember about an IPO boom is not the amount of supply created by the initial issuance of shares, but the torrent of lockup expirations that happen 90-180 days later, bringing out even more supply than the initial wave of shares.  

Eventually, the hot demand for these EV and ESG names ends up creating a lot of bad supply, as in overpriced, hyped up, and unprofitable concept stocks that always sound great when there is no pressure to be profitable because all the revenue is supposed to be generated 3 to 5 years in the future, when supposedly everyone will be buying EVs and dumping their gasoline/diesel powered cars in a firesale to used car dealers. 

This EV boom is in many ways more ridiculous that the dotcom boom in 1998-2000.  At least with the internet, it was actually a disruptive technology that had a huge effect on businesses.  But EVs?  Really?  Are people's lives really going to change because they have an electric car instead of an ordinary gas powered one?  With the internet, the imagination could run wild with all the possibilities, and yet, not that many companies benefited.  With something far less consequential as EVs, its hard to imagine it changing much of anything. 

Electrics cars are a solution seeking out a problem that doesn't exist.  Last time I checked, electricity was mainly generated by burning coal and natural gas, and those create greenhouse gases just like burning gasoline and diesel.  Energy efficiencies are similar when you consider that while battery powered cars are more efficient than internal combustion engines, a lot of energy is lost in the converting coal/natural gas/renewables into electricity.  And the additional electricity demand from EVs will be mostly coming from coal, which is the cheapest, most abundant, and dirtiest.  So no, its not going to have much of an effect on greenhouse gases.

The parallels with the dotcom boom and the EV boom are eerily similar.  After a long bull market, that lasted 18 years (1982-2000) and at least 12 years (2009-2021?), investors throw caution to the wind and start to speculate like crazy on the latest hot technology.  This ends up creating a lot of IPOs to supply the demand.  From 1998 to 2000, IPOs were considered guaranteed big money profits for those who could get in at the offering price, as the IPO pops on the first day were huge and IPOs outperformed the broader market. 

And the speculation eventually spilled over to biotech and semiconductors in the later stages of the bubble in early 2000.  Recently, biotech stocks have been on fire, especially the speculative small cap names that retail investors are heavily involved with.  Semiconductor stocks have also done very well this year, and have easily  outperformed the Nasdaq composite over the past 3 months: 

The only question is what stage of the bubble are we in, using the 1998-2000 comparison.  Well we are definitely past the December 1998 stage when internet stocks were the new stock market favorites and IPOs were just starting to ramp up hot and heavy.  But I don't think we are at the December 1999 stage when almost all the people I knew who were investing were over the top bullish, Fed was tightening, and economy was roaring at the time.  

The Rona has probably extended this bubble by 12+ months because it just resulted in a flood of liquidity, as M2 has gone parabolic, with the combination of a Fed spewing tons of liquidity which is being spent by the government in the form of monster stimulus packages.  So I think we're probably in the middle of 1999 stage of this bubble, which probably means that there is still another 6 to 9 more months of this craziness before we hit the peak.  That timing coincides with the 180 day lockup expiration supply that should all come around the summer/fall of next year.  It should also coincide with the peak of the vaccine distribution and opening up of the economy, which will bring a euphoria of economic optimism along with a very overextended stock market.  

The crowd is already quite optimistic as it is, but when most of the Rona worries go to the rear view mirror, and investors start to talk more about pent up demand and excess savings, that would probably result in the irrational exuberance that would be the bell ringing at the top.  Until then, bulls have the edge. 

The Bull Case

I am long term bearish on the stock market, but there are a few things that are favorable for longs.  

1. Money supply growth.  This is the biggest positive for the bulls, and it is unlike any rate of M2 growth when the stock market is at an all time high.  Usually, when stocks are at all time highs, the Fed is not doing a lot of QE and signaling that it will stay at zero rates for years.  From March to June, M2 was growing at a 65% annual rate, and while it is slowed down from June to December to a 14% annual rate, that is still very high, higher than anytime from 2010 to 2019.  When money supply grows much faster than the demand for goods and services, it goes to asset markets, the big 3:  real estate, stocks, and bonds.  If the supply of those 3 don't go up enough to meet the demand, then prices have to go up, regardless of valuations.  

2. Monopolies and oligopolies.  Over the past 40 years, competition for almost all industries has gone down and profit margins have gone up.  Nothing from the US government is signaling a change in policy.  There is no desire by politicians to do anything to hurt the stock market, which means they won't want to break up monopolies for fear of hurting the SPX.  Which leads to number 3.

3.  Fed and the government want a higher stock market.  It is clear now that the Fed has thrown away any fake concerns about asset bubbles.  They don't care about financial stability.  Powell tried to fight the stock market and he took the loss when he caved big time in January 2019.  Since then, Powell has followed the standard Fed playbook of acting like turtles and doing nothing when bubbles are getting bigger, and acting like rabbits and immediately bringing out the bazooka at any sign of a weaker stock market and/or even a sniff of a weakening economy.  Powell now knows that he's only liked and given good reviews when the stock market is going up.  SPX is going up = good monetary policy.  SPX is going down = bad monetary policy.  So naturally he will do anything to make the stock market go up.  

Note that I mentioned nothing about the Covid vaccine or the pent up demand for travel and services.  Those are positives for the real economy, not the asset market economy.  A lot of people confuse the two and that is the biggest reason for macro bets that go bad. 

Rona Part 2?

 Going into the end of the year, what else, but the Rona to provide the last bit of volatility for this crazy stock market.  You just had your casual 120 SPX drop from Globex open to the premarket lows, on nothing more than some fears of a Rona variant that is causing a little panic out in Europe, again  (remember late October Europe 2nd wave fears?).  And they agreed to the $900B stimulus deal.   And they also pumped the financials on Friday after hours on the Fed pouring more gasoline on the inferno by letting the banks buyback stock.  

So a classic bad news following good news situation, where they aggressively sold the positive news, and Europe joined the sell party thanks to Rona fears again and you get a panicky plunge from 3680 to under 3600 in just over an hour.  

This is NOT your typical post crisis bull market, it is a hyper volatile chase for performance, as the hedge funds are at 99 percentile net long exposure along with mom and pop pouring money into equity funds after the all clear post election.  

So how to play this?  With Christmas and New Year's just around the corner, any post opex hangover that you see today will not last for long.  Those that want to sell size and reduce risk have probably already done so earlier in the month.  The yearly performance is strong, so its hard to get fund managers to de-risk in a panic over worries about being down on the year.  This looks like a decent buy the dip opportunity, with strong support below at SPX 3600, and above that, SPX 3630-3640 area.  Also, gold and bitcoin are strong, so you don't have much collateral damage here.  I did a little buying in the premarket and may buy more during the regular session.  Not looking to hold for long, maybe a few days to catch a relief bounce.  Will definitely sell before the end of the year.  

In an optimistic market, you get these occasional plunges lower to trigger all the sell stops from fast money longs, to cleanse the system, for the next move higher.  The first couple of dips are worth buying, when the dips start to become more common, it gets more and more dangerous buying the dip.  Right now, we're not at that danger zone.  The market still hasn't given enough opportunities for latecomer bulls to buy, so it should still be relatively safe to buy.  

It is interesting that they use computer jargon to describe these Rona mutations, they are calling this new virus a variant that is 70% more contagious.  At this point, the market is still expecting the vaccine to eliminate all future Rona fears so it will probably look past this little hiccup in the road to normalization.  Now if there was a problem with the vaccine showing serious side effects, that is a more serious issue, but this just looks like another Rona scare that eventually goes away and is quickly forgotten.

Leaning long today into next week.   With the renewed Rona fears, I like Nasdaq over SPX until year end.

Pump and Dumps in a Raging Bull Market

In a strong bull market, there are fewer opportunities in the index futures market.  When institutional investors are comfortable and have made a lot of profits, they trade much better than when they have been losing and are starting to feel the pain.  Much like a poker player usually playing better when he's winning than when he's losing, investors are similar.  It is psychological, because poker players, just like investors, don't like sitting on losses and want to make something happen to reverse their situation, and that means either playing too loose or aggressive.  For traders, its overtrading and betting too big to make up for losses quickly.

Even though the VIX is staying above 20, this isn't a typical high VIX market.  Since most institutional investors are sitting on large profits, they feel less of a need to trade, they sit on positions, and they make fewer irrational decisions based on fear.   When institutions make irrational decisions based on greed, those are harder to fade because they have staying power, and they are willing to hold on to positions for months at a time.   

That is where the big difference between retail investors and institutional investors comes in.  The retail investors in general, have a shorter time frame, and dominate the action in the small cap space.  Institutional investors, due to size constraints, usually avoid investing in small cap stocks.  

There is a clear dichotomy between how small cap stocks with a low percentage of institutional investors trade versus mid to large cap stocks with a high percentage of institutional investors.  Try this:  Go to finviz.com and do a screener on stocks that are up the most for the quarter.  Look at the stocks with almost no institutional ownership and compare them to the ones with some institutional ownership.  You will quickly see that the stocks up the most this quarter with some institutional ownership are much closer to the YTD highs (ex. CRIS, SOL, FPRX) than the ones that have almost no institutional ownership (ex. KXIN, SPI, CBAT), which have faded from their rallies much more quickly.  

This is extremely useful information for a strategy that involves shorting actively traded stocks that are up huge in a short amount of time.  A lot of these stocks up hundreds of percent in a few days are overreacting to some press release, a chat room pump, or most likely, involved in some hot sector which is latest fad in the market.  It was the Covid stocks back in April to July, the EV stocks from the summer to now, and biotech stocks starting from last week.  

Retail investors piling into the latest hot stock is the reason most of these stocks are up huge in a short amount of time.  But these retail investors don't stay for long, and if they do, they just become long term bagholders who eventually give up a few weeks later, sick of tying up their capital in a stock that is grinding lower.  So they instinctively sell quickly when the pump is over, learning from their past bagholding experiences, and their mass exodus is the reason for the dump.   

But not all pumps are dominated by retail.  Some have a lot of institutional investor involvement, and those are the stock rallies that have staying power, because these institutions have longer time frames and aren't looking to sell right after they buy.  

Institutions are also involved in pump and dumps, but they are on much longer time frames.  Just look at TSLA.  That may be the biggest pump and dump since the ones we saw in 1999-2000.  But it is a long term pump, so you can't really fade that, and expect a positive outcome, unless you are looking out over several months and years, and can withstand big drawdowns along the way. 

Some people may think it is odd to focus on shorting stocks during a raging bull market.  But they don't realize that it is only in a raging bull market when you get so many irrational moves higher in stocks that are unsustainable and quickly fade away.  It is only in these type of markets do you see mass retail investor participation in small cap stock speculation which create so many short term pump and dump situations. 

And it is harder to pick stocks that will explode higher, even in a bull market, but with shorting these pumps, you are already selecting the ones that are ripe to move back lower.  It is about probabilities and shorting these small cap stocks offer high winning percentages with big wins.  But there is one big downside to this strategy.  The black swan.  Some of these stocks will make insane moves that defy gravity, at least for a few days.  Causing giant short squeezes which are exacerbated by predatory algos looking to force short sellers to liquidate their positions.  A few examples:   AQXP, KBIO in 2015, DRYS in 2017, UONE, KODK, SPI, GLSI in 2020.  There are many more which I've forgotten about. 

So like a lot of trading strategies, the high winning percentage strategies are the ones that are usually short gamma.  Shorting small cap pumps is basically a short gamma strategy, as these stocks can sometimes go up thousands of percent before the eventual dump.  So unless one can manage risk and position size properly, its not a long term winning strategy, due to the potential blowup factor.   I would only recommend using only a portion of one's capital for this strategy, as 1. risky with black swan risk and 2. don't scale up well as most of these pump and dump stocks have low floats. 

Overall market is acting like its 1999, slow grind higher with dips quickly bought, rampant stock speculation, and optimism staying high.   Based on the time of year, starting from mid December, its really a no shorting time period because you rarely get any meaningful selloffs, and the risk reward is poor for shorting the indices.  So I will probably not be trading from the short side in SPX for the next 2 weeks.  All the action these days is in individual stocks.

Walking the Tightrope

Throughout my trading career, I’ve had a few close calls.  Not just losing a lot of money, but real danger of losing it all and going negative.  

I was trading only stocks at the time, and I only had one strategy.  Shorting pump and dumps.  It was a high percentage strategy, winning percentage was over 90%.  And the wins were not small, around 10-20% on average, over 1 to 2 days. 

Winning percentage over 90%,  aggressively using margin, and 10-20% average gains add up quickly.   I didn’t know why more traders weren’t doing what I was doing.  There were some, and most of them were making a good living off of it, but most of the traders out there were long, and short sellers were viewed negatively.  Just looking at the Yahoo message boards at the time, you could tell.  Most of these retail traders/investors were looking for the next big move higher, not lower.  

It seems like shorting is just not natural for most traders, rooting for a stock to go down to make money.  Its like betting on the don’t pass line in craps.  Most craps bettors bet the pass line.

When I was trading back in my earlier years, I was reckless.  If I was winning most of the time, why not make as much as possible and bet big?  I had no money management, no risk controls.  It was a balls to the wall type of trading, and it led to spectacular rises and even more spectacular crashes.

Going all in was not something that I did only for the best setups, I did it almost all the time.  If only had I known back then how extreme volatility in the account is bad for long term returns, I wouldn’t have bet so big.  And probably would have a lot more money now. I wrote about this several years ago.  I didn’t even think about the Kelly criterion, about the probability of losing my bet.  Or even the thought of having cash as providing optionality for averaging into a bet at a better opportunity if the move goes against me.

In February 2000, I shorted a multi day runner called Metrocall (MCLL), a paging company that was suddenly now a wireless internet play.   Investors stretching their imagination to pump up a stock.  It was common back then.   It went from around $1 to over $5 in a few days and came up on my scans.  I knew it was a dinosaur paging company that was eventually doomed so I started shorting the stock around $5.25, with plans to add more if went higher.  It was a crazy time, moves got wild, so even the aggressive short seller I was didn’t go all in right away.   The next day  the stock gapped up and started trading in the 7s, and I decided to add more, going almost all in, giving myself some room to weather a spike towards 10 if it happened, but I expected this to be the final pump day and expected a dump coming very soon.  It grinded higher into the close that day, closing near 10, putting me in a margin call.   I was in the middle of the maelstrom, and all I knew was just to hang on and hope it didn’t go much higher.  

The next day, I was in a full blown crisis situation.  MCLL gapped up above $11, and I was all in.  I knew it was eventually going to go way below my average short price, I just had to weather the storm.  The short squeeze and momentum daytraders piling into the stock took the stock all the way to $13 in the morning, and now my account had a negative balance!  I had blown up completely.

I was expecting a phone call or an email from my broker about the margin call and my negative account balance but they didn’t contact me.  The stock went over $14, making my account balance even more negative, and I was getting bigger and bigger into debt to my broker.  The volume and price action was frantic on MCLL, but it eventually settled down as the stock ran out of momentum and fell back down to close around $11.  I breathed a huge sigh of relief as it looked like I dodged a huge bullet.

I was going to get another margin call, but at least I had 2 more trading days for the stock to go down so I could hold on to the position.  I had no other money outside of that brokerage account so sending in funds was not an option.

Back in those days, most online brokers used primitive end of day risk management systems, and you actually had 3 full trading days to meet your margin call.  You could push the boundaries of using margin and even hold on to positions despite losing a lot and becoming deeply under margined.  They only liquidated you after the 3 days were up and you were still under a margin call.

Luckily, MCLL gapped down the next day under $10, and the selloff that I expected to play out 2 days before finally happened, and I covered about half at a more manageable loss and kept the rest and covered a few days later near break even. 

If I had put on the same trade in 2020, I would have been liquidated on the way up near the peak and my account would have been in tatters.  Or worse  they discover it late after my account went negative equity and liquidated me.  That actually happened a few years later, although that’s another story for another day.

That kind of all in trading eventually caught up with me and I did blow up a year later, and again and again after that.  I still have to fight those outlier black swans every now and then, even though I don’t ever go all in on my capital on one trade anymore.

We are getting the big gap up off of the small down day on Friday, on no particular news, or is it Mutual Fund (now ETF?) Monday?  I did cover my small short on Friday for a small gain, as I wasn’t super confident about the trade and took the gift of a dip to cover.   No edge at these levels in SPX, just focusing on individual stocks where the action is these days.