Sand Castles and Fed Waves

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The past two months have had the equivalent of about two years of news and market activity compressed into an incredibly tight and vivacious space. This is an incredibly difficult market to trade. Now that the weekend is upon us, allow me to reflect on an important personal anecdote and how it is informing my current approach.

The time leading up to the February 19th was a total and utter grind. It was an era of a VIX in the sub-teens and a relentless notch higher every single day for the bulls. It was horrific. And then, out of the clear blue sky (and many weeks after the virus was widely reported on the news), we got our first good, hard dip. For me, it was like a tall glass of cool water in the desert.

What a sudden and welcome change. Everything was going right! Having profited from the drop, and starting to sweat that the market was recovering, I put together a premium post called New Approach This Month in which I stated, in part, this pledge:

To come right to the point: I have a handsome profit for January and February for my portfolio, and as God is my witness, I am protecting it. I made that pledge to myself: that I would make it mathematically impossible to have a loss for the quarter.

I was up about 20% as of March 3, and by God I was going to protect it like mad. I even considered stopping trading completely until March was over.

Mercifully, I didn’t stay entirely true to my pledge. Oh, I definitely got less aggressive (it turns out to my utter detriment), but I kept shorting the market, even to the point where, hypothetically, I could have blown my hard-earned profit. As shown in the chart below, I’ve marked with an arrow where I made my “risk off” pledge, and that’s when the market really started rocking and rolling.

By the time March 23rd rolled around, I had parlayed a 20% profit into a 50% one, but I beat myself up every second with the stunning amount of profits I had left on the table based on my fear.

In other words, the exact same caution that I expressed in the above post cost me about a quarter million dollars in forsaken profits. I was simply too scared of building a beautiful sand castle and having a huge wave come and sweep it away. It had happened to me far too many times, and I simply wouldn’t permit it again. Jerome Powell has become Poseidon, and I’m the little kid on the beach.

To my credit, on March 23rd, I wrote a post called No More Juice in the Lemon which, as the post title suggested, stated that I didn’t think the market was going to fall anymore in the near future. I covered all my shorts and – gasp – actually started buying stuff.

I’m a far better bear than bull, however, and my dabbling in the world of being long equities didn’t last. In my mind, the market was going to hack its way up to about 2700 and then resume its fall. Well, it certainly got to 2700, but it just kept going. The rise over the past four weeks has been brutal and, at times, hard to stomach. We closed at a new “bounce” high Friday.

As I’ve written before, my role has more dimensions than a person who simply has a trading account. I feel the weight of a certain amount of leadership and visibility. Between Slope, my Twitter account, and my show on tastytrade, I have a certain amount of notoriety which provides the opportunity to toot my horn (and, conversely, be pilloried for facing the wrong way). When I’m doing great, the winds of glory blow through my hair. When I’m doing poorly, I feel like a complete dink, filled with awkwardness and regret.

Besides all of this, in my personal life, virtually every trading friend I’ve got has been lambasting me for believing the market will ever get weak again. After all, Powell, Powell, Powell, right? Here’s a Telegram message from one of these friends:

He’s not the only one, believe me. Let’s face it, no one likes a bear. Nobody.

All this chatter and pressure can cloud a person’s vision. Once again, I feel like I’m just about the only equity bear on the planet. It’s just as lonely as it was in January. Plus, a lot more people have their eyes on me.

I am a logical person, and I am a problem solver, so when I have big losing days (which I’ve had twice in April), I really sit myself down and consider what to do about it. I’ve considered several possibilities.

  • Go Long – join the party! After all, this is what 99.999999% of everyone else does. You’ve heard the reasons. Don’t fight the Fed. Jerry’s got your back. The President will do whatever it takes to keep things propped up until election day. And so forth. Well, that’s worked out for the past four weeks, it’s true, but I’m a chartist, and there aren’t many charts that look genuinely bullish to me. Some do, however, and I’ve persistently kept my Bull Pen watch list up to date for premium members who care to peruse what even I consider to be bullish (and I would note those securities have done well).
  • Only Day Trade – This eliminates all overnight risk. It also eliminates all overnight opportunity. This would be an incredibly steep price to pay for a good night’s sleep, and I’m a swing trader, so dealing with the gazillion positions I like to manage doesn’t work really for this. I’d also mention that I have, from time to time, dabbled in scalping large ETF positions on an intraday basis, and it’s nice to put a little icing on the cake, but it absolutely isn’t my style.
  • Stay the Course – This is the easy answer, which is just to keep on keepin’ on. This is terribly challenging in times like this, however, because going up against those trillions of Powell bucks is no mean feat. I have absolutely no idea – – zero – – what could cause things to “break” with the Fed throwing countless trillions at this beast, but intuitively, I find it impossible to believe that a problem this big could be solved that easily. It just makes no sense at all.

As the arrows below show, the market is almost exactly where it was when I did my March 3rd “they won’t take my profits away from me” post, and I feel very much as I did back then. Cautious. Conservative. Scared. And believing that Powell was about to steal all these great setups away from me. At the same time, I also feel, as I did then, that I don’t think I’ve ever seen so many amazing short setups in my life.

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