Why Are You Here?

First of all, why are you here? What are your goals as an investor?

What is your Risk Tolerance? How much are you willing to lose on a particular trade in the 'off chance' that you are incorrect?

What is your Time Horizon? When are you trying to make money? How long are you looking to hold a position?

Ask anyone you know who has survived this market a long time. They'll tell you the exact same thing.

They may say it or phrase it in a slightly different way. But these questions above need to be answered and written down before ever entering a trade.

I put together some notes on the way we approach Managing Risk: Entries & Exits.

Also for those interested in how to calculate your Position Sizing, this is a really helpful calculator that we use.

For me personally?

I don't need to pick the exact top, or the exact bottom in trends. I just want to get a lot of the big chunks in the middle and position myself where the risk vs reward is skewed in my favor.

For example, so far this year, we're see a lot of strong divergences that have pointed to a more defensive position towards equities.

That's why we started to enter short positions 8 days ago, after being labeled a permabull because we had been buying stocks for 18 months during a bull market.

It's not that I was a permabull. It's just that the trend was up.

One of the things that has me more defensive as we enter the back half of February is the negative divergence between the S&P500 and the US Dollar.

For those who have been following along, one of the things that had us so bullish for so long was a weak Dollar. The negative correlation between stocks (and other risk assets) with the US Dollar has been very strong for a long time.

Since about 2016, when the Dollar is strong, stocks struggle. When the Dollar is weak, stocks do well.

And so far this year, US Dollar Index Futures are up every single week. That's 6 positive weeks in a row to start 2024. And while I understand that the majority of stocks have NOT been going up (as the US Dollar would suggest), the S&P500 has still continued higher.

Granted, there's been little to no support from the majority of stocks. But the S&P500 and Nasdaq have in fact continued higher despite all the deteriorating breadth.

A stronger Dollar has consistently been accompanied by a weaker market for stocks. So keep in mind that the majority of stocks on the NYSE are DOWN for 2024 so far.

While most of our bearish positions are either working or they're flat, our puts on indexes still are not working. That's part of why we went out to March expiration, to give ourselves some time.

"Let them dance", as I always like to say.

As a reminder, Dow Futures fell 100 points on Friday and the VIX was up for the day as we headed into the weekend.

Momentum has really rolled over for the Dow as well. You can see that here:

One of my favorite exercises is to go stock by stock for the entire Dow Jones Industrial Average. There are 30 of them.

You saw a lot of potential bearish key reversals last week among the largest components. And you have a lot of Dow stocks that aren't even in uptrends.

I like looking for a good risk vs reward opportunity.

It's not about being right. It's only about making money.

I think we can make money from the stock market continuing to get weaker.

Maybe it starts to improve and get stronger.

It could.

And in that scenario we'll start to put on more bullish positions, if that's what the environment calls for.

I'm good either way.

No narratives here. Just good risk vs reward opportunities.

Let me know if you have any questions.

But make sure to check out the Position Sizing and the Risk Management posts to get better perspective on how we approach things around here.

Over the years people have found these really helpful!

JC