I've just updated the Monthly Chartbook, and although October was a rough month for the equity market, our opinions really haven't changed all that much from last month in terms of trend and risk management levels. With that being said, I want to use this post to highlight a few things that stuck out to me.
I am really enjoying these conversations with Phil Pearlman. This is the 3rd episode we do where we're discussing important topics about our feelings and emotions. Today's topic is Grit, and the advantages that someone with grit has these days over those who don't. Taking a loss and moving on is not just part of investing, it's part of life. In this conversation we discuss the Bond Market and the implications of U.S. 10-year yields losing 3% and why Phil is Bullish Grit going into 2019.
In corrective and bear markets, bounces and false rallies are powerful and swift. They should not be feared, but they should be respected. And the patient among us will use these rallies for better entry points on our short ideas.
Tuesday's stock market bounce affords us a great chance to get a better entry in a name that is high on our list to be short -- Boeing $BA
As you guys know, we've been rooting for a stock market crash for most of October. When we're shorting stocks, we want the market to drop as fast as possible so we can make a profit. You may not like the repercussions of a severe market correction, but since there is nothing we can do to prevent it, all we can do is try and profit from it. Innocent people's portfolios will get slashed under those circumstances, companies will shut down and people will likely lose their jobs. An economic recession may even follow. We have no idea and no say in the matter anyway. So we've had two options in October: Close our eyes and ignore it? Or prepare and profit? We've chosen the latter.
In case you're wondering, we're still rooting for a complete collapse in U.S. Stocks. The only thing that would make us more neutral is the Russell2000 Index Fund $IWM holding above 151. Under those circumstances and more neutral approach towards equities is best. In the meantime, we'll keep pressing shorts and hoping for the worst.
The last two months have not been kind to India's stock market, which is why we've been approaching it from a more neutral perspective for most of that time. Although big selloffs are never fun, the progression of this trend from its start to now has been pretty orderly.
We want to use this post to lay out that progression for educational purposes, as well as update our views on the market now.
Welcome to the new market regime, young lads. Many of us, and many more that are way older than me, have seen plenty of bear markets. At our shop, we rely heavily on global markets to give us information about stocks as an asset class, so we're accustomed to seeing bear markets all the time. It's nothing new to us. But I understand that many of you are new to this whole up AND down thing. It's normal, I promise.
Today I want to stress an important point that I think gets forgotten: The biggest stock market rallies come in bear markets! You don't get 6% rallies in the Dow when we're in healthy uptrends! You need serious volatility to spark something like that, and it only happens when risk is extremely elevated. I'm sure you've noticed that we’re getting much bigger down days AND up days in the market lately. This is not characteristic of the type of environment where stocks are going up. It’s the type of behavior we see, historically, when stocks are going down. This is one of many reasons why we’ve wanted to sell stocks throughout October.
The market is a beautiful thing. We have uptrends and we have downtrends. We weigh the evidence regularly to determine which one of these we’re in, or if it's a sideways trend. Our approach to the market has to depend on the market environment we have. In other words, we have to play the cards we're dealt, not the cards we might want. So we first determine how we want to approach the market, and then we decide which vehicles would be the best way to express that thesis.
Here are a list short ideas that I think present favorable risk vs reward opportunities:
Over the weekend I ran the performance metrics of the Russell 3000's Sectors and Industries to get some perspective on where the leadership is since the S&P 500's high on October 3rd and year-to-date. In this post I just want to share this table and talk about some of the themes I see.
On the blog we've been discussing why a more neutral approach to the market is best, as well as what we're looking for to mark a tradeable bottom. Last week we saw an expansion of new lows and stocks hitting oversold conditions in the Russell 3000, however, we are beginning to see some improvements in its daily momentum readings.
It has been a wild couple of weeks for participants in US equities. Up is down. Black is White. Dogs sleeping with cats. This is what happens when market regimes go through change. The ripples can be seismic.
The one thing we can count on as options traders is that implied volatility -- more specifically, the fear premium being priced into options right now -- will eventually subside. If there is anything that can be counted on to be "mean-reverting" in this crazy world of ours -- it is most definitely implied volatility. This means we definitely want to be on the hunt for opportunities to put elevated options premiums to work for us. We want to be net sellers of options here.
With 53 days until December options expiration, now is the ideal time to start scanning the most liquid ETF options in our universe for income trades.
The big question coming into this wasn't whether or not we wanted to be sellers of stocks, but how low could stocks go? The point I tried to make was that they could go a lot lower than any of us think. I've been around too long and have seen too much to be surprised by anything anymore. So if the risk is skewed to the downside, in theory there is unlimited risk. Whether there is or there isn't, is not the point. The fact alone that we're even talking about it has been reason enough to not be long this market.
When looking below trying to figure out how low we can go, I can draw all sorts of Fibonacci retracement levels and horizontal lines of all colors, but the truth is that the market doesn't care about JC's lines. Forced selling sparked by margin calls and hedge funds blowing up causes prices to blow through any "levels" all the time. Remember, when we identify specific prices, they are just levels of interest, not necessarily support levels. We won't know if they were actually support until well after the fact.
