It's easy to say. You hear it all the time. That word, "Patience".
How many of us actual put this into practice? It isn't easy. We're an instant gratification society. How happy does it make you feel when someone 'likes' a picture of your kid, or the beach selfie you took over the weekend. Traders get similar dopamine kicks when we enter a trade, and that soothing bling sound on the computer goes off, almost as a reward for entering the trade. You notice how those post trade sounds are never something ugly and nasty like the sound of a car accident or something horrible. It probably should be, because that trade you just put on is most likely going to lose you money. That's not blingy like the default audio settings on your trading platform are suggesting.
The point is that in both markets and in life, I think we need to recognize what is just making us happy today vs what will make us happy in the future. Temporal Discounting is what the behavioral finance people call it. Who are you trying to make happy - the JC now or the future JC? I think it's important to approach both life and the markets by proposing this question.
The TSX Composite is down roughly 6.75% year-to-date, with stocks getting hit hard since their July 13th, 2018 high. Only one sector is positive over that time period, but I think its recent action gives us a really good perspective on the type of market environment we're in.
Counter-trend trades are lower probability by nature, which means risk management is vital both when they work and when they don't. Taking the loss and reevaluating when the trade thesis is invalidated is something most traders think about, but managing risk on a trade that begins to work right away is just as important and not discussed as often.
Today I want to look at the importance of managing positions that begin working right away, so that we can avoid winning trades turning into losers.
Small-caps have been lagging for most of the year with that trend really accelerating in May, posing a major headwind for the broader market. One thing we were looking for before putting cash to work on the long side was a sign(s) of risk appetite for stocks, which we're seeing for the first time in a while. The question now is will it last and how does it affect our portfolios?
Rates are at multi-year highs and bond prices are at multi-year lows. This has been the trend. We've been in the camp that rates would break out above 3% and that 4% was next. This has been logical target for a variety of reasons, but today that is not necessarily the point. I just don't think it will be quite so simple for rates to continue higher, and a break back below 3% would make rates incredibly vulnerable to fall quickly.
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.
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.
