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Month: July 2019

Revisiting Past Predictions

Last week I made a few predictions. How’d they turn out?

I don’t believe the Federal Reserve is going to cut interest rates next week.

Wrong. I believed the Fed would keep rates steady.

I think the Fed didn’t want to disrupt markets which had already priced in a quarter-point cut this month following the Fed’s meeting last month.

The fear of upsetting the markets was there, and the Fed caved in my opinion.

I think the stock market will sell off. I think gold and treasuries will sell off.

Many investors have priced in a rate cut already, and they are preparing themselves for a potential devaluation of the US currency. If the Federal Reserve doesn’t cut rates, those three things will likely be going down.

The market did sell off today following Jerome Powell’s press conference. $SPY was down 1.10%, $GOLD was down 1.31%. However, $TLT was up 1.10%.

In this post, I made a prediction about market volatility:

I think following the Federal Reserve meeting VIX will climb up to 15 or possibly over 17 by the end of the week.

$VIX finished at 16.1 following the Fed meeting today. Fuckin’ nailed that one square on the head.

Predictions for the end of this week

VIX will peak around 23-25.

SPY pulls back to $292 by the end of this week.

IWM pulls back to $151.

I don’t mind putting my predictions out there publicly. It forces me to be accountable and maintain a critical perspective when it comes to my own beliefs.

What do you think will happen by the end of this week?

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Why should you expect market volatility to rise in the coming days?

Whenever the Federal Reserve holds a meeting, markets are on edge.

So many investment models must take into account risk-free discount rates, those rates based off Federal Reserve policies. As a result, pricing adjustments always take place around important Federal Reserve meetings.

Investors adjust those models based off what they believe discount rates will be in the future. This month, many investors have priced in a rate cut.

Speculation

If the Federal Reserve doesn’t cut rates I think the market will be disappointed and will sell off.

If the Federal Reserve does cut rates, I think the market will be optimistic (more than they already are), stocks will get a boost, and treasuries and gold will surge.

I don’t believe volatility will stay low this week. VIX is sitting at 13.2 as of now just before market open on July 23rd 2019.

In July, VIX bottomed out around 12.4. It’s bounced off this support line a couple of times this month. It’s surged over 14.5 on a couple of occasions. I think following the Federal Reserve meeting VIX will climb up to 15 or possibly over 17 by the end of the week.

That’s what I think. How about you?

What is the Federal Reserve going to do with interest rates this month?

There’s been much speculation among market participants about what the Federal Reserve will do with interest rates.

Many investors are pricing in the belief that the Federal Reserve is poised to cut interest rates for the first time in over a decade. The speculation hasn’t been about whether there will be a cut, but rather whether the cut is going to be 50 basis points or 25 basis points.

Debacle

James Bullard, President of the Federal Reserve Bank of St. Louis said he would like to cut by 25 basis points at the upcoming meeting.

This came after John Williams, President of the Federal Reserve Bank of New York said the Fed should “take swift action when faced with adverse economic conditions”. This led to much speculation and market positioning that bet on the FED cutting rates by half a point at the end of the month.

A spokesperson had to clear things up for Williams, and stated that he was making an “academic argument”, and NOT talking about the Federal Open Market Committee and their plans for the two-day meeting on July 30th and 31st at the end of this month.

JP

Federal Reserve board chair Jerome Powell has faced harsh criticism from Donald Trump. Trump’s relentless on Twitter about the Federal Reserve and the decision to hike rates in recent years.

He’s been critical of Powell and the Federal Reserve for not cutting rates while central banks across the world are cutting their own interest rates and engaging in other monetary stimulus.

Trump believes that if the Federal Reserve Cuts rates the US will continue to grow and reduce their debt burdens.

Respect

Personally, I believe Jerome Powell has handled the criticism from the President fairly well. I believe he’s done a good job (since December) at communicating the Federal Reserve’s expectations and focus going forward. I don’t know if it’s a popular opinion, but I like Jerome Powell.

He hasn’t caved to Trump, at a time when other individuals have made pathetic attempts trying to appeal to Trump through the media, in an effort to get a position with the Federal Reserve. And I respect that of Powell.

Why Cut?

]Economic numbers have actually been decent in the most recent reporting month. Retail sales rose by 0.4% in June which topped a 0.1% expected gain. On a year-over-year basis, sales increase 3.4%. From a consumer perspective things are still looking pretty good.

What about in job growth?

In June, non-farm payrolls rose 224,000, which was well above market expectations of 165,000. Unemployment rate edged a little bit higher to 3.7%, but is still sitting near 50-year lows. Wage growth was 3.1% year-over-year, one tenth of a point below Market expectations.

Trump continues to tout how great the economy is, but then he wants the Federal Reserve to engage and easy monetary policies which are generally reserved for times where markets are shifting tides.

Trump is trying to toe a line here and all he wants to do is have somebody to blame if the market does go to shit before the next election.

My Predition

I don’t believe the Federal Reserve is going to cut interest rates next week. I think the  stock market will sell off. I think gold and treasuries will sell off.

Many investors have priced in a rate cut already, and they are preparing themselves for a potential devaluation of the US currency. If the Federal Reserve doesn’t cut rates, those three things will likely be going down.

Following all this volatility, the Fed will cut rates by 50 basis points in September. That’s my prediction and I’m going with it. What do you think?

What I’m working on

Lately I’ve been working on creating a report on my trading in my portfolio that I can run using a Jupyter notebook. The code is written in Python.

The purpose of the report is to give me a summary of my portfolio, and how much I have positioned in various stock options. It’s broken down by the different tickers, option types, expiration dates, so on and so forth.

The purpose of the report is to make it easier for me to see where I’m positioned in the market. This allows me to make better decisions I’m sure that I am following those trading rules that I said set forth for myself.

Hedging

One part of hedging is that you need to make sure positions are balanced out in some manner. If the market moves significantly to one side or the other, you want to reduce the significance of the adverse effect on your portfolio. That much is known.

What ratio, type of option, days till expiration of option, and so on and so forth have to be figured out. That’s what I’m working on doing right now. That’s why I created the report. I want to be able to analyze past trades based on the different criteria. I also would like to apply different machine learning techniques to the material down the road. So that’s what I’ve been working on.

When I stopped trying to be right, I became a better trader

I began my journey trading stock options in September of 2018. When I entered the trading arena, market volatility was picking up. This was the environment I traded and adapted to over the three months from October to December of last year, 2018.

During this time period I learned to trade options in an extremely volatile environment. I was able to successfully gain over ten thousand dollars on my small account in December by being short on the market.

I primarily bought put options on bank stocks and other stocks that were experiences drastic declines at the time. My portfolio saw outsized gains which I had experienced up until that point. Enjoying the outsized (mostly unrealized) profits that I reaped up to Christmas Eve, I continued to buy put options on the market.

This turned out to be disastrous.

The subsequent decline

All through January until April, I had the thought that the market shouldn’t be going higher. I absolutely knew what was going to happen next. Or so I thought…

At the time, I was following Fintech Twitter. I wanted to know what was “happening” in the market, and took to Twitter to see what people were saying.

90% of the people on there seem to be bearish during the first quarter of this year. This influenced my investing and my perspective of the market.

The illusion of being a good trader

It took a while, but at some point I realized that being right, or the illusion of being right, doesn’t put money in the bank account.

I called it!

On Twitter it’s easy for people to create the illusion that they called many good trades. It’s easy to do. All you have to do is post a bunch of charts calling bullish or bearish, put them on Twitter, let the market play out, and then delete your tweets that were wrong. Then you can easily pin your tweets where you “called” the market top or Market bottom.

I got caught up in the Twitter atmosphere and my trading suffered. Being right doesn’t matter.

Hedging instead of guessing

In recent weeks I’ve developed better hedges on my trades.

I like to build up large put options positions at times when I believe the market could go down over the next few months.

In the first quarter of this year, I built up put option positions, and lost a significant amount of the value that I put into those positions. It’s only after reflecting and experiencing the pain of those few months then I realize how important it is to hedge my trades.

I was concerned with effectively predicting what was going to happen in the market. I wanted to be right, and I would only enter trades on one side of the mark get out of time. This was stupid. I lost out on a ton of games I could have gotten all throughout January and February and even into March and April.

Current endeavors

I’m currently building up put option positions on SPY and IWM.  I’m hedging the position by buying shorter-dated call options, debit spreads actually, and then collecting profits when the underlying stock price land somewhere in between the two strike prices of my debit spread. This has been a much more effective strategy and has kept my portfolio more even overtime while I continue to build up a larger put option positions.

Ideally, call options on the S&P 500 and the Russell 2000 Index will continue to gain value in excess of the value that I lose on those longer-dated put options while the market continue to rip higher. Then, when the market does turn, I’ll have built up a decent size put option position to benefit from larger price declines.

Conclusion

I believed I had to try to predict the market and be correct. Instead I have to be flexible, I have to adapt, and I have to head to effectively on my positions.