This week was rough for me

I got my ass kicked this week by the market.

It started early in the week, when I bought WORK and SPCE call options, just before the market reversed course on Monday and sold off in the final hours of the day. Because the SPCE options expired on Friday of the same week, I had no choice to cut this loser. Only to see it rip higher Thursday and Friday.

I started the week in a hole, down $1,100.

I spent the rest of the week trying to climb out of the hole, only to make the situation worse. End result, down $4,000 on the week.

How did this happen?

Getting in a hole sucks. Spending the rest of the time trying to climb out of the hole led me to making sloppy trades, overtrading, and putting on trades that I wouldn’t normally make on SPY and IWM that I told myself were “hedges” in case the market sold again.

I forgot what was working.

I forgot how I made $12,000 in a matter of weeks from May 27th to June 19th.

Nothing seemed to work.

Every trade went against me as soon as I entered it. Or so I thought.

Either way, it doesn’t matter what they did.

What did matter was my mindset sucked. I was in a bad mental state, and desperately tried to “undo” my bad trades from the early part of the week, only to have even more bad trades to “undo”.

I wasn’t doing what works for me.

I started trading options expiring this week. I started day trading more even though I very much prefer swing trading a position for 1-2 weeks.

I cut winners too soon (primarily due to short-dated options being traded).

I let losers run on too long.

I added to losing positions.

I put on positions that were not favorable from the get go.

I spent too much time this week hoping for my positions to go in my favor.

Now is a time for reflection

It’s the weekend. My trading week sucked. But I still live to trade another day.

Goal #1 and always: DON’T LOSE ALL YOUR MONEY. When the money is gone, the game is over.

I’m going to take this weekend to reflect on my trades. I will review past trades further and understand what happened and why it happened. I will try to understand what my mental state was when I entered into those trades.

Trading is hard. It’s hard to tell by all the so-called experts all over social media. They’d have you believe they make profits all day. You rarely see is the hard part of trading. The part where it beats the shit out of you and makes you question why you started in the first place.

I share this for anyone else who had a bad day, week, month, or year. It’s not easy. It’s not supposed to be easy. I knew that. You know that. So take time to reflect, take care of yourself, and objectively review those trades and improve the process. It’s the only thing I know how to do.

Why you need to get better at taking losses

If you have any dreams of becoming a trader, one of the most important things you can do is take losses.

Taking losses is admitting defeat.

Taking losses is means you analysis was wrong.

Taking losses is unacceptable.

These are myths that we tell ourselves about taking losses.

The three most costly trading errors you can make

According to Mark Douglas, author of Trading in the Zone (book notes here) the three most costly trading mistakes you can make are:

Not predefining your risk
Not cutting your losses
Not systematically taking profits

Taking losses hurts. But why does it hurt so much?

On a psychological level, you don’t want to be wrong. Being wrong means losing money, and you don’t want to lose money. Losing money is painful.

Being wrong is a hit to your ego. It means your analysis failed.

Too often traders allow themselves to sit on a losing position, waiting for it to come around in their favor. I can speak from personal experience regarding this.

For about my first year of trading, it was so difficult for me to cut losing trades early on.

I didn’t know when to cut a trade. I thought to myself “if I just wait a little longer, the trade will come back my way. I just know I’m right.”

Frame losses differently: the cost of doing business

Losing trades are a business expense.

They are the cost of doing business as a trader. Don’t look at them as anything else. They are not a reflection on your analysis. They are not a reflection of you as a person.

Losses are merely the cost of doing business in an uncertain environment with uncertain outcomes.

Dave Portnoy is playing the media like a fiddle

For those of you who don’t know, Dave Portnoy is the CEO of Barstool Sports, and has taken on the persona of Davey Day Trader since sports were cancelled in March due to coronavirus.

Dave’s an avid sports fan and sports gambler, and trading stocks have given him and many others an outlet as the sports world is put on hold.

Now that Dave has gone on a winning streak, he’s called out the likes of those in the FinTwit community, including calling Ross Gerber a “SIMP” and Warren Buffett “washed up” and an “idiot”.

At first, financial media thought what Dave was doing was pretty cute. Fast Money would have him on their program and their panel of experts would give Dave advice on stocks.

But now they’re fed up with him. Interviewers appear to be defensive. Portnoy continues to remain brash as long as he continues to make money in the market.

What the media doesn’t realize is that they are being PLAYED by Portnoy for millions of dollars in free publicity.

And you know the sad thing?

This is the same playbook that Trump used to get free publicity through his 2016 campaign. The media believed there was no chance Trump could beat Hillary, so they built up Trump as the candidate so they could rag on him every time he said something stupid. Then he won the election and it wasn’t quite so funny.

This was the same playbook used by Lavar Ball to get free publicity when his son Lonzo Ball was at UCLA and getting drafted by the Lakers. Lavar was building up his own brand, Big Baller Brands, and leveraged media attention to try to monetize this idea.

He used his son’s hard work and accomplishments to push his own thing. It only ended once Lonzo Ball rolled his ankles multiple time in Ball Baller Brand shoes causing him to switch over to Nike, and suing a former brand partner.

The media gets played so hard. They fall for these electric, brash, loud personalities who say whatever is on their mind. Then they get defensive and attack when those loud people don’t do what they want them to do.

That’s what’s happening with Portnoy. As he continues to brag about his stock market gains, financial media and those in the financial space grow more and more resentful of the man.

Thing is, Dave doesn’t care about making money in the market. Once the world goes back to normal, and sports come back into our lives, Dave will go right on back to running Barstool sports. Except now the Barstool sports brand has been exposed to tens of millions of people who may not have otherwise heard of them.

So, financial media, you are being played. You fed the beast, the beast has become bigger. Now you are upset that Portnoy is making a joke out of the financial industry.

To the mainstream media in general: you get played so hard repeatedly, and you don’t even realize what is going on. While your attention is on Dave’s trades, he’s busying enjoying all this free publicity at the benefit his brand.

Don’t like it? Stop giving him attention. That’s it.

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

What’s going on in the stock market today? August 7th 2019 Edition

In the futures market, the S&P 500 was up 50 basis points overnight just before 6 am this morning.

As of this writing this the S&P 500 futures have tanked precipitously. At 8:10 a.m. the S&P 500 futures are down 45 basis points, almost a full 100 basis point swing from just two hours ago.

What are bonds doing today?

Bond prices continue to rise today. The 10-year T-note Futures are up 50 basis points this morning driving expected yields down as central banks across the globe continue to implement easy money policies.

What is the Yuan doing today?

Yesterday, it appeared that China was letting their foot off the gas. However, their currency is devalued again today. After dropping slightly yesterday, the USD/Yuan exchange rate is up 34 basis points.

The concern is if China doesn’t have control over the currency. As I mentioned the other day, if China loses control over their currency it could be very bad for global markets.

What should you watch for today?

Based off the futures behavior in the past two hours, and the volatility index spiking up 9% off of its morning lows from just a few hours ago, this could be an interesting day in the market with more selling to come.

I’m not sure what’s going on in the market at the moment but it seems like investors are dumping risk assets.

Money seems to be piling into bonds at the moment.

Also money is piling into commodities. Gold is up 1.62% from the prior day. gold continues to Rally in the face of easy monetary policies engaged by the central banks across the globe.

What’s going on globally?

According to a report from Bloomberg, global easing is picking up pace as New Zealand shocked the market with a bigger rate cut than expected.

New Zealand’s Central Bank reduced its cash rate by 50 basis points. New Zealand Reserve Bank Governor Adrian Orr didn’t rule out negative interest rates to help prop up inflation.

This cut by New Zealand mirrors what’s been going on in Europe, Japan, and what will be coming in the United States in the near future.

Interest rates are getting cut. They’re going to get caught big. They’re going to go negative. This is going to have a significant impact on the bonds in commodity markets especially.

Keep an eye on GOLD and TLT today to see what the market is pricing in. Check out the article I wrote about on game theory and the markets, and why you should pay attention to not only equities, buy bonds and commodities as well.

Today’s stock market is turning out the way I expected

As of 2:20 pm, at the time of this writing, the SPY is up 1.2% and IWM is up 0.5%, with VIX down 16.7%.

Yesterday I made a post about how I expected a rally off of the sell off that took place in the market.

The rally has been quite strong today, and I think it could continue into tomorrow as well.

Why did I think the market would rally?

SPY and IWM were heavily sold off yesterday. If you use RSI, you can see that it was entering heavily oversold territory on the intraday charts.

Markets tend to rebound off of big moves, and yesterday was a large gap down and a slow bleed off throughout the rest of the day.

Today’s rally was a relief rally, or an opportunity for investors to take a breather and see where we go from here.

Was this the dip to buy?

I don’t think so. I think the market will continue to move lower over the next few weeks, with whipsaw days occurring during that time period.

If you’re a day trader or a swing trader, you could find some opportunities in long positions, as long as you keep your stop loss exits pretty strict. If you’re looking for good long-term investments, this isn’t the dip to buy quite yet.

Didn’t you say volatility would explode yesterday?

I thought it was possible, given the news about the US accusing China of currency manipulation, coupled with the futures selling off 1.5% in the opening minutes yesterday evening. However, the futures markets quickly rebounded off those lows, and a test of these locals didn’t seem likely today.

I do still believe there is the potential for volatility to explode given the political backdrop. Tariffs, trade negotiations, Yuan devaluation, dumping of treasuries by China, and their ripple effects all pose a risk for this market right now. VIX could explode. If you play a volatility play, keep it very small (NNT’s barbell approach).

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?

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.

No China trade deal soon, as expected

trumpxi

As expected a meeting between the United States and China to resolve the trade war won’t be taking in March or April. Instead, the South China Morning Post reported on Friday that a trump-Xi meeting may be pushed back to June.

As I said last week in a blog post, and as I’ve been saying the past few weeks on Twitter, I didn’t believe that we would get a China trade deal. If you read into comments made by representatives by those on the side of the United States and those on the side of the Chinese, it didn’t sound like we were close to resolving some of the key sticking points to getting a deal done.

Listen to the negotiators, not media pundits

In my opinion, if you want an honest assessment of where a trade deal is at, you have to look at what both sides are saying. Don’t listen to media pundits (this means don’t listen to me either). Listen to what the actual negotiators on both sides of the table are saying.

On Thursday a news story broke that’s an official state visit by President Xi Jinping would only happen in the event there is a trade deal with the United States already in place. This fits into with what I mentioned earlier about President Xi maintaining the appearance of strength for China.

I think that the Chinese officials are nervous about what would potentially happen in a meeting between Trump and Xi, especially considering the events that unfolded during Donald Trump’s meeting with Kim Jong-Un in Vietnam.

The Chinese don’t want to be in a position where they don’t have the upper hand. Showing signs of strength are extremely important for their economy and to maintain respect from their citizens.

China is taking desperate economic measures

China is getting desperate. China’s economic growth in 2018 was 6.6%. This was the slowest pace of growth in China in 28 years.

On Friday the Chinese government enacted additional monetary policy measures to try to help support economic growth. Officials even said they would cut “it’s own flesh” to help finance large-scale tax cuts to spur further investing.

This comes even after China rolled out measures in January 2019, such as cutting the bank’s reserve requirement ratio (RRR) to ensure there is liquidity in their financial system. They slashed this ratio by 100 basis points in January, which was the fifth such cut in the past year by China. China’s Banks doled out a record 3.23 trillion yuan in new loans in January, but the stimulus doesn’t seem to be working if they’re looking to slash taxes two months later.

What’s next from here?

The Chinese are doing everything they can to try to maintain a 6% to 6.5% GDP growth rate in 2019. I believe at this stage of the game the United States has the upper hand. However that could quickly change if the stock market comes crashing down. We are all aware that Donald Trump places high importance on the performance of the stock market as that is his barometer of success. And he made this completely transparent when he said a trade deal with China could boost the Dow Jones Industrial Averages as many as 2,000 points.

According to Robert Lighthizer, deal or no deal, trade negotiations will end within the next few weeks. The real question is, are we going to raise tariffs on China if we’re unable to come to an agreement on a deal?

To be a good trader, ignore what other people say

I have a problem. I spend too much time and have given too much attention to financial news and to what Twitter gurus say about the market.

Every morning when I wake up, I check the financial news to see if anything has happened overnight. Every day for the past two months it’s been the same old story: a potential US-China trade deal lifts the market. Every single day, the same headline is regurgitated.

It doesn’t feel right

Surely this can’t be right. I had a sense that we weren’t going to get a China trade deal soon after listening Donald Trump’s trade advisor, Robert Lighthizer’s testimony to the Senate. I also don’t think this a unique observation.

I’ve grown frustrated with this narrative, and I don’t believe that’s what is powering the market up words. According to a recent story from the South China Morning Post, a potential Trump-Xi meeting probably isn’t going to take place until June at the earliest.

Fast Money

At night I like to see what the “gurus” on CNBC’s Fast Money say about the market. As an independent trader, this is one of the way I can get an idea of what others are saying about the market. But this didn’t leave me satisfied.

Finding reason on Twitter

In an effort to find out what is with really going on in the market, I turned to Twitter. I began to follow a lot of Twitter “gurus” to see their thoughts. While they give a good effort, many of these guys have been very wrong too. Fact is, a ton of perma-bears have decent followings on Twitter. I’ve been following a few of these bears over the past two months as the market has ripped higher and higher.

Manipulator in Chief

Many of these bears complain about how the market is manipulated, blame the plunge protection team, and blame Donald Trump for influencing sentiment following algorithms with his tweets and headline-making quotes.

I have no doubt that Donald Trump is more obsessed with the stock market than any other President that we have ever seen (at least publicly). However, I find it hard to believe that he is single-handedly manipulating the market when you consider millions or possibly billions of players in the market today.

Even if I’m wrong about this, it doesn’t change what is happening in the market. I must better learn how to roll with the punches.

Even if Trump manipulates the market, it’s up to me to see that and use it to my advantage to make money.

To succeed, you must trade the market that is given to you

At the end of the day, to succeed in the market, I must understand that the market can stay wrong longer than you or I can stay solvent.

I think you can gain some insight from reading financial news and hearing people discuss the market on Twitter. But it’s important that you develop your own instinct of the market and use this mental model to come up with an honest assessment of the market. It’s important that your mental model fits your personality and your beliefs about the world.

It’s possible for two people to have two different approaches to the market and still make money. It’s happened for years and will continue to happen.

No more “gurus”

It’s very easy to get caught up in the convincing charts that perma-bears post on Twitter every single day and fool yourself into believing that your short position is the right position to be in at this specific moment in time. I know because that’s what I’ve been doing to myself. And that’s on me. I own that.

It’s a fool’s errand if you rely on gurus to give you hidden insight into the market. At the end of the day, we’re all players in the giant ocean that is the stock market. The most important thing you can do is watch the movements of the waves and try to catch the ones that you believe in the most.

For this reason, I’m working towards ensuring I don’t give too much attention to financial news or what individual people think of the market, because I find that it has been skewing my own perspective and my own beliefs about the market.

More signal, less noise

We live in a world where there is so much noise, and separating the signal from the noise is one of the hardest things to do. The solution to noise isn’t by adding more noise but to take noise out of the equation.

From this day forward, I’m going to make an effort to give less of my attention to the financial news and instead focus on those few things that really matter and move the market today.

This isn’t mean to be self-righteous, but more so a reminder to myself (and for your possible benefit) to develop a system and expectations of the market, carefully track those expectations from day-to-day, look for any divergences between those expectations and what’s actually happening in the market, and adapt accordingly. Because at the end of the day the markets and gurus don’t care if I make money. That’s on me.

Do or have you watched any financial news or Twitter gurus? Are you a recovering news follower? Let me know with a comment below.