A member of my trading room asked me about my thoughts on the potential for a breakout in gold and the implications on markets.
I told him about avoiding biases…our 1 on 1 conversation went a little something like this…..
That was my quick answer…at least in terms of the short-term potential for a spike in gold as markets get shaky here.
Here’s a bit more of an elaboration…
Avoiding Biases Despite Their Origins
Being biased in markets is typically a formula for losing money.
Of course, we can point to 2008 and some of the tales told of those who crushed (made money) off the enormous downside we saw in the markets as things fell apart.
That gives most of us hope regarding holding our biases…sticking through them despite down-side against those beliefs and then eventually getting some massive paydays due to their conviction.
While such strategies work when you can afford to see the initial downside of being ‘right’ but having to face being ‘wrong’ in terms of how the markets reward you for being right.
It worked great in real life, books, and movies with regards to the hedge fund managers (my favorite being Dr. Michael Burry) getting a massive payday when their bets turned out to be right.
The only issue is that this stuff doesn’t work for the average investor/trader who can’t afford huge downside.
Beyond being able to afford them, most retail traders would rather get the upside when it is there and then catch the downside when the market flips (meaning shorting or buying puts when we go down and making money off of that).
In most crashes, there are often several contrarians who make out like bandits while the rest of the markets suffer losses.
In 1987, the most notable of these names was Paul Tudor Jones. He crushed it, tripling up on profits on his short positions during the crash. Such massive wins are obviously the talk of the town…both when they happen and for years afterward…
But how can the average trader take advantage of such moves without getting washed prior to the actual event?
Are we in the midst of such a situation?
Trading Around Biases
Yes, now seems like a great time to get into that contrarian position. Markets are weakening. But let’s look at why they are indeed weakening.
Mostly it seems that we’re in the middle of a trade war. That, combined with Facebook’s Cambridge Analytica scandal and its’ impact on the Qs (the tech sector; $QQQ or $NQ_F [aka the NASDAQ 100]) it seems like a crash is inevitable.
Yet, we aren’t in a trade war. China’s last response to Trump upping the ante included a very plain line that we don’t want to engage in a trade war. Trump upped the ante at the end of the week last week, and this resulted in what I had called with regards to Friday being shaped like an inverted U.
However, Trump has always spoken of his superior ability to negotiate versus that of other Presidents. Well, that versus that of other businessmen in-general as well.
What does all this mean?
Well, I can’t claim to know with absolute certainty. But I think Trump is doing the typical bargaining that even goes on when you go to buy a car. They give you a price…you counter…they counter…and so on.
So I think Trump is currently trying to just up the ante in terms of the impact China would feel if a trade war occurred. Of note, once again, is that WE ARE NOT IN A TRADE WAR (yet, at least). I don’t think we will enter one for a long time. As much as China might be undercutting prices, we in the states need that for most people to be able to afford most electronic goods.
How things will play out eventually, well, I’m not sure. I’ve been advising my room to be a bit more heavy in cash than they have been since Trump got elected and the markets ripped.
What I’ve really been advising is a move towards longer dated options and getting out of the short-dated stuff on any of the pops.
Why? Because even though your ‘bias’, regardless of what it is and why it is that way, fighting markets is an exercise in futility. You shouldn’t fight markets if you’re the average retail investor. You’ll lose a lot of money, particularly if you’re trying to aim for downside with short-dated options that you’re ‘fighting’ against the market with.
Frankly, you’re better off in cash. Maybe you’re right and this is the end of this over-extended bull market. But if you’re in cash with such a belief, when a sharp move happens you’ll have your cash on the side to trade the market when that bearishness continues. Open a small position in the move you think might happen that support a bearish equity and bullish equity portfolio.
But elevated levels of volatility doesn’t mean the markets are going crash right now necessarily. Cash on the sidelines gives you the opportunity to go in and trade as you would like to when the move happens….rather than losing money as you convince yourself that your belief that markets are terminal.
Maybe they are…maybe they aren’t. But throwing all your trading money into the markets to ‘fight’ it typically results in more losses than gains until the move you see happens.
Of course, the market will crash…it always does. But when it will remain a question yet to be answered until it occurs. As I’ve stated before, stay hedged and allocated for both directions.
That, coupled with less short-term bets in the market will keep you safe.
Unusual Options Flow and The Market
I read unusual options trades every day. Thousands of such trades every day…then I filter them as we go and pick my favorites. Those of you in my room or on my free text alerts get my read on these trades in general on a daily basis.
But based on the flow I’ve been reading over the past several days, what I see is the markets bracing for some chop this week.
Last Sunday, I made a prediction on StockTwits, here on the blog as well in the room and on some webinars. It ended up being nearly exactly right.
Today is Sunday…will my predictions remain true? Maybe. I don’t claim to be able to make such predictions every week.
With regards to this upcoming week, I had this to say Friday…
Will that turn out right? I have no idea. But the options flow inclines me to think so. There were a full notable bullish trades expiring this Friday that I’ve seen the flow on. There’s also been a good set of bearish trades expiring Friday. As we go out in-terms of expiration dates and options buying…it seems like the ‘smart’ money is seeing more chop and downside over the next week or so.
I’ll give updated versions of predictions as the week progresses…but for now the above stands.
You might really think that the market is gonna die this week. Or perhaps you think we have no options but to crash very soon.
What I’ll say is this…while I see further downside coming….namely with this upcoming week ending up down despite some up days during the week, I can’t commit to the very long-term inclination of downside or a ‘crash’ quite yet.
As I keep saying, stay light on your feet…lock in profits when you get them…but beyond the always hedge motto I stick by, don’t get too heavy in them yet either. Be patient…sometimes when all signs point to something in the market…those are the signs you have to avoid.
So as usual, we’ll see. Just avoid being all-in in one direction; it’s just not smart. Regardless of how sure you are in your bias unless you can withstand a heavy drawdown in your portfolio over the course of the next year, avoid allocating heavily toward any side.
In times of chop..keep on some long dated index puts, be in and out of individual equity names quickly as profit comes.
And stay safe.
Might make another post tonight or tomorrow pre-market.
P.S. – Today in history, in 1974, legendary slugger Hank Aaron set the career home run record. While that record has since been eclipsed…Aaron was one of the critical figures (beyond obviously Jackie Robinson and other African-Americans in the MLB) that helped solidify the place of his people in the game. Swing away.