There are plenty of people online talking about a potential economic crash. There are also plenty of people saying stocks are a bargain. The goal of this post is to share some knowledge I’ve gained through experience over the years and to somewhat explain how I’m handling the current conditions in stocks and treasuries. As always, there are no recommendations being made here to buy or sell anything. I’m simply offering perspective.
For years, many traders told me treasuries were too slow for them to trade. This is no longer the case. If anything, people are now telling me they move too much. People who were accustomed to seeing breakouts only move 4 to 8 ticks in the 10-year notes before stopping are now seeing more 12 to 20 tick moves in one direction and the 30-year bonds have been having some 30+ tick runs. This is not a bad thing but it is definitely different.
New traders are always looking for the “setup” which will make them consistent money. This is flawed thinking because the “setup” has to fit the “context”. There are times when it’s very easy to play the edges of a range back and forth and other times when there is no identifiable range. There are times when catching a reversal isn’t that difficult and other times when you shouldn’t be looking for a reversal because the momentum in one direction is too strong to fade.
There have been a lot of one-way street days as of late. If the S&P 500 opens 40 points lower and instantly starts dropping like a rock, there’s no reason to fight it. A lot of the easy money has been made by going with the momentum. I’m still looking for fade trades and the Friday before last, May 20th, was an excellent day to catch moves in both directions all day long. I had a really good day and actually traded till 3:30pm (I usually only trade mornings). The markets were moving back and forth in a ebb and flow fashion that was easy to read. There was good follow through on the runs and reversals. The markets weren’t terribly erratic or grinding one way at a snail’s pace. But most of the days in the last three weeks haven’t offered a lot of good back and forth, fade style trades for me. Going with the early trend has been the name of the game.
This last week was a bit more difficult, particularly Thursday and Friday in stocks, May 26th and 27th. The problem was that there was a quick one-way move higher right off the open and then the action became terrible for the rest of the day during both days. The majority of the opportunity was in the first 30 minutes after the open. After that, forget about it. Hard to make money if there’s no volatility (today, May 31st, is pretty much the same as last week).
Here’s where I’m going with this: we are seeing some serious one-way runs and at the moment, I’m looking to go with the runs most of the time rather than go against them. I’m also looking to get paid well when I’m on the correct side. I’m not playing a breakout to quickly scalp 2 or 3 ticks like I may do during slow conditions. I’m looking to get a big chunk of the runs. Yes, it may not turn into a run and I may end up scratching trades here and there that could have been small wins but this is a time when I’m going for more money on the one-way streets.
This qualifies as a time period when the saying “let winners run” has more merit than usual. Sure, I still jump off the train as soon as I see some indication that the steam is running out of the move but when the train is rolling down the track at 100mph, I don’t panic out just because it hits a bump. And if I do panic out too quickly during a pause in the ride, I will get right back onboard the trend if it keeps going. I’m still looking to scalp retracements and small bounces but I’m more cautious than I would be during periods when the markets are ranging more frequently.
Treasuries have been rocking and rolling the last few months. Most of the action has been in the mornings (as usual) around 8:30am number releases but they’ve also had some big runs at other times in the day. There has not been a reliable correlation between treasuries and stocks lately. For awhile, they were moving the same direction as stocks but then started moving the opposite direction of stocks and most of the movement has been unrelated to stocks.
Emphasizing the point again, this is not really a time period to look for a ton of fade trades in treasuries unless I’m seeing solid S/R levels holding very well. When going for the fade, I want to see some serious signs that the trend seems to have run its course.
The main driver of this treasury movement is interest rates. The yields on treasuries have been fluctuating wildly. It looked like the 10-year note was heading straight to 4% but it recently dropped back below 3% (somewhat unexpectedly, I think). Uncertainty causes volatility and there is most definitely plenty of uncertainty these days.
I’m always on the lookout for fade trade days but at the moment, I’m more biased towards going with the trend and will keep that bias until I notice these big runs are happening less frequently. This includes staying on the right side of a reversal because many of the reversals have been big reversals.
Now…let’s talk fundamentals. In my humble opinion (which is based on a lot of experience), there is no way to save the day with regards to the markets. There are elements of this current world scenario which are unprecedented so it makes it difficult to figure a long-term play but here’s what we know:
Many stocks have fallen by more than 50% in the last year. The only reason the indexes are still as high as they are is because they are weighted. The tech sector is still keeping them up but if Apple, Microsoft and Google see a slowdown in revenues and Amazon posts another losing quarter, look out below. Inflation is through the roof and if layoffs start happening, sales of everything will drop dramatically. While a company’s stock may initially rise due to a layoff, the overall economic trend for a country is terrible if multiple companies begin laying off thousands of people at the same time.
The energy sector is also helping to keep things afloat. It doesn’t look like energy prices are heading lower anytime soon so I imagine this will influence the day to day movement quite a bit in the coming months but should the price of oil fall dramatically due to a slowdown in travel or more truck drivers quitting or any other number of potentials, the indexes will likely suffer even more.
On one hand, I don’t think it’s going to be a crash, per se, the likes of the dot com era or 2008 but on the other hand, one could make the argument that there has already been a crash.
Amazon…off more than 30% from highs. Netflix…carnage. Facebook…way lower. Tesla…cut in half. Cannabis stocks…down 70% to 90% from January 2021. Peleton…$160 to $15. The list is long.
Then there is crypto. I haven’t talked about crypto much but some of my customers are very interested in it so I’ll share my thoughts. This is a comment on the next year of crypto action and crypto pricing and not a comment on the next ten years and the future of block chain. What will happen with block chain technology is anyone’s guess. It undoubtedly has valid uses. But what we’ve seen the last few years has been nothing short of a hype machine in motion which has scammed millions of people out of billions of dollars.
I’ve not been a fan of crypto for day trading due to high fees, difficulty shorting, exchanges being hacked, etc. It has certainly become better the last two years but I still don’t think it’s a great product for high frequency day trading.
Living through the dot com era prevented me from getting too involved in the crypto game. I know nonsense and hype when I see it. However, I forgot how convincing the hype can be and how quickly prices can be pumped to the moon if enough people buy into the hype. I certainly wish I’d mined some coins back in the day. But I think the good times are finished for awhile. At this point, there’s no denying the reality.
If anything today resembles the dot com situation between 1997 and 2002, it’s crypto. During the dot com bubble, the creators of companies which had zero chance of succeeding managed to convince investors their companies were going to be hundred million dollar companies. The money poured into these stocks like crazy. Read up on it sometime. Webvan.com. eToys.com. Pets.com. theGlobe.com. There were stocks trading above $80 a share that went to $0 in less than two years. When I look at the range of crypto currencies available today, my brain is seeing nothing but a bunch of Pets.com stock.
The recent Terra debacle erased billions. All crypto is lower by substantial amounts. Major trading firms which put huge sums of money into crypto are getting hammered on these holdings. Will Bitcoin go to a million one day? It’s possible, I suppose, but it seems extraordinarily unlikely. And that’s Bitcoin, which can be considered legitimate. A good amount of crypto currencies are complete scams and this is why the regulators are looking to regulate them and more regulation will, no doubt, reduce the number of currencies which can be hyped, pumped and dumped.
Trading crypto is obviously still going to be a thing and there will be people who make money at it but I think there’s going to be much less interest in it as a trading vehicle during the next few years. Buying the dip as a strategy stopped working awhile back so I think the day to day swings are going to be less predictable. I certainly can’t see why anyone would bid Bitcoin prices back above $40,000 anytime soon but maybe I’ll be proven wrong.
Housing is another story. This part of the equation is what separates today from 2008. Almost no one in the industry is expecting a housing crash and this is because there is a lack of inventory. Yes, there are some areas where house flippers have driven prices to absurd levels but those areas are not seeing much of a decline in prices and in other areas, there is still more demand than supply. Higher mortgage rates are slowing down the buying frenzy but it’s not like people are going to start dumping homes en masse.
If housing stays relatively stable and energy prices remain high, I’m figuring on a sideways to slightly lower stock market for the foreseeable future but not a massive sell-off. However, I think there will be moments of severe uncertainty in the next few months when some big moves will take place and those days will provide many opportunities. I know that sounds vague but my point is that a person should be on the ready for these days when they occur. A lot of people dismiss summer trading because they think summer action is always slow but that’s not true. This coming summer, due to aforementioned reasons, there could be some huge days.
If you are not on vacation all summer and have the time, sitting in front of the screen could be very worthwhile. On any given day, the major firms could make a move causing a thousand point run in the Dow or a 45 tick run in treasury bonds. If the day is looking crazy from the start, don’t step in front of the steamroller. Too many fade trades against the steamroller lead to getting flattened like a pancake. If it’s obvious that you’re getting flattened, stop fighting it. How is it obvious? Easy. It’s obvious if you’re fills look like this…
Bought at 25. Sold at 23.
Bought at 21. Sold at 18.
Bought at 16. Sold at 14.
Bought at 12. Sold at 14.
Bought at 12 again. Sold at 9 the next time.
Ideally, you want to stop the stupidity after the second or third loss and not continue speaking obscenities to your computer screen all day as you try to catch a falling knife by the blade.
I would like to finish this post discussing something which often causes a debate. Many times in my life I have heard the following…
“The markets always go higher. There’s no reason to sell unless you need the money.”
This is utter nonsense. It appears this way for a few simple reasons. The “buy and hold forever” advice fails once a person understands the reality of history.
What, exactly, should I be buying and holding forever (no one ever seems to have a specific answer) and how can I buy it if I just lost all my money buying and holding something else that is now worth $0?
Humans have short memories. That’s problem #1. Problem #2 is that young people who have not experienced an economic crash have no frame of reference for predicting one or knowing how to respond to one. In 1999/2000, I understood that there is a problem with a company that’s never made a profit trading for more than $100 a share but knowing that didn’t help me much. I thought I knew more than I did about a lot of things when I was younger and there was a part of me which thought the “buy and hold forever” motto had validity. After all, I knew old people who had been holding property for years which had increased 20x in value. But I didn’t understand how it all goes down when things go very wrong for a lot of peope at the same time.
Allow me to explain. The Nasdaq is currently trading just above 12,000. It would appear, on the surface, that if you’d bought and held anything representing the Nasdaq index at any time prior to 2020, you would be profitable on that investment. This is false. In a nutshell, here’s what happened in 2001/2002:
Investement funds, including most retirement funds which managed pensions, were invested in the different stocks which comprised the Nasdaq 100. A lot of those stocks went to $0. The Nasdaq collapsed. Everyday people who had retirement plans which were entirely invested in Nasdaq stocks watched their retirement money evaporate. People who at one time had $500,000 in their 401K accounts received $50,000 or less when the fund closed its doors. A sustained period of emotional misery followed. These people had no money to put back into the new Nasdaq which would include different companies that were added over the years. The “buy and hold forever” maxim was proven wrong (for the gazillionth time in history).
2008 – The housing market collapsed. People who were upside down on their homes were forced to sell or hit with foreclosure. People who lost their jobs and couldn’t make the mortgage were forced to sell or hit with foreclosure. Property prices collapsed. A sustained period of emotional misery followed.
The only people who could buy property and stocks between 2009 and 2014 were people who’s lives weren’t decimated in 2008.
“You shouldn’t try to time the market. Just buy and hold.” So they say.
Okay. Sure. Tell that to the millions of people who lost everything in the crashes over the last forty years. “Buy and hold” works for people who have disposable income they can invest AFTER the crash.
Riding the trend higher is fine and dandy and exactly what a person should do when prices are continually moving higher as a result of QE (quantitative easing), free money, excessive credit, etc. But the danger signs have been flashing for awhile. In late 2021, plenty of smart individuals were warning the general public that a recession was likely in 2022. The Fed was openly discussing raising rates. Many stocks had already begun trending lower. All a person had to do was watch, listen and use a little bit of critical thinking.
I’m not saying a crash the likes of 2001 or 2008 is coming but timing absolutely matters in both day trading and long-term investments and, as argued previously in this post, an initial crash has already occurred. It’s just not being fully reflected in the major index pricing. Amazon and Apple and Microsoft aren’t going anywhere but what about the rest of the companies out there? Does anyone really think Netflix is ever going back to $650 a share? And Netflix isn’t a rarity. It’s more of the rule rather than the exception right now. I’m sure there are some solid companies trading at a discount which will make it out of this alive and do well in the coming years but trying to find those outliers is a difficult task. Also, nearly all stocks go higher in a bull market and lower in a bear market so even if a person can find those undervalued stocks, the person will probably be holding them for some time before seeing a substantial rise in prices.
Things change and things are currently changing in a big way across the globe. Adaptation is crucial. Fortunately, traders can go short as well as long. Don’t freeze like a deer in the headlights just because things are changing and don’t be afraid to step out and take a chance when the opportunity presents itself. And don’t step in front of a train;)