Magnasparta1 t1_j8uyhmd wrote on February 17, 2023 at 3:09 AM

You are shorting too soon. Last year the bulls let bears run wild. This year the bulls have convinced themselves with statistics that benefit their own narrative.

“The market has only every been red for two years consecutive four times””X percentage of the time January is green, the year ends green”

These are all narratives that remove the underlying cause for the final result. WHY in these scenarios, did the year turn green? Did things change? More than likely the issues were resolved within the year leading to a green result.

If we analyze what the problem now and determine if we can resolve it in a year, it is more likely not possible. This will not stop the bulls from completely ignoring data that works against them.

Not only that but there are more bulls in general because things like DCAing exist. If you ignore last year, the past 10 years with easy monetary policy stonk only go up. This is indeed a form of recency bias, hence why bull only funds are shit like ARKK. They don’t know how to play downside because they became famous for the auto win buy button that lasted 10 years.

This week has shown something unprecedented. If a up day or down day are determined on a blackjack game. The bulls always get 20 on technicals ALONE. Every narrative, every earnings, everything is seen in bullish lenses. Fundamentals, mechanics, the option chain - all irrelevant.

In order for the stock market to go red in a day, EVERY SINGLE other bearish indicator must be active at once, oversold, bollinger bands, expensive calls, DXY/Vix pump…. If not the bulls buy it up and shrug it off.

This is how the crash will happen: EVERY SINGLE MACRO ITEM MUST COALESCE. Negative earnings, red chart, SPR drained and gas prices up, inflation up, layoffs, interest rate delay, credit card crisis, savings at new lower levels, liquidity crisis, housing crash, student loan repayments…. All of it. SPR being empty doesn’t even take place until early 2024.

Save most of your bear ammo for then. Play the bullish sentiment as it comes and goes.

ProsaicPansy OP t1_j8xdfkp wrote on February 17, 2023 at 5:03 PM

Nah, if the fed keeps raising rates and keeps them higher-for-longer there will be pain in interest-rate sensitive sectors and valuations for all US stocks. The immediate risk for the rally is that the ten year rallies above 4% again and tech stocks/long duration gets whacked again.

My overall thesis is that inflation will stay elevated for longer than people think because there is a lot of money from fiscal stimulus that hasn't been deployed yet (greater demand than before) and even with China reopening, supply won't ramp fast enough in the next year to mute the heightened demand. In this scenario, the Fed keeps raising rates because inflation gets another peak and they are hesitant to rapidly lower rates until the job market breaks. When the job market breaks, people pull money out of their 401ks (especially if laid off), stop DCAing (or net sell), and slow down their consumption. All of these things will slow down the economy, lowering companies revenue and profit margins (aka earnings). This situation will eventually allow for lower rates, but not before there is a lot of pain. The current pricing for equities implies that the fed will start lowering rates within the next year AND there is no recession. The only way the Fed lowers rates from here (and even higher) is if we have a recession that shows up in the jobs numbers.

I currently think we get out without a recession for 2023, but persistant inflation forces the fed to keep rates above 5% and then we see some level of recession in 2024. I don't think SPY, QQQ, etc. are priced for this scenario, so it's a good risk-reward to be short US equities broadly through OTM options as a hedge against a standard long-only portfolio. If the market continues to rally, I'll be flat to slightly up. If the market takes a huge shit and goes to 3600 again in the next month or so, I'll be up big. Worst case scenario is we grind between 4000-4200 for the next month, but again, I'll lose less than 2% of my portfolio in this case. You've got to love the convex payout of options :)

Magnasparta1 t1_j8xfhcc wrote on February 17, 2023 at 5:16 PM

Ok. 2024 recession works with my thesis as well. There are a lot of negative headwinds, including the ones you mentioned. Let’s see what happens.

However, bad news can be good news or bad news throughout the year. Market sentiment is the only way to make money right now imo. Trend is your friend. It can be easy to find yourself biased trading right now. Bearish if you have extensive research and bullish if you don’t lol.