I’m not sure if I need to add anything to the title, to be honest. Sometimes it’s the simplest things that become the hardest things to accept. Like the fact that trading is hard. There sure are a lot of people in crypto that don’t think this is true. That’s pretty much what spurred me to write this blog today. It’s the idea that all you have to do is buy and HODL. Nope, not a misspelling. HODL, which started as a misspelling, has become the battle cry for the crypto crowd. The group think is Hold On for Dear Life. The idea is if it goes down, just hold on to your position, eventually you’ll be rich.

As I’ve stated so many times at this stage of my career, I’ve seen this movie before. No this isn’t a Charlie Munger, Warren Buffet, Jamie Dimon, etc denial of bitcoin and crypto. As my readers are well aware, I’m all in bullish, to the point that I work for a crypto exchange. That’s about as IN as you can get. So am I long term hyper bullish on crypto? Yes. But I’ve been trading a lot longer than bitcoin has been around. I was good enough at it to stay in the business for a long time. Dead markets, wild west markets and everything in between. I’ve taught others and spoken with many many traders of different instruments over the years. We all agreed on one thing…to have longevity in the business you needed to accept that it was hard.

Don’t get me wrong. Can you get rich trading and not be good at it? Absolutely! I’ve always believed in luck over skill any time. And generally successful people have some luck along the way. It’s been said those people make their own luck, but either way there’s still some luck involved. And crypto traders and hodlers alike have been lucky; this has been one helluva bull market. I’m not saying it’s over, just saying it’s been going on for a while. The run has had some hiccups let’s call them, but it’s been a 10 year (+) bull market. So looking back, yeah just holding positions has worked. No matter what. And those are some strong hands, or ignorant, or a little of both.

Back when I traded gold futures and gold was trading under $300/oz. I used to hear the same refrain. Gold will make new historic highs. The previous high was approximately $850/oz. back when the Hunt brothers were trying to corner the silver market. My response was simply, “If you survive long enough and your pockets are deep enough, you can wait for any position to come back.” This is not something I would recommend…for a couple of reasons.

First, if you’re trading exchange instruments you’re probably getting a lot of margin calls along the way to support the position. Second, instead of holding that position as it goes against you, just get out. You can buy it back again when the setup seems more bullish. Or you can buy it back cheaper. Or you can simply reallocate the money to a better trade. But getting out allows newfound clarity every time. Third, and extremely important,  it’s Painful! Sitting on a position that is going against you and you’re just sitting there watching yourself lose money hurts. And that’s hard. One of the things that will always stand in the way of profits is emotion. Thinking you’re right and the market and the world are all wrong. You may be vindicated eventually; let’s just hope you haven’t run out of money before it happens.

So about that movie. We’ve discussed on more than one occasion the ‘internet bubble.’ When it seemed that anything with .com in the name would make money. One of my favorite examples is always Pets.com. Cutest sock puppet ever! Never made money, stock went to zero (Ok, there’s a trade that isn’t coming back). Everyone and their brother, and their sister, cousins, aunts, etc. thought they were the best traders in the galaxy. Why? Because they were making money. One friend used to trade on his lunch hour and didn’t understand why I wasn’t richer. He was buying things and taking vacations…then it all blew up and he realized no more of that nonsense; couldn’t afford to make money like that anymore, cost too much in the end.

Recently we saw this in fast motion with the Wall St. Bets crowd looking to crush shorts in traditional stocks. Sending Gamestop up over $400/share was a lot of fun…unless you were the one that bought it at $400, because ‘they’ promised we’d get it to $500. This plays out over and over for the same reason Ponzi schemes do. Easy money, or seemingly easy money, is attractive. But most money isn’t easy.

The second favorite refrain in crypto, after HODL, is BTFD. Buy The F*cking Dip. Another strategy that’s fun and profitable, until it isn’t. Buying the dip is great, but how do you know which dip? Or how deep a dip? Or when the dip is done. Buying the dip in gold, in our previous example, probably felt good at $600, and $500, and $400…when do you give up? Throw in your cards? Often it feels like you did it just when you really should have been buying more. But it’s tough! Those emotions again. I’ve got 10 rules of trading; one is ‘Save Emotions For Your Family.’

[Click to Bid – NFT Bids Accepted Until May 23]

The point is that there’s a difference between riding a wave and actually trading. The other thing I like to say is trading is not a hobby. Another friend once told me he got a financial settlement and he was going to turn that $100k into enough to live…for a while. After all, his girlfriend had bought him Trading for Dummies. I kid you not. I have known him since high school, so we discussed this plan. We agreed that while not the smartest guy in the room, I’m generally not the dumbest. And yet, after reading books, studying charts, writing successfully implemented trading algo’s, I still wasn’t rich. If it was easy, then even I should be able to make enough…he finally agreed, it must not be easy.

Sounds like I’ve seen the movie, huh? It doesn’t make me feel good to have to constantly point this out. It usually means people have lost money. In this case I hope it saves some people money. Like I said, the story is an old one. In fact my grandmother, immigrant from Hungary who lost her husband early, yet never worked a day in her life after that. How? She found a really good advisor. For even she had the wisdom to tell me when I was younger, `Any idiot can make money in a bull market.’ Now you don’t have to pay attention to me, but I do think we should all pay attention to her.

A quick note: We lost Welles Wilder recently. He invented many of the indicators we use today. I am a heavy user of his RSI and ADX indicators; in fact the TrendStall indicator I built while at Bloomberg is actually a derivative of ADX. I owe much of my charts success to using what he gave us. I always wanted to discuss his use of recursive calculations over simple, and whether that was his choice due to having to do hand calculations vs what he would have chosen if he had a PC way back then. I’ll never get the chance. Hope he’s looking down with satisfaction, knowing his tools are used and taught and discussed, and will continue to be at the center of our industry for many years. RIP Welles Wilder.

So the new kids won the game and the old guard is crying. After printing their own profits for years, the hedge funds lost money. WTF? You can’t make rules, break them yourself and then blame someone else when you lose. I’ve often pointed how often people try to blame their losses on anyone but themselves, yet every profitable trade is just further proof of the genius at work. I’m not trying to save on word count here, so I’ll spell it out…Shaking My Head.

This is not the first short squeeze. This won’t be the last. And every time, there’s an outcry to take short selling out of the market? Why? Because a bunch of people on reddit decided to band together and make the same trade? I remember when we used to be told how cute it was when a group of old women got together and made trading clubs. They’d gather, share their research and decide as a group what to buy. Why is this one different? Because we don’t like the crowd that inflicted the pain? Because we want to protect the crowd that lost money? Maybe some of both?

We’re all pretty familiar already with what happened. ‘Hedge Funds’ were short some stocks, betting they’d go down based on their ‘value.’ Then the reddit crowd came in and bought up the stocks, squeezing the shorts or in old trading terms, giving them a facial. There are so many parts to this that this blog writes itself, though it might need installments. We can examine hedge funds and their trading missions. We can examine other short squeezes. We can examine Liquidation Only, possibly the equivalent of a long squeeze. And we can examine why the people shouting about banning short selling and exchanges deciding a stock’s ‘value’ are misinformed and really haven’t thought enough about their points of view.

Let’s start this by looking at those hedge funds that lost all that money. The guys we’re supposed to feel sorry for. Obviously, I don’t. A hedge fund, by definition, is supposed to hedge. In other words, they’re supposed to have laid off much of their risk by having some sort of counter position. Reason one to have no sympathy. If they were hedged, they wouldn’t need to get inflows of billions of dollars to stay in business. Understand, this is not Bernie Madoff. This money existed, still does, but has changed hands. Isn’t that what buying and selling is all about? Hedge funds rarely hedge. They take sides. Call it what you want. They buy or sell because they think something will go up or down. So, in effect, they’re gambling. Thing is, usually they’re more like the house…they win more often than they lose. But every once in a while even the largest casino loses to a whale. And then they don’t let him into the casino again. Kind of like when Robinhood shut down trading for the masses so the hedge funds wouldn’t lose more money.

It wasn’t that long ago, in fact, that hedge funds were actually the devils of Wall St. So to now turn it around seems like an argument of convenience against the new newcomers. The part about the reddit crowd being called reckless gamblers and the hedge funds being portrayed as the victims is really crazy. Seems to me they weren’t reckless, they were on a mission. To inflict pain.

I’ve told stories here before about the old commodity futures trading pits. Every once in a while, one trader would get pissed at another (well, that part happened all the time) and vow to inflict pain. People said things like, ‘I don’t care if it costs me 10 grand, I’m gonna make you lose 50!’ We called it running someone in. In this case, the reddit crowd was on a mission to run in the hedgies. And it worked! So now we need to change the rules? Maybe we should have changed them before; or at least followed the ones we have. I’ve been in this industry for a while, but I still don’t get how a stock that is shorted can be shorted to the tune of 140% of the outstanding float when shorts are supposed to borrow the shares. IOW, the shares you’re shorting need to exist, and be deliverable. So who was in the wrong?

Again, nothing new. 1922, Piggly Wiggly. More recent? Porsche, Herbalife, Tesla, etc. etc. etc. In 1980 there was a kind of a long squeeze, in fact. The Hunt brothers attempted to corner the silver market driving prices up to $50/ounce. This became a ‘problem’ and so the COMEX changes the rules on futures; it was called liquidation only. It meant silver would crash and the Hunt’s would be ruined. So while the Hunts were portrayed as the bad guys, it was the exchange Board of Directors that changed the rules mid-game.

Robinhood wouldn’t let you trade? I know the issues they’ve spoken about around reserves. But few believe that; their position as one of many firms being paid to provide order flow was exposed and that sure seems to be a bigger problem than a bunch of r/wallstreetbets people getting long GameStop at the same time. This also is nothing new. I’ve had my own account shut down at TD Ameritrade. Why? While no one would provide an answer, I’m pretty convinced it was because we found a way to beat the firms that were paying for order flow at their own game. We were making money. Every Day. I was trading commission free, they were paying TDA for order flow. We both know who won.

Traditional Wall Street firms are like the kid in your neighborhood that as soon as they were losing, took their ball and went home. So why all the outrage? Why the call to protect them? Why are we going to ban short-selling, which anyone who’s actually participated in these markets is well aware adds more liquidity and serves to make markets actually more efficient. Why? Because the suits don’t like getting played by those ‘unprofessional reddit kids who don’t understand how this works.’ Actually, they do understand how this all works. So well, they were able to run you in. Deal with it. These markets aren’t guaranteeing profits, they’re guaranteeing opportunity. Will this end well? Probably not, but a lot of people have learned a lot about the realities of a somewhat free market. Now to go grab some more popcorn.

I recently lost my dad. It’s painful, we always discussed my blog of course, but what was most amazing was all the stuff that had to be dealt with. One of those things involved my parents’ investment accounts at Morgan Stanley. My dad had a good relationship with his Advisor. I met him once prior, and found him to be personable, smart, informed, and realistic. I realized immediately why my dad always said how much he enjoyed their conversations.

When dealing with paperwork, establishing new accounts, etc., I made it clear to him that no matter my background in markets, trading, advising, and teaching I have no intention of trying to tell him how to invest what is now my mom’s account. This was a worry of my mom, so I wanted to squash that one quickly. I continued to chat with David over the following days and weeks, and finally asked him, “Can you please explain new highs in the indexes to me? I just don’t get it!”…as evidenced by the obvious losing trade I wrote about previously. I told him I definitely don’t envy the position he’s in.

He laughed. He told me that many of his clients call as they watch this crazy rebound (my description) and wonder why he’s got any cash on the sidelines. How could he not have them fully invested? The line that stuck out to me the most was when he told me some of his clients actually feel like they’re losing money. After all, NASDAQ futures (I think in futures, old habits are tough to break) are up over 80% from the lows of the spring. E-mini S&P futures are up over 60%. So if your account hasn’t grown that much in the last 5 – 6 months you, or your advisor, are lagging. At least that seems to be the thinking of many investors, whether you’re considered a novice or advanced investor. Many of these people are even at the level of accredited investors which, by the government’s definition, means they have an understanding of market movements over time.

But is this a fair critique? I’m not sure. As I said in my last blog entry, many of the most advanced professionals I’ve spoken to, or whose opinion I’ve read, seem to have a problem understanding this rally on a fundamental basis. Being a chart technician, I should be bullish. Buy every dip. But I’m not. Neither are many of these professionals. As a believer that the market is always right, does that therefore mean all these opinions are wrong? Let’s examine a bit and you can draw your own conclusions.

The NASDAQ index is based on 100 stocks. The S&P 500? Eponymously named for the 500 stocks in that index (505 actually). I keep reading on Twitter that my 401k, if I actually had one, is screaming higher. I should be thankful for this recovery as it will cushion my later years. OK, then why can’t these advisors keep up? Well, a couple of reasons. One, it’s really difficult to call a bottom when it’s falling out from under us. And if you did call the bottom, what did you do about it? Most of these accounts are not trading index futures or even ETF’s; they’re trading equities, and that’s when it gets really hard.

The bulk of the S&P up move is centered around 5 NASDAQ stocks; AAPL, AMZN, MSFT, GOOGL, and FB (Facebook). Those 5 stocks have a Year-to-Date return approaching 50%. The rest of the S&P? Negative 3%. By another person’s measure, those stocks account for 44% of the up move. I’m guessing most professional money managers would not consider themselves to be truly performing their fiduciary duties were they to focus portfolios on only 5 stocks. That definitely isn’t the diverse holdings model that is constantly taught and hammered home. And we always seem to forget why these people are good at their jobs, even if they haven’t returned 60% – 80% over the last few months of this surrealistic world we’re living in.

I’ve tried to explain this to many people over the years who have pointed out that if you “Just buy an index ETF, over 10, 15, 20, 30 years you’ll make good money.” The problem with that statement is not only is it overly simplistic, it shuns human nature for most of the population. We’ve discussed corrections and why a 10% down move is a buying opportunity in a bull market. A 20% correction converts that same index into a bear market. The S&P e-mini futures dropped 36% in one month. That does not sound like a buying opportunity based on all the old rules. And we all know I don’t believe in a New Normal. At least not as often as we’re told they happen. We’re usually told by different experts each time, and this is not a new normal I’m willing to buy into (literally).

Double digit unemployment. Small businesses begging for another life line. And every time we’ve thrown that lifeline recently, we’ve done it in ways that devalue the US Dollar on the global currency markets. The argument can be made that even if you are making money, you’re making a lot less than you think you are. But that’s not the point I want to make. What I do want to point out, is that emotions drive most investment decisions that aren’t automated strategies. And even people using those computer models often want to override them when they don’t get the returns they want. They may be getting the returns they expect based on the research, but it still sucks to read on social media how much more money people are making than you. Personally, I think it’s like those Photoshopped vacation pictures. If you were having that good a time, or making that much money, you really don’t need to brag. We can all tell from your smile.

What we need to learn and keep in mind, is that a single benchmark rarely tells the full story. A long term strategy, be it fundamentally based or technically, has to have rules. And you have to live by those rules or else for all intents and purposes they don’t exist. Don’t look at someone else’s family pics on FB to decide if you’re happy. And definitely don’t believe the hype of how much money you should be making. Devise a plan, stick to it, keep your head down, and worry about your own money. That’s more than enough to think about for any one person.

Yep, I’ve been absent for a while, so this one’s a bit longer than usual. There definitely is not a shortage of material. In fact I can start briefly with my own personal COVID-19 journey. Not going to ignite any big debates about re-opening and crowding bars. I don’t want this to get political and that will send us there. Being a survivor, feeling stronger every day makes me feel lucky. This thing kicks your ass. Only way to describe it. And I thought I was being careful (paranoid) before I got sick. Just want it known; I’m a believer in masks and distancing. ‘Nuff said.

Plenty of economic material too. I recently went against all of my own rules. I shorted the NASDAQ. Bought puts soon after the open for the trading day after all-time highs. The day the NASDAQ dumped about 150 points. When teaching or discussing charts I always tell people that you should have the same opinion about a chart no matter the symbol. And if I was looking at a NASDAQ chart with no symbol, I’d be solidly in the ‘Buy the Dips’ camp. But I just couldn’t stand it anymore.

So I broke the rules. I went against the chart. I put on a trade steeped in emotion. I went with my gut. The list goes on. And yet, so far I’m right. Stepping back I do see some places that were cracking that maybe I saw but didn’t pay attention to. Maybe those actually were good reasons.

The lack of good measurable momentum. The RSI couldn’t make a new high when the market did on either the weekly or monthly (so far). The monthly chart shows an impending TrendStall, which would indicate the move is over, at least temporarily. But not great reasons to fight the overall trends.

[NASDAQ e-mini Weekly]                                     [NASDAQ e-mini Monthly]

But the Fed is printing money and they’re ready to print more. The government has even gone so far as to buy corporate bonds. Sure sounds like a nice soft cushion under that ugly looking cliff jump. We don’t want to fight the Fed, as the old saying goes. And I’ve discussed in this space what happens when an incumbent President is running for re-election. Make no mistake, many of the actions sold as helping citizens when they need it might not have occurred a year or two ago (one man’s opinion, but it is my blog).

What made it so that I just couldn’t stand it anymore and had to get short? Well, timing aside as it wasn’t the first new all-time high day, but I had been holding back. Printing money is nice, but what good will come out of it (unless you’re long gold and/or bitcoin)? Let’s look at what else is going on and we’ll come back to that one. Unemployment is around 14%. That’s not going to get better. There are business that have hung on for the last 3 months, but now we’re faced with being back where we started. States reversing course on openings. Bars realizing they’re the center of it all, helping extend the pandemic to a population group that we all thought was in less danger (but isn’t), and the people in that group believing they’re invincible…didn’t we all when we were in our 20’s? And many of those people go home to parents in known risk groups. Not going away.

So all that curb side pickup that let restaurants hang on while they thought a re-opening after a couple of months would help them make it through, now see that the light in the tunnel may be a freight train. And even home improvement can only go on for so long when you’re semi-quarantined. Eventually the house is in decent shape. With the economic problems we’re facing and the fact that they could get worse rather than just being a brief period of pain, well, people get nervous. They get nervous about losing their income, i.e. job. Sure don’t live on Amazon as much when you start getting that feeling in your gut.

It hurts to see how many small, family businesses will be seriously hurt and probably close. More unemployed, many somewhat older and less employable; just late 40’s early 50’s is older or simply old in today’s corporate America. These are the entrepreneurs and businesses we’ve encouraged for almost 15 years. Since the last time people lost jobs en masse. We’ve created a Shark Tank nation. Can’t find a job, simply invent a business. It’s great in times when things are expanding and people are spending money. Unfortunately, now is no longer that time.

Commercial real estate? Not feeling it as more companies see people really can be productive from home. Big purchases like cars? Really need a brand new Ford F-150 truck? Well if you’re in the home building or improvement business probably not as business slows. If you leased the last one because you thought it was the awesome truck you absolutely needed to haul your Home Depot stuff home, you’ve probably figured out a smaller, less overkill truck will suffice. How many grills are you really going to need to bring home. You may even question whether you really need a truck at all. Maybe a nice electric car after all. Save money on the purchase and the fuel. Double win. You get the idea.

Vacations? LMFAO. If you can’t drive there, and probably stay semi-secluded like a beach house (but not going to the crowded beach), chances are you’re just staying home. Drinking more perhaps, but there are only so many alcohol stocks out there to invest in. And all of this is just the easy to spot low hanging fruit. The lack of jobs and resulting lack of spending are like pebbles in the pond. The ripples will touch every part, every piece of shoreline. And if it doesn’t happen to you, it will happen to enough people you know to scare you.

Now back to that money printing thing. Eventually that leads to inflationary pressures, Econ 101. One can argue that with the lack of spending I’ve just argued is in progress inflation probably isn’t a worry as there isn’t demand across the board for goods of all kinds. And that’s true. What’s also true is that food is not part of the inflation measures that are cited to make arguments one way or another. But we all feel it when food goes up; I know I’ve noticed. Therefore it’s tough to say that’s not an important thing to think about when really thinking about the price pressures that hurt the most.

So what do we get? Some inflation that no one can avoid. An economy that’s going to struggle in almost every aspect and sector to find a way not to contract. In fact, it’s tough to argue against a worldwide recession. Ugh! As in Ug-Ly. Maybe F’ugly is an even better word. Stagnant economy, inflationary pressures, and don’t forget a currency under pressure as we lower rates and talk about negative rates. This is called stagflation. People cringe at the word. It’s kind of the worst of all worlds, economically speaking. It was coined in the 1980’s to explain problems that previously followed economic theory never accounted for. In other words, the shit would never hit the fan. I’ve heard that one more recently…Oh yeah; mid 2000’s the educated professionals said real estate would never go down. Nope, we don’t learn…short memories. And negative rates will not improve that situation or outlook. Brief Public Service Announcement: Negative rates are not a good thing. I’d go into more depth, but it’s a blog unto itself. That blog will focus a great deal on the economic history of Japan since the mid 1990’s. Or look it up. Probably be quicker than waiting for the blog.

The point I’ve been trying to make is this upward movement in the market is unsustainable. Hopefully one of the many arguments I’ve put forth has made that point in your mind. Did I pick the dead high? I’m not going to bet on that. If I did, well better lucky than smart any day. But the lack of technical momentum, paired with overall economic news that contains no positive long term indicators drove me to it. I won’t learn from this trade if I make money. In fact, it will probably just lead me to do the same undisciplined thing again. But this market is like that old joke about shit inside Tiffany boxes. If you put some shit in a box, no matter how pretty the box may be, robin’s egg blue with a wide white ribbon, it’s still, well…just shit in a box. And no matter how much money we print to find its way to temporarily drive a bull run, any look at history will show this is unsustainable. As I’ve said before, there’s rarely a new normal. It just looks like it till we go back to the old normal. Be prepared.