You are a F-ing Idiot to be Long the Market

Boris Schlossberg

I was bearish Nasdaq in ‘99. I was bearish New York real estate in 2005. So I was early which in trading terms means that I was wrong. But I wasn’t trading stocks or real estate. I was looking at those assets an investor and while everyone else was getting margined out of their stock accounts or turned upside down on their mortgage, I (like some 19th-century immigrant) stayed in cold, hard cash. For a while, in 2008-09 I didn’t even keep my money in a bank and bought T-bills directly from the Treasury instead.

Now if you are the type of person who never sells your investments, never needs liquidity and always buys every dip in the market you can ignore every word of this column. I am sure you will be richer than Warren Buffett and I commend you on your ability to not need your money.

If on the other hand, you are looking to use your money for stuff like food, housing, travel, medical bills, you know, -- life, then just as day follows night, there will come a time when you will wake up in the morning and half your savings will be gone before you could even login into your Ameritrade account.

I don’t want to rehash all the old arguments -- that FAANG+M are the new Nifty Fifty. That my Upper West Side Apple store which routinely did more than 100M+ in business per year is now barren most of the time (yes it’s just the kind of bullshit anecdotal evidence that usually isn’t worth much -- except when you are trying to gauge relative rather than absolute change.) There are many analysts much smarter than me that have made much better arguments as to the stretchiness of valuation.

No. What I want to tell you exactly how the crash will happen since I’ve lived through all of them starting with the “Big One” in 1987.

There will be some unexpected catalyst, or perhaps no catalyst at all -- just a price cascade that will take the S&P down by 100 points in less than a minute. At first, the algos will step in and try their usual mean-reversion, vol-dampening routine but traders spooked by the move and investors looking to cash out long held profits will create customer flows that will quickly overwhelm the machines. The Spoos will start to dive again. Then, ignition algos seeing momentum will start to mercilessly pound the bids and drive the futures even lower. HFTs which only like to handle a couple of hundred shares at a clip will instantly turn off and suddenly all equity bids will disappear from the market. The exchanges will trigger circuit breakers and stop trading altogether. Now you will not be able to sell out at any price.

After a period of some time, the exchanges will once again reopen and once again investors will clamor to sell in order to salvage the profits build up over the years. Because really -- who at this point is not long the market? Do you REALLY think that at 18,000 Dow someone will step in and say -- “Wow -- what bargain!” No -- that’s going to happen later, much later, when the Dow is at 10,000 and you are left to wonder how 10 years of investment profits could be erased in a matter of 10 days.

I have absolutely no idea of when this will happen, but I do know that like all the other times before I will be safe rather than sorry and will stay in cold hard cash and let the rally pass me by.

The Hidden Trade that is the Key To Long Term Success

Boris Schlossberg

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Ask most traders what are the possible outcomes of a trade and they will inevitably give you a binary answer.

You either win or lose.

But if we think about it for a second, there is actually a third choice. You can neither win nor lose. In short, you can basically not lose and close the trade out for even. If we go over our many trades, there are countless examples of trades that may have started out badly only to rally to breakeven and then ultimately fall apart.

The art of NOT losing is perhaps the most underappreciated skill in day trading. It is, in fact, the foundational strategy of high probability businesses like insurance and casinos. Insurance companies are of course notorious for eliminating any possibility of large payouts. They are in the business of collecting premiums but the moment a client presents any type of collectible risk they move swiftly to cancel the policy. The insurance companies much like casinos will make sure to rig the rules so that customer has virtually no chance at collecting a payout.

So in Las Vegas, they will stop you from counting cards in blackjack and in Hartford they will make sure to exclude all coverage of any malady you may already have. Indeed, the current debate on pre-existing conditions in Trump-care is simply an attempt by insurance companies to collect as much premium as possible while providing the absolute minimum coverage necessary to satisfy the contract. Indeed, as my wife just pointed out to me under Trump-care pregnancy will be considered a pre-existing condition and could cost insurance buyers as much as $17,000 in out of pocket expenses even if the woman has full coverage.

Now we can all lament the evils of the insurance business, but it has a lot to teach us about trading. The more I trade the more I realize that there are really only two viable models of making money. The low frequency, high-profit model where your wins are very few but are massively larger than your losses and the high-frequency high probability model where the losses are very rare.

We are all familiar with the fact that throughout the whole history of the stock market all of the gains have come from only 20% of all publicly traded companies. Fully 80% of stocks are long term losers. And even amongst the 20% of winners, it is only a handful of equities that are responsible for almost all the stock market returns.

That’s why index investing is so hard to beat. When you buy the index you are essentially buying the whole lottery pot and betting that you will capture the few jackpots that will pay for all the losing tickets. Little wonder then that the hedge funds have been getting killed looking for the diamonds in the ruff amidst a pile of garbage.

But there are other actors in the market that actually play a very different game. HFT (High-Frequency Trading) funds have gotten a bad rap for being nothing more that digital “front runners”, but in reality, they employ a wide array of strategies almost all of them focused on mitigating risk. In fact, HFTs are the kings of the “not lose” trade as they break even on as much as 50% of their positions per day and yet make money almost every single day. Big firms like Virtu have lost money only on one day in six years.

If we are day-trading, the insurance model is the way to go and the “not lose” trade should be studied much more seriously. It is the hidden key to long-term trading success.

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BK Big Trade USD/CAD Long 05.04.2016 +53

Swing

5/4 -- Close USD/CAD at market 1.2873

Moved quickly we hit 1.2858 for +53

Reload at 1.2825, Stop at 1.2625

Buy USD/CAD at market (now 1.2805)

Stop 1.2630

We’ve gotten a serious trend change in USD/CAD after this morning’s horrid Canadian trade balance numbers. Friday’s employment report is likely to show weakness as well after the strong numbers from the prior month. A break above 1.2800 paves the way for move to 1.3000.

Big Trade USDJPY Long 01.06.2016 +50

Swing

1/8 -- Take profit on USD/JPY here at 118.70 for +50 because average hourly earnings was weak . reaction may not last

1/6 -- Order to Buy 1 Lot USD/JPY at 118.20 TRIGGERED

1/5 -- Place Order to Buy 1 Lot USD/JPY at 118.20

Place Order to Buy 1 More Lot of USD/JPY at 116.28

Stop for ALL at 114.35

The meltdown in Chinese stocks has meant significant losses for USD/JPY. However last night’s actions by the Chinese government to support its sinking stock market through a short sale ban for major investors and buying of equities by state controlled funds shows how responsive China will be to disruptions in their markets. While the Shanghai Composite Index opened down 3% overnight, it rebounded to close down only -0.26%. The markets are nervous but between China’s actions and the stabilization in their stock market, we believe that the slide in USD/JPY should come to an end soon. U.S. policymakers remain optimistic that the impact of China’s rout on U.S. markets is limited. The Fed may be less discouraged to raise rates again in this environment but no one expects another rate hike until March so they won’t be talking down rate hike expectations so early in the year. In other words, monetary policy divergence still favors USD/JPY in the long run and these could be bargain levels to buy USD/JPY.

EUR/GBP – Approaching Major Long Term Support

EUR/GBP – Approaching Major Long Term Support

Chart Of The Day

Fundamentals

The EUR/GBP is on the verge approaching lows it hasn’t seen since 2008. The reasons for the decline have been startlingly clear for many months. UK is on the verge of coming off the zero rate standard while the ECB is likely to compound their negative rate policy with additional QE increasing the gulf between the two monetary policies. Tonight’s EZ CPI could be key as to whether the ECB will actually take the plunge sooner rather than later. Another negative read which would suggest that deflation remains persistent could push the ECB policymakers over the edge and Mr. Draghi may announce new measures at this weeks presser. On the other hand any slghtly positive news could delay action and provide the EUR/GBP with a modicum of selling relief.

Technicals

The EUR/GBP pair now finds itself on the 7700’s as it approaches very long term support at the 7700 level that has not been seen since 2008. A break there would open a run to 7500 while only a retake of the 7900 figure alleviates the bearish bias.