2021 has been a big year for the equities markets, not quite as easy going as the 2020 rebound but generally the indexes, certainly the S&P 500 Annual Total Return is up a whopping 26.67% [LINK] and not only floating around an all time high but opening strong across Christmas and into the first New Year Session of trading — that's a bit of a problem for investors going forward.
For those traders who were able to avoid the choppy months, and there were a few of them, and for those traders that were able to benefit from the Sector Rotation away from Covid Tech Stocks by shorting these assets a few months ago, well ... these traders will have done even better than the market.
As positive as this all appears, next year may not be so straightforward and assets are looking expensive, really expensive ... All time highs on the Warren Buffet Indicator [LINK] — In fact, we are running at about 2½ Standard Deviations above the historical average.
Asset Prices at all time highs | Simon Ree [LINK]
Simon Ree, an experienced, well respected trader operating out of Singapore has similar sentiments [LINK] on the market in respect to asset prices, and his comments that there is little solace diving into bonds to save us from a wave of inflation is also appearing treacherous. Stepping away from traded assets and investing in say property, would be a frothy experience at the moment and some prices in specific locations are ahead of themselves.
Returns vs PE Ratios
As Simon points out in his video, entering heavily into stock positions on a market that is running at an all time high generally doesn't drive out solid or even positive returns over the next decade.
All this said, the markets aren't looking bearish either, that will come we can be nearly sure but we are not there yet. CNBC Squawk on the Street classifies the equities market in a mid-cycle phase which could result in asset prices for strong companies rising 10% as an outcome of earnings valuations [LINK] in 2022 — that's risky at the top investing but an exciting investment proposition all the same.
The Perspective
To put this into perspective, you just need to plot the S&P 500 for the last five years or so on the one hand and consider the massive amounts of support the Federal Reserve has put under the market; including direct position taking on listed entities, relaxing various capital rules under the banks, running a super low interest rate regime and literally dropping cash on the population through handouts (yes the US government did this).
All of these things are unheard of in a normal world and they leave the Federal Reserve without tactical ammunition if the market does pull back. Large fund managers are also aware of this prevailing market condition, and word on the street is that they have been heavily switching their hedging strategies from treasuries to put options — this might end up becoming a self-fulling prophecy.
Then there is the average retail investor today; so many newbie WFH Investors have entered the market and young investors are more often than not, long-only biased with a buy to hold mentality. However, they are at that point where they are starting to mature and switch their tactics to play the short side as well.
Finally, the index may be up but it's being held up a only a handful of stocks. The broader market is down 10% from the 52-week high.
S&P 500 Index
Now I am not saying the market is going to open up in drawdown territory by the end of January, but given the high levels short term Supply Chain Disruption and Demand-Pull Inflation, sector rotation and tapering in play ... it's hard to buy assets at the top, even quality assets — We are about to enter an earnings season, and that could a decisive moment for a lot of companies.
So what's the play when the market is at the top and pushing higher and you're not really that bearish?
The Strategic Edge
Firstly, we have substantially shortened our trading horizon, and have now opened up an entire team that will become Vwapians. VWAP trading is a trading style, speculative in nature that rapidly adjusts to what is being presented in a time series rather than taking long term technical or fundamental positions on assets — This TrickTrades video [LINK] explains a tiny part of the strategy, and we'll be posting more on the VWAP approach to Pattern Day Trading in the coming months ahead.
Secondly, 21 EMA Crossovers on assets that are sitting on market highs are likely to find themselves on a Bearish 35 DTE Call Credit Spread as a conservative play. We'll also be assessing a long term Bearish Cyclical Index Income Strategy similar to what Andy Crowder describes here in his practical hedge [LINK] guide.
Don't get me wrong, we are not short biased but we are adjusting our approach so that if the pullback happens, we will be ready for it and such an event should be profitable ... if it doesn't happen, there won't be losses from any Directional Bias and we carry on in this Covid Crazy world, riding the market higher on very Short Dated positions.
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