The market has been brutal across January with volatility or chop as traders refer to it, causing a lot of losses on day trader's portfolios. There have only been a couple of days where momentum has prevailed, and yesterday was one of those days.
Bloomberg also notes in an intriguingly titled article "Adults Back in Charge of Stock Market as Fed Awakens Big Money" that the market is transitioning away from being driven by hype, reddit postings and fast money from the fed to more traditional metrics.
A market driven by institutions is one where old-school metrics like earnings announcements, valuation and guidance matter more than populist drivers like Reddit postings ... The share of overall trading represented by do-it-yourselfers has come down a lot. After spiking to 24% in the first quarter of 2021, it’s now around 18%
Adults are back in charge | Bloomberg [LINK]
Do not be put off by any of this, nor should you worry about inflation. Ummm may be you should worry about demand fed inflation causing dislocation in the economy with a huge array of potential ramifications from social unrest through to interest rate hikes. Still, from a trader's perspective, such sources of volatility can give rise to great opportunity.
I also am a big believer in a mixed approach to DIY Wealth Creation & Preservation (these are different trading activities) versus handing your savings across to a wealth manager where it often ends up in a passive fund — Actually, for once, Passive Funds may not do so well this year.
All of this said, there is no mistaking the 2022 January Chop, and we can expect periods of this throughout the year ahead, even without any geopolitical shocks and we are facing plenty of those.
When life gives you lemons, make lemonade
Back in the 2020 recovery, you may have been doing well with Mean Reversion, Swing Trading or Trend Following strategies or perhaps you were just one of those people that buy the hype. Either way, this year you'll need to transition your trading style to be far more dynamic taking in ...
Developing and following a trading plan
Employ shorter trading horizons
The use of VWAP Trading Strategies as your daily discipline
Configure your Trade Charts to enable VWAP
Be careful trading bias-linked narratives
Remember cash is a position, deploy capital then retreat to cash
There are a lot of opportunities to be had for those traders who dynamically respond to changes in the market, including taking positions on trend flips rather than buy to hold or buy the dip mentality.
The toll of January 2022
I know it's tempting to buy those dips or to chase those trends but these trading approaches are likely to be the source of great pain. You need to be far more nimble and defined with your trading strategy, disciplined and at times, contrarian to the market.
Nimble — Able to enter and exit quickly
Defined — Enter trades with planned exits (upside targets & downside limits) that are honoured
Disciplined — Do not chase trends; look for suitable entries
Contrarian — Buy when everyone else is selling, sell when everyone is buying
There are lots of opportunities in choppy markets, in all markets, but in choppy markets you have to actively trade the deck of cards you are handed if you are to make money.
Let's look at a couple of examples.
The Flip Side
The Labor Department releases a monthly Jobs Report (usually on a Friday) that indicated a massive 709,000 jobs were added in the US over the months of November and December. This is substantially more than previously estimated, and when one considers this coupled along with wage gains accelerating as well, wow that seems super positive for the economy.
What do you expect the outcome will be? ... ... ... The market will rise, yes?
How to read the jobs report | The Wall Street Journal [LINK]
Umm not quite and why do I hear you ask; why is good news bad for the markets?
Well in this market, good news translates to higher inflation and that confirms the possibility of the Federal Reserve acting sooner than later. What the market wants to hear is good news but not news that is too good, if that makes any sense — Be contrarian with your thinking which I translate to think critically, think beyond the obvious and keep an open mind to more than one outcome.
In the time series above, you can see the immediate response to the Labor Department's publication of figures and that's a tradable signal, and if you were floating around the indexes on the 11th of February 2022, it was hard to avoid the volatility but it was an opportunity all the same. Dangerous for long only momentum traders but it's heaven for traders that seek out these types of market conditions.
Everything Value
With a new style of trading, a VWAP style of trading, it is important to accept that yield can be harvested from more than just growth stocks that are in perpetual momentum where the only way is up for a business without profits departed from fundamentals.
There is also value to be had in the dislocation of market opinion with the intrinsic value of an asset, in the extrinsic value more broadly or the way an asset trades with its risk, and the way the market establishes an expectation or baseline with that risk.
I would go as far as to say that dislocation of pricing factors, earnings surprises (good and bad) and commodity forward curves in backwardation have been serving up some incredible opportunities each day this year.
To capture these opportunities, you need to evolve beyond the idea of simply building a long-only portfolio of stocks you believe will outperform; that style of investing in an inflationary market doesn't work because the market is now at a place where momentum has stalled.
PTON Trade Review | Causal Capital Chart
The reversal of the Peloton reflation trade is an excellent example of a short opportunity that has been cranking on since July, certainly when insiders dumped their stock holdings !!! What better confirmation do you need to see to know that you are right on track with the short.
Platform News on PTON | Trading Platform
So people are saying to me Peloton is a lousy investment — I am not saying that, I am saying the stock is interesting, it has divergence it has the potential for ... wait for it ... .. . for a takeover ... .. . who would have thought, and if you were dynamic with your trading style, this becomes another opportunity.
What I am not saying is to put PTON in your stock portfolio, but that an option play could generate profit for you long or short as this the Paleton narrative plays out each day.
Here's a thought, you missed the Facebook Short (Metaverse ... no one is taking the name for anything other than reaching into a desperate future) but is Facebook now too cheap? ... that is; relative to profits when considering other assets, is it quite simply inexpensive and as a consequence, valuable.
Basic Valuation Comparison
Earnings Comparison Unhedged | FT [LINK]
Comparing PE Ratios alone has Facebook looking very cheap. As Ethan Wu at the FT writes
You are buying growth for much less than it would cost you at any other Fang ... but the market does not really believe that the company's expected 14% revenue growth rate will be realised this year.
Facebook, has poor earnings guidance, serious brand problems and wooly expenses, it's a dud and no one is going to like it BUT it's still an opportunity?
The answer to this question depends how you trade it. If you were to shoot out and buy 35 DTE Call Options in the hope that it's going to be a quick recovery, well that's unlikely to reward you. However, if you were to accumulate the stock by averaging down and sell covered calls or even better entertain a calendar option spread this may be an interesting way to explore a stock trapped below it's true potential where it's priced now but with upside opportunity factored in.
Daily VWAP Trades
Then there are the daily VWAP Trades each day that present the greatest opportunity of all, but you need to be focused, disciplined and patient to capture them effectively.
Daily VWAP Strategy | Martin Davies
The nice thing with these VWAP Strategies is that they result in you making profit & losses (it does go both ways) each day, and once done, you are out on cash.
In effect, you are able to dip into the market and play idiosyncratic opportunities, then go to cash when you are finished, made your targets or you simply pull your positions as the market draws to a close. This style of trading protects you from any of the political and economic madness that is currently banging on in the background but you are still active in the market all the same.
So there we have it; there is an endless list of opportunities that aren't tangled up in what so many investors have been doing over the last couple of years.
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