It’s been a while since our last blog update. Our overall performance in the official Discord account continues to impress.
+77% YTD
+167% last 12 months
+20,128% since Discord inception some 22 months ago
However, performance as of late has lagged – down 16% in the past 3 months. This, despite a plethora of extremely accurate predictions delivered daily for our community. The swing call on LUNR from $14 to $19 and GLD from $385 to $415 are two recent prominent examples.
These two calls alone should have sent our account soaring in recent weeks but they didn’t. The issue we are facing is not poor predictions, but sub-optimal execution. No longer are we consistently making $100,000 in monthly profits with the original $18,000 capital.
Has the market changed or have we?
You may be surprised to learn we were up nearly 8% in the month of July – the month when most people had trouble – the month when the AI trade busted and Situational Awareness almost went under. No – market drawdowns have not been an issue for us. We navigate those well shifting to account preservation and hedging strategies.
But we massively underperformed in June and again here in August. The trouble started in what we see as a new market regime – that of extreme and unprecedented volatility. This elevated level of volatility started with the SpaceX IPO and has impacted how we tactically execute trades and manage risk. Before we discuss how this new regime has impacted us and potential solutions, let’s count the many ways in which the market has changed:
1. Much larger intraday ranges: It’s routine now for stocks – even mega-caps to move 10-20% in a day from trough to peak even without news.
2. Large opening gaps: it seems now almost daily that popular stocks or sectors gap higher or lower by 3-5% before the opening bell even rings.
3. The rotation game: if one sector goes up, another must go down – even if there is no news to justify a pullback.
4. Magnitude of daily moves: It used to be if money flowed into a particular sector on no news, 3-5% moves would be the entire move for the day. Now a rotational move can cause sector moves of 10-20% in a single day.
5. Technical indicators are less reliable: We have noticed that the technical indicators we use, particularly for intraday trading are now less reliable. Tried and true concepts like breaking pre-market lows signaling a failed trade or a green to red move on good news signaling a failed trade are no longer reliably working. Wild volatility can result in sell signals only to completely reverse by end of day.
6. Sell the News: This dynamic has become much more prominent on the first day of positive inflection news. Without any possible bear case on a positive catalysts, stocks often inexplicably sell off hard on day one, often violating technical support levels, only to completely reverse on day two or three.
These changes have caused us great trouble particularly in how we manage risk. As part of our risk management strategy, we have had great success over the years following many rules. Some of them are listed below:
- Rarely do we buy dips. We preserve capital on dips. If a stock dips on good news we consider it a failed thesis.
- We have very very low tolerance for drawdowns – intraday or otherwise. If a stock moves 2-3% against us, we bail on the trade.
- We don’t like holding stocks overnight in our short-term trading account due to the risk involved.
You can imagine how our risk-management process above does not meld well with the recent elevated volatility levels. Most notably, wide intra-day ranges often force us to sell our position in trade ideas which ultimately hit their targets. Before implementing a solution to these issues, let’s first delve into understanding why the market has changed. After all, we are StoryTrading and our starting point is always based an understanding of market price action.
There are three main reasons we believe are the cause of the recent changes in the nature of the market.
1. Traders are Fully Invested: There is plenty of evidence for this and by this, we mean including max margin capacity. We are also referring here to hedge funds, not just retail. So if you are fully invested and you want to buy the latest and hottest thing for the day, how do you do it? There is only one way. BY SELLING SOMETHING ELSE. We believe this is at the core of the change in market dynamics and it was exposed with the SpaceX IPO and continues to this day. This is the reason for the wild rotations. This is the reason why a stock which was up big yesterday goes down the next day and vice versa. It’s a game of musical chairs as there isn’t enough capital to stay invested in all of the opportunities.
2. Inflection Point in Group Trading: When things move, they move fast and hard. A 5% move is no longer a great day. A 20% move is. Why? Because capital is now moving as a group powered by group-think due to social media influencers, and the impact of agentic trading where bots are all following each other.
3. Impact of Overnight Markets: It’s becoming evident just how much the U.S. open is impacted by the action in Asian and particularly South Korean markets overnight. This causes large gaps in both directions at the 9:30am open.
Now, armed with an understanding of all of the above, can we begin to propose a solution.
Solution #1: Do nothing different. Follow the process which has worked for years with an expectation that market volatility will come back down to normal levels.
Solution #2: Increase tolerance for drawdowns. Understand that the new normal are wide 10-20% swings in a day. Be willing to sit through a 5-10% drawdown instead of getting shaken out on a 2-3% drawdown.
Solution #3: Understand that sectors can move 10%+ in a day on no material news. Rotations alone can cause such moves. Therefore, be more willing to buy 3-5% gap ups when a sector is in play.
Solution #4: Be willing to swing overnight more often. This will lead to more account volatility. Be okay with that.
Solution #5: Stick around to trade a positive catalyst on day two or three, understanding you may have to tolerate pain on day 1. (or swing with a timeline of weeks to months accepting drawdowns along the way)
Solution #6: Be more respectful of crowd and money flow. This after all goes into the Sentiment pillar of our 4-pillar trading process. Also understand, due to group-think and trading, it can cause significant 10-20% moves in a day.
Solution #7: Place a much greater emphasis on selling cash-secured puts and covered calls. (we’ve already started doing this in our long-term account and a dedicated put selling account we issue alerts for in our Discord)
The truth is, we have not settled into a solution yet for our main trading account as much of the observations above fly in the face of decades of experience and routine. However, we think the new volatile regime can be a new normal which is here to stay – so an adjustment is needed.
As always, we come into every day explaining markets in our Morning Note and offering accurate predictions on a routine basis. Many of our readers and Discord community members are thriving in this environment as they deploy much looser risk management practices in their own accounts than we do. Others have trade tactics where extreme volatility plays right into their hands. Many of these talented individuals routinely alert their successful entries and exits directly in our VIP Discord Trading community.
While we are proud of our overall performance, we can and will do better. The market has changed and we’ll be here with you in our Discord and through our Morning Note as we navigate and master those changes.