Strategy Note: WOTE Special Ops
Shutting down for 2023. Preparing for 2024 operations.
Discussion
The WOTE Special Ops strategy is an options-oriented, highly tactical strategy that comprises less than 10% of my overall portfolio. The problem is it comprises over 90% of my mental capacity.
Per the cliche, my greatest trading strength is my greatest weakness: my greatest strength as a market practitioner is my ability to read cross-asset market signals; the flip-side of that is I’m obsessed with watching the market day-to-day, which underwrites my greatest weakness - that being, overreacting to short-term signals from a tactical trading standpoint.
The Special Ops strategy was born this year out of my broader long/short portfolio once I started incorporating options trading into my process. The long/short strategy is much slower moving than Special Ops, as trading options obviously requires more active trading. I’ve been building and honing the Special Ops strategy on the fly really over the course of 2H23, crudely documenting it along the way via The WOTE.
Back in July I correctly identified the opportunity to short in size that was building over the course of the month…
…but my execution has been poor. I traded Special Ops well into each tactical low from August to October, but overstayed my welcome at each turn. However, over the course of that stretch the process was honed: I developed The CASP framework, and around the last tactical low in late October I made the best decision I’ve made to date - I reduced the portfolio by 50% and put it away in the bank.
The remaining portfolio has done poorly since late October - not because I didn’t adjust to the rally, but because I never got into MENTAL position and as a result got shaken out of long positions along the way, which brings me to this note.
It’s time to shut down the Special Ops strategy for 2023, use December and early January to rebuild mental capital, get away from screens, zoom out, and refocus on the forest. Staring at screens all day and trying to capture 1-3 day moves is amateur hour, full stop. The real money is always made getting in line with multi-week/month trends and tactically trading around the core positioning.
When I put together the WOTE Asset Management framework I so happened to label my tactical trading strategy as “Special Ops”…
…but after a rough stretch of over-trading and burnout, the “Special Ops” name has taken on a whole new meaning for me.
Again using the cliche, my greatest overall strength is the ability to piece together the cross-asset market outlook using a “WOTE” approach, but my greatest weakness is allowing that outlook to influence my tactical trading signals. This week is a prime example. I correctly identified that the market was in the process of breaking out post-consolidation, and I positioned for it, but then bailed on the position once the Fed re-hawked ahead of Powell’s Friday morning fireside chat appearance. I didn’t follow my signals, allowed my macro view to take over, and I missed the very breakout I was looking for.
Then it hit me this morning: special operations.
The operations conducted by an armed forces special forces unit are highly tactical, event-driven operations designed to enhance the more methodical, strategic operations conducted by the core of the force. These special operations are intricately planned, high-stress, high-risk, and high reward, not to be conducted with anywhere close to the regularity of a plodding strategic defense force operation.
I have no desire, nor ability, to run a “singles and doubles” trading strategy that requires intense daily market observation and meticulous level-to-level execution. My desire, process, and abilities are very much aligned with a “special forces” style of trading where I stalk multi-week/month opportunities that I attack with size, take profits along the way, and get off the “battlefield” as soon as the operation is over. But the consequence of my natural obsession with constantly monitoring cross-asset market movement is that I have a difficult time not trading around short-term signals. In short, I’m trying to run high-stress special trading operations on a micro time frame basis, and it’s not working.
There is nothing wrong monitoring cross-asset market signals day to day. That’s how pattern recognition is developed. It’s the equivalent of sitting back and monitoring, processing, and strategizing while off the battlefield. But you can’t “fight”/trade every day. I have to spend more time off the battlefield than on it.
As outlined in the SPX Market Outlook below, if all goes to plan there will be two key operations to be conducted in 2024: a 1-2Q23 correction from a January/February peak followed by a rally into Election Day.
Theoretically, there’s an operation to conduct from circa SPX 4600 today to SPX 4800 in January/February. But A) I’m not in mental position to conduct it, and B) it’s too uncertain to conduct in size given hawkish FED rhetoric potentially capping upside, the JPM 4515 “pin” potentially capping upside, and nasty action in FICC suggesting the economy is weakening faster than it appears. And while the market is overbought, there is a case to be made the Fed is currently covertly underwriting a new economic upswing by “cutting” long-term interest rates, so the risk/reward of going short in size here also doesn’t make sense.
I understand full well the power of flows, and the fact the narrative tends to find the excuse it needs to justify a flows-driven move. But for me to trade in size, I need to have a firm grasp on the narrative driving the move no matter how little it has to do with the move itself. It’s the only way I can take the other side of it or go along with it.
And right now, the current outlook is as confusing of a set-up as I could imagine. Central to the SPX Market Outlook above is the Fed holding firm in its war on inflation even as the economy turns down, so if the Fed is really going to start cutting in March to engineer a soft landing, the outlook changes entirely. As I’ve said for over a year, if Powell buckles and is in fact Burns, the bear case is eviscerated.
I believe my thesis is correct and that the Fed is simply selling a “strangle” here, but as long as the Fed is more aggressively selling the “put” side of the strangle, the market and economy are likely going to behave as if Powell is Burns.
The bottom line for WOTE Strategic Ops purposes: It is time for me to shut it down until at least January, step back, rebuild mental capital, and stalk the next opportunity. If my thesis holds, the next opportunity will be on the short side in January/February. If my thesis is wrong, the next opportunity will be on the long side once a new bull market is officially confirmed with a series of powerful breadth thrust signals and FED rate cuts, and the market pulls back to an oversold condition.