Trading Journal: Introduction
A generational short set-up is in the works, and the full weight of The WOTE is dedicated to extracting a 10-20x return from the opportunity.
The set-up is crystal clear: Because above-2% inflation is the result of excess demand and not Pandemic-related supply constraints, the Powell Fed must engineer a sufficiently severe recession to bring inflation back to 2-3% on a structural basis; and because historically the S&P 500 does not bottom in and around recession until it reaches 10-15 times cycle peak EPS, SPX is unlikely to durable bottom for this bear market cycle until it falls to 2000-3000, or 2500 at the mid-point, -46% below the 4650 peak it’s likely to reach sometime this month. It’s a matter of when, not if, and the longer it takes the deeper and faster the decline (as a result of interest rates going even higher for even longer, and the build-up of volatility market imbalances).
I run my personal trading account as a highly aggressive, absolute return hedge fund, theoretically designed for no more than a 5% allocation within a high net worth individual’s equity allocation. Since December 2021, it has been utterly focused on extracting as much absolute return as possible from this bear market.
At a very high level, the progression of positioning since December 2021 has been as follows: I went to cash in December 2021, short QQQ in March 2022, levered short QQQ/SPY in August 2022, and from February to May 2023 built an even more levered position. Along the way I have traded around my positioning so not to get blown out of my short position on rally legs.
At the end of May, just before their self-imposed blackout period the Fed communicated that they were going to skip a hike in June. That skip combined with still-strong economic data underwrote the squeeze from circa SPX 4200 to the current 4400-4500 level. In response to the “skip” guidance, I started to very aggressively trade around my short position, until June 15 when Cem Karsan publicly pounded the table on shorting SPX into that blow-off. I held a max levered short position from June 15 until closer to EOM, then again began trading around the position to avoid getting blown out in an EOM/BOM rally.
My thought process for getting max levered short in the May timeframe was as follows:
First and foremost, the Fed was coming out very aggressively talking down SPX any time it popped up to that 4200 level. I viewed that as a hard “call” on the market that made the risk/reward of a short position exceedingly attractive.
The 50dma of the HY CDX was starting to break out above the 200dma, a classic early sign of a big risk-off event; and defensive sector relative strength was beginning to firm very nicely.
Lastly, key members of my flows & liquidity “team” were indicating the signals they were seeing in the options market structure told them SPX was topping out right then and there.
So, I went for it in a big way, and despite stopping myself out once the Fed signaled a “skip”, performance has suffered as a result of multiple attempts to jump back into a big short position. In “short”, no pun intended, until recently I have failed to “be like water.” But that has since changed. My clarified view and better grasp of the landscape, greater confidence in my own process and ability to read the market environment, and a more appropriate silo’ing of the views of my flows & liquidity “team” members’ views have put me in excellent position to navigate the next leg of the bear market that’s been in place since early 2022.
The opportunity at hand is very simple: SPX is in a blow off topping process that will allow for at least a 10-20x return on the short side in a 2-3 month period. Timing remains uncertain, but the entirety of The WOTE is dedicated to identifying the appropriate zone to pounce.
This is a generational set-up unlikely to be replicated for decades. I want to document my navigation of the opportunity in real time, hold myself quasi publicly accountable, and I want serious market operators able to absorb high volatility trading the opportunity to have the ability to follow along. So, I created this Trading Journal channel under The WOTE for Founding Member subscribers. I will continue to write about portfolio strategy at a very high level publicly (as I am here), but detailed positioning, performance, and trade alerts will be for Founding Members only.
Please see the About page for more information if interested.