HAPPY NEW YEAR! WELCOME TO 2021
The Year in Review
Q1 was strong! The pandemic hit the markets at the end of Q1 2020. Volatility was wild, there were limit moves, and the Fed "stimulated the economy/markets" on March 23. Exchanges raised margins that still remain higher than normal at the end of 2020. We made some adjustments to our trading strategies and the first half of 2020 was very positive.
The second half started slow but August was very strong in most portfolios with a positive Q3. The pre-election chop started to show up in September and continued through December.
It has been one of the longest and choppiest periods I have seen - September through December.
While Q1 and the first half worked out well, Q4 was disappointing to say the least! Frustrated is an understatement with draw downs in the portfolio.
"Stay positive pal. Most people, they lose, they whine, they quit. But you've got to be there for the turns. Everybody's got good luck, everybody's got bad luck. Don't run when you lose. Don't whine when it hurts. Its like the first grade Jerry, nobody likes a cry baby."
Gordon Gecko, Wall Street: Money Never Sleeps (2010)
Passive and Active Asset Management
Passive managers are typically long term buy and hold investors who benchmark their returns against the S&P 500. They greatly benefit from low volatility parabolic bull markets. Their success has been greatly fueled by the Federal Reserves fiscal policy over the past decade.
Active traders, (that is us), take short term trades (and day trades) on both the long and short side while also trading a variety of commodity markets.
There are cycles in performance between active and passive management styles and results.
When the stock market goes parabolic and
- the perma bulls in the financial news media are as giddy as a group of teenage girls,
- new market participants buying tech stocks think they will become the next legendary hedge fund manager,
- it starts to feel like the only way to make money is to buy and hold stocks, you know the cycle could be near the end.
Active traders can under perform and go through a downturn during this cycle, especially when you take both long and short trades. Its important to manage the cycles and not to switch back and forth at the wrong time.
Frustration and Optimism Are Good
Markets have the tendency to change on the month, quarter, and year based on my observations. Most of the negative months in the Portfolio Calculator that I have experienced are usually "one off" months where we see quick changes in the new month and a snap back to profitability. Sometimes it extends beyond one month.
While the Georgia run off is next week, and there is no absolute certainty the market will change for sure on January 4, we know that real institutional accumulation and distribution will occur at some point and we will have some real trends come into the market.
I have seen strong trends in January's after the holidays, and more so the last few years. Q1 can be strong with these types of trends.
So while I am frustrated about the end of 2020 and the pandemic in general, I am also very optimistic about 2021.
As a trader, I have learned that holding Frustration and Optimism together is a good place to be.
If you hang on to Frustration, your Pessimism will take you out of the game.
While traders may argue, optimism won't move the market in your favor - you would be correct! However, Frustration and Pessimism will kill your ability to see new opportunities in the market and your ability to take action.
Too much optimism isn't good either. Traders need to maintain a balanced mindset in their trading and welcome skepticism. Unchecked Optimism will lead to Greed and Greed will lead to an aggressive increase in position sizing and leverage (this is what the bulls are doing now).
Greed can take a profitable strategy and turn it into a loser fast!
Three Reasons for my Optimism in 2021
While I hold both Frustration and Pessimism together for balance. Three of my reasons to be optimistic about my active trading approach in 2021 are:
- January and Q1 in general has the tendency to be have strong trends. We have seen institutional traders take action in January. As retail traders, we want to ride these big money trends.
- Cycles change on a monthly, quarterly, and yearly basis. I have seen this happen many times in my trading career.
- A 2021 Commodity Bull Market. Soybeans and Corn ended at six and half year highs on December 31 and Orange Juice had its first up year in a long time. Crude Oil ended at $48, $89 higher than its low of -$41. Did the demand come back that quickly or has inflation begun? Many of our portfolios are setup to take advantage of strong commodity Bull markets with strategies in Grains, Energies, and Metals.
The US Dollar has dropped dramatically against other fiat currencies and Bitcoin has rallied to 31,000+.
The money printing at the Federal Reserve has devalued the US Dollar. This will eventually lead to inflation.
While asset prices have sky rocketed since the end of the financial crisis in 2009, (thanks to an accomodative Federal Reserve), cost of goods and wages have been relatively stagnant for a while. Its been a glorious time for asset holders who have seen massive appreciation in real estate, stocks, and other assets.
Other assets such as sports franchises have been one of the best investments over the last 20-30 years. Jerry Jones paid $150 million for the Dallas Cowboys in 1988. 32 years later, it is worth $5 Billion.
Imagine a cycle where the cost of goods begins to rise.
Inflationary cycles are normal and can't be contained forever. While none of us wants to pay more as a consumer, as a trader we can take advantage of inflationary cycles and commodity bull markets.
What to Trade in 2021
We have a list of seven portfolio setups that we like for 2021. The Portfolio Calculator has been updated with the latest results through December 31.
This week, we continue to highlight one of the strongest portfolios in 2020 The 25K-50K Portfolio. While it had a losing December, the results were consistent throughout 2020. We had one challenging month with NightTrader in October. NightTrader has bounced back and we only made one change to this portfolio as we roll into January. The only change going into 2021, is adding a profit target to Cobra III E-mini Nasdaq.
The 25K-50K Portfolio is a low frequency trading systems portfolio with a good balance of strategies in the Stock Indexes, Soybeans, Gold, and Crude Oil. The five bonus strategies for the annual subscription include one strategy for each of the five markets: Natural Gas, Soybeans, Gold, Crude Oil, and E-mini S&P.
The special offer to subscribe to the 25K-50K Portfolio (Annual Subscription) with the 5 bonus strategies is good through Monday, January 4, 2021.
We will continue to highlight our Seven Portfolios for 2021 throughout the month of January.
Thanks for following us in 2020! Wall Street (1987) and Wall Street: Money Never Sleeps (2010) are pretty entertaining trading movies that I recommend if you haven't seen them. While Hollywood is known to exaggerate the truth, director Oliver Stone has done his homework on trading and the markets.
Wishing you a Happy, Healthy, and Prosperous New Year!