2020 was a year of mayhem, reckoning, and just plain exhaustion. Through the chaos, the tweeting, the threats, and the Covid for that matter, the stock market held resilient. In March, I highlighted and explained that though Covid was not the “reason” for the sell-off, it was definitely the catalyst excuse. I also expressed that this “reason” would provide an elevated volatility that would create wide ranges and snap back trends. That said, I did not expect what we got. 2020 brought us a very profitable year as soon as the Fed stepped in and backed everything.

The VIX staying elevated above 20 has been ideal for getting some great swings and momentum moves week in and week out. Being ahead of the curve on the Covid sell-off gave us an opportunity to capitalize. And being flexible enough to follow the Fed’s lead allowed us the opportunity to buy the dip. Given that this is a calendar rollover I find it valuable to go over some of the things that worked and some of the things that didn’t. Specifically, I’m talking about things that can be taken and applied to future moves and not necessarily the “here’s where I was right” nonsense.

On the front end, though, I will tell you that I had my second best year ever. My options trading account in particular, with returns of 760%. This self-congratulatory behavior is just to give you some context. I trade an account (predominantly options) at $280,000. For me, trading options with anything significantly larger than this keeps me from respecting my risk tolerance and the results get inconsistent. That said, I do have a larger account that I trade commons in when I see momentum/swing names. Again, this is predominantly for context’s sake.

Key Tells

We read the late-Feb/March correction almost perfectly and were able to capitalize on the aggressive sell-off.  The first clue; On Feb 24, the Major Indices gapped down 3% and closed below their 50 day. This was, and moving forward, should remain a tell. Aggressive gap down technical breakdowns along with negative headlines are your tell to get out. In this case, it was a combo of a 50Day break and the Covid headline.

Another tell, and this one that we’ve adopted in the room, is the importance of the 5D and 20D MA’s in thin markets. Using the above example, we’d already been out of the market prior to it gapping down below the 50D because of its inability to stay above the 5D in an overbought market and light volume. In these events we’ve remained light into closes and just day-traded around momentum names. Secondarily, the larger the MA break the more violent the move will be (up or down).

An important lesson that was more important than ever in 2020 is understanding the old adage “don’t fight the fed.” This was difficult to follow through on at times as the disconnect between the real economy and the stock market continued to widen.

Relative strength is another critical tell. When stocks began to rally in April, we identified sectors with the most relative strength (Software, Technology, Solar/Wind, Biotechs) as the best sectors to dabble in while avoiding/shorting the "dead cat bounces" among the re-open stocks (Cruises, Casinos, Airlines, Restaurants, Entertainment, Stores, Sporting and Travel).  A very strong rotational theme prevailed from the spring through the summer right up to the Labor Day in early September. 

Throughout the entire run there were people throwing cold water on the rally over and over again. Concern after concern was thrown at the market. Rising concerns of a "second wave" and US Election rhetoric dominated headlines enough to put the brakes on the market's strength, eventually. The eventually here is the critical word. By the time the markets hit the skids they’d risen 60%. The only thing that mattered the entire way up was that the Fed had the markets back. Beyond that, every dip was a buying opportunity.

Rising Tide

The old saying “a rising tide lifts all boats” was and continues to be very true. The amendment I’d make to that is that the tide will lift some boats higher than others. Newly minted Robinhood Traders experienced this first hand as WSB degenerate stock after degenerate stock rallied integers over percents day after day. Geniuses were, and continue to be minted daily as the Fed’s tsunami of cash settles into Wall Street.

Part of the reason I shared my account’s performance is to explain this rising tide more closely.

Annual

Every year, I put together an annual report where I go through some of the themes I’m looking for and some of the names I’m looking to trade. 2020’s was probably my best packet to date. From CRSP to FSLY, once the Rona selloff actualized opportunity was abundant and pretty much everything hit. The main gem came in the form of TSLA. TSLA was my #1 play into 2020. The setup was perfect. Short interest + large Musk stake + cult + change in paradigm = 💥💥💥💥

I want to stress that I mapped out how I would attempt to play TSLA. By and large, I executed it the way I wanted to. The exception to that was my inability to bring myself to buy the dip (again) that we got from Covid in TSLA. In hindsight that was a mistake and the setup was perfect. I stress this because the fact of the matter is that you can have a perfect strategy or a perfect plan and still in the moment fail to act. Secondarily, you can also be risk averse/prudent and in turn handicap your ability to profit.

In my case, the biggest drag I found on my account was my attempt to play things both ways and mistime some of the downturns. Had I just stuck to my original plan I probably would have fared better.

The whole point here is sometimes being prudent will in fact cost you. This is not meant as a pejorative. This is meant to serve as a mechanism that it’s not always about the %/$ return. I am perfectly fine with the result. What I would (and have) change is the attempt to swing both sides as often as I did and simply “trust the process.”

Sticking with TSLA, there are those that did not stick with the plan. In fact, there are those that did not recognize the headwinds of betting against the stock. In fact, TSLA shorts lost over $40 BILLION in 2020. Much of this could have been avoided with the previously mentioned risk management. The entire point of this here is that the process will undoubtedly always trump the money.

Nigerian Prince

I want to end this blog with a quick little story. Did you know that the first Nigerian Prince scam was actually done in the 1800’s? I bet you didn’t.

The story goes that in the 1800’s a 16 year old kid used the emergence of newspaper advertising to con individuals into sending him four dollars and a pair of pants in exchange for elephant tusks, diamonds, and other jewels. The boy was able to pull off the con across the country and some of those that were scammed stormed local post offices arguing that they were being robbed by the postmasters.

The story here is not the scam itself. The story here is those duped lived in this alternate reality where they refused to believe they were being duped. The reason I bring this story up is because it’s an allegory for the markets. We’re always being told some variation of “this time it’s different.” In reality the casino known as Wall Street is just a giant shell game where the house is always going to win.

The latest shill here is the newest rage, SPAC’s. Like a degenerate coke head who doesn’t know when to call it quits bankers have used this latest mania to push “opportunity” to unsuspecting investors. I don’t say this as someone with disdain or someone telling you you can’t make any money trading it. I say this as someone who wants to be the voice of reason in an otherwise unreasonable world. SPAC’s are especially dangerous because they don’t require the stock to actually have a product. Many of them are basically a blank check for a business plan.

For context sake, in all of 2014 a total of $1.8Billion was raised for SPAC IPO’s. SPAC’s in 2020 raised over $90Billion. In just five years Wall Street’s taken the excess to the next level by a factor of 50. Be cautious, optimistic, but cautious.

Wild Ride

If this write up tells you anything, I hope that it tells you that there is possibility out there in the midst of all the madness. Secondarily, I hope that it provides you with a little insight to the reality of the excess that exists. Finally, I hope that it gives a little glimpse into the notion that a little process can go a long way. Oh yeah, and don’t let all of this distract you from the fact that the Clippers blew a 3-1 lead.

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