State Of The Market

 Hey folks, 

Wanted to do a quick post to try and explain what's been happening in the market the last few 2-3 months and try to make sense out of all this.... 

I started trading in November 1998 after winning two back to back Stock Picking competitions for my University finance course. I started actively following the markets about 2 years prior and was instantly mesmerized and a  obsession started that's lasted until today..... I have seen and traded through all sorts of market conditions(some much scarier and intriguing than others!). As they say, 'experience is the best teacher'. 

Over the years, I've learned the famous phrase by Marty Zweig(reputable Hedge fund manager from 80s and 90s): "Follow the Fed".  I have found that this simple 3 word phrase to be the single most important thing when it comes to the stock market. While a company's earnings and especially it's future earnings growth projections are also an important part to the equation, there's none more important and plays such a dominant factor than the FEDERAL RESERVE, it's language and especially it's actions!

Pretty much, every single major stock market downturn that's taken place in recent history, the FED has directly played a key role into it. In the late 90s, Fed chairman Alan Greenspan, started to aggressively raise rates in 2000 and as a result caused the Internet bubble(and pretty much the entire market rally) to pop as he was projecting future inflation and was reacting early in "anticipation". The other time, I recall when the market pulled back very aggressively was in October, November and December of 2016 when Fed Chairman Gerome Powell merely "hinted" that the FED would consider raising rates and the market dropped about 25% in that 3 months period! The market did "misinterpret" his language and he ended up clearing up his comments and the market took off like a rocket in January 2017 and stayed strong until the COVID19 crash in Feb/March 2020.... where once again, the FED stepped up to the plate and was VERY aggressive with monetary policy and was determined to do whatever it takes! 

Once again, "FOLLOW THE FED" ..... 

However, right when you think, you've seen it all when it comes to the stock market, you end up seeing and learning something completely new...   

That brings us to today....

What we are seeing right now in the market or at least a certain SEGMENT of the market to be more precise is basically an aggressive rotation out of "momentum stocks"(these are the stocks that were "popular with the Retail Investor/trader and the same stocks that pretty much made the biggest and strongest moves up in 2020 and early 2021 coming out of the bottom from the dramatic COVID19 stock market crash). 

In my humble opinion, what makes this particular rotation much more unique than the average rotation we witnessed in the past, is a direct result of the whole GME(GameStop) saga. What's made this particular steep pullback in "high growth" stocks very different than most of the previous rotations we saw in the past, is that this time around the INDIVIDUAL investor played a direct role in "bringing down" several of Wall Street's biggest and more prominent Hedge Funds which were aggressively over-leveraged on short side especially those funds that were directly involved in GME(and a few other names) stock. In my humble opinion, this was a very rare direct "assault" on Wall Street that was fully engineered by Main Street trader/investors.... 

A modern day 'David versus Goliath'. 

This time was DIFFERNT! 

Under normal circumstances, it's Wall Street that holds the upper hand on Main Street but this time was truly something different... and I don't think Wall Street was going to sit back and allow that to happen on a regular basis under their watch(too big to fail).... And that's something that I've never seen in my 23 year trading career. Did it catch me personally off guard?  YES, it did.... like many others, so please don't think you're not alone even if most would never admit it. For example the AOT Swing Trades portfolio which is a portfolio of 10 stocks with equal 10% position size into each trade was up just over +100% in 2020(after being down as much as -30% at the lows of the COVID19 crash in Feb/March 2020). The portfolio shot up about +35% in Jan 2021 and is now down around -7%(as of last week's close). A quick and fast drawdown in the AOT portfolio which is reminiscent of the COVID19 crash in many ways except this time around the rotation is localized to "one segment of the market" instead of the entire market. 

However, it's becoming increasingly clear to me and many other fellow traders that non-Wall Street traders are being "targeted" by most likely the mega Wall Street hedge funds, via a rotation out of Technology and high growth technology under the "excuse" that inflation is going to pick up so much for so long that the FED is going to have to raise interest rates at such an alarming rate that the Media is taking this headline and running rampant with it(we've seen this before at least 2 or 3 times since the 2009 market bottom).... keep in mind, we are STILL in the midst of one of the most uncontrolled pandemic in recent history. FED chairman, Gerome Powell has made it very clear on numerous occasions that the FED is going to stay "ACCOMODATIVE for as long as it takes." Obviously with vaccines rolling out, the economy will open up and cause an economic spurt due to pent up demand ... but keep in mind, that's most likely going to be a SHORT TERM effect at most(and with new virus variants emerging and other countries having a very difficult time controlling the current COVID virus situation, it's hard to see how the FED can realistically go on an aggressive rate raising binge!) ....  

And that takes us back full circle to where we started.... the FED moves markets and therefore I believe the recent steep rotation out of momentum is getting closer to playing itself out after a good 50% to 70% pullback in many individual stocks. Imho, the same "powers" that moved these stocks up in 2020 and moved them down the last 3 months, will sooner or later, slam the brakes, shift gears(probably due to some sort of media headline) and reverse course back up....  

Just as fast as they took em up and then took em down.... they can just as easily take em back up again(obviously some individual stocks will vastly outperform others).... except this time around, the market has brought in a huge influx of a new generation of aspiring traders. It seems that after the recent aggressive rotation out of high growth stocks, the retailer investor/trader is worn out, frustrated, disheartened and now pretty much "turned off" by equities. It seems like the newly minted retail trader/investor has pretty much moved on to DOGECOIN where all the buzz is at right now. 

This article attached below shows how aggressively Hedge Funds have been actively shorting individual stocks, and sooner or later, the "tides of momentum" will shift and we'll start seeing some big short squeeze events in many stocks: 

https://www.zerohedge.com/markets/pile-epic-proportions-hedge-funds-short-tech-shares-10th-straight-day

Hope this helps!