8/18/2024
From Zero to Hero: The difference between a couple of weeks!
On August 5th, traders were sweating and panicking. Fast forward a couple of bullish weeks, and suddenly, we’re feeling like Superman? The VIX has dropped back to the teens, fear is subsiding, and indexes are once again chasing all-time highs. The bears? Quiet, for now.
What does this mean for your portfolio? How do we manage the portfolio when the market’s direction is uncertain? That’s our focus this week in Maxwell’s Market Mindset.
The challenges of the stock market:
The stock market’s biggest challenge is also its appeal: no one knows anything. Remember last week when I mentioned how "this time is different" is the most expensive phrase on Wall Street? (link to read full article)
Two weeks ago, we saw the third-largest VIX spike in history. Now? That fear has evaporated.
The VIX collapsed, despite predictions that it wouldn’t.
Uncertainty is constant in the market, but I also know: some things are certain.
- If you’re overleveraged, the market will humble you.
- If you think you've found the "holy grail" strategy, it's only a matter of time before you're proven wrong.
These aren’t threats—they’re truths. We’re not smarter than the hedge funds with deep pockets. But that’s not bad news! We just need to focus on our own strategies.
Warren Buffett didn't predict the Japan unwind trade ahead of time, and he wasn’t calling for the end of the bull market. I want you to look at these headlines:
Buffet sticks to his plan, and that’s what we need to do. Your plan should make sense for you, not for Warren or anyone else (including me).
The fact is the market likely overreacted on Friday and Monday during volmageddon.
Now the market might even be over correcting bullish. Who knows?
The market's quick V-bottom recovery over the past two weeks caught almost everyone off guard. Reminded me of COVID
Rumors swirled—was it the Japan carry trade? A firm on the brink of bankruptcy? Technical glitches? Who knows?
Does it even matter if you follow your plan? If your strategy makes sense, then it’s irrelevant what rumors fly around or how unpredictable the market is. Buy low and sell high friends!
The truth is, no one can predict what tomorrow brings, and that’s both beautiful and exciting. Whether you're Warren Buffett, Tom Sosnoff, or Jim Cramer, you can’t know for sure. But what they do know—and what you should, too—is how to manage risk and stick to a solid plan.
That’s why Good Kids Trading, focuses on simple strategies that make sense. I believe in our trading plan, I know there is more to learn, and we go further together as a team, even if we go a little slower.
So, as surprised as I am at the market's recovery, I'm not surprised that almost all the predictions were wrong. It’s reassuring to know we can depend on math, mechanics and risk management and we can make money in the market. My account is back to new highs, and I’m also sitting on a sizable amount of cash (in SGOV) because as we reach new highs on the index and VIX is near lows again, I can’t
Risk management as a premium seller:
Think of the stock market like REI's biggest sale of the year. You wouldn't buy gear in April when the prices are high, right? You’d wait for the sale. The same logic applies to selling premium. When VIX is high, and stocks are low, that's our version of the REI sale. Right now, though, with VIX low and indexes high, it's like paying full price—risky with less reward.
You may remember my blog about trading lessons from the Appalachian trail? Just know I spent lots of money at REI, so this example hit home. If you didn’t read that blog, check it out:
The same logic applies to selling premium in the stock market. When the VIX is high and stocks are low, that’s our version of the REI sale. The market is giving us an advantage, and that’s when we should be loading up on opportunities. But right now, with the VIX low and market indexes high, it’s like paying full price for gear in April—not exactly a smart move.
In this environment, risk management becomes key. Selling a lot of premium when the VIX is low means you’re taking on more risk without enough reward. That’s why I’ve shifted my focus to earnings gaps and moments when volatility spikes. When a stock gaps down on seemingly good earnings but there's uncertainty in the report, that’s my chance to step in.
I’m using strategies like put ratio spreads and 111 or 112 put spreads alternatives to put sales. Did you read that blog? It made me money during this pullback: Checkout this blog if you like money:
These alternatives to put selling allow me to benefit as a stock pulls back, but I also get paid if the stock keeps going up. It’s like getting ready for that REI sale—preparing to buy when the market gives us a discount.
Emotions vs. Strategy:
Emotions will run high during pullbacks. Even after 30 years of trading, buying dips is tough. The "experts" will flood the airwaves with why this time is different and why panic is justified. Ignore the noise. It’s up to us, the Good Kids, to recognize opportunities when they come.
Right now, it’s time to ease off on selling premium. There's still easy money in SGOV for another month. Meanwhile, start preparing your watchlist and your thesis for upcoming rate cuts.
If you're unsure where to start, join Mr. Money Maxwell's Inner Circle.
I share my game plan, watchlists, and stock ideas with you. We’ve seen these patterns before, and this time probably isn’t that different. That’s what gives me confidence to follow my plan.
Fear and Greed / Market Cycles:
Check out CNN’s fear and greed indicator:
I want to break this down because it’s important.
Do you see a month ago we were at greed (the chart above gives us history)
Today we’re at fear at 35, but 2 weeks ago we were at extreme fear!
Look at the line chart:
Now look at the psychology of a market cycle chart:
by aligning our portfolio’s risk to these cycles, we can keep our emotions in check. You can’t predict the next black swan, but you can be smart about managing risk.
We knew when the greed and fear index is in extreme greed or greed, there is risk of the market changing. Remember all my blogs saying small swing trades and we have risk free money in SGOV?
Thrill and Euphoria are going to eventually turn to panic. Align your portfolio’s risk to these simple indexes and chart to keep your emotions in check. Depressions turn into bull markets eventually.
You can NEVER predict the next black swan. But you can be smart when you are risk on or risk off!
Weekly recap:
SPY – We’ve had 6 bullish days in a row. That’s very unusual.
We also had a v bottom recovery on SPY, which I haven’t seen since the covid crash
QQQ- looks a lot like SPY! These three candles are a morning star reversal (same as SPY)
IWM- the Russell bounced right where it needed to. I’m still bullish small caps into the rate cut.
VIX- what a bearish week on the fear index!
TLT- I expect treasuries to keep going higher. I hope you are already in TLT, lets keep holding this one.
GLD- hit new all time highs. Is this a risk off recession play? Likely it is.
Upcoming ex dividends:
I’m watching HAS, VTRS, SMG, PSX this week.
Dividend Kings:
Dividend Aristocrats:
The Week ahead:
Fed is meeting in Jackson Hole this week. There will be headlines all around this.
Watch the jobless claims, as that seems to be more of the focus than CPI for inflation concerns. NVDA al
Earnings:
There are not as many earnings, as we’re getting late in the season, but still some names I’m excited to trade on gap downs: LOW, MDT, TJX, TGT, SNOW, ZM, CAVA just to name a few.
If you made it this far I appreciate you and hope it provided you value. Until next time! If you want more specific trade ideas join Mr Money Maxwell's inner circle!
Happy Trading Good Kids!
-$Maxwell
For more insights and real-time market updates, join our GKT community on Discord. If you need personalized help, schedule a 1:1 intro call using my Calendly link.
Comments