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Thoughts on the 2021 Trading Year

I think this is the year shorting finally returns to being a profitable strategy. Why? Mostly because everyone else is on the other side of the boat. Are there any bears left? Is anyone at all playing the short side anymore? Traders often focus on situations referred to as “crowded trades” and the normal logic is to avoid them, especially once they become very mature. This market is getting very mature and very extended. I think this is the year that logic finally applies to the overall market. I’m certainly not going all-in short, but short trades will certainly be more common in my 2021 trading. At some point, all this bubble inflated stock is going to have to be converted back to cash, and who’s left to buy this expensive overpriced stuff? The greater fool theory is getting near its cyclical end.


I’m not sure what the catalyst or signal will be when the market reaches that tipping point between bulls and bears, but there will be one. Sometimes it’s big, sometimes it’s barely noticed, but there’s always a catalyst. The real key to making money on the short side is timing. The account destroyer is being early on the short side. Let the catalyst happen. Let the reversal happen. Try not to outguess the market. When the market is ready to turn, there will be a signal, but it’s our job to stay alert and look for that signal. Don’t let greed cause you to miss it.


I guess my point here is not to get too confident. Stay focused on your risk control. I went through this in 1999-2000 and I’d love to have kept all the money I made in that bubble, but I hadn’t been trading long enough to understand how bubbles work and the need for keeping risk control. I got blinded by greed and thought that if everyone else was bullish that the party would never end. What was even worse was my arrogance in thinking that I would see the turn and get out before the bear took my profits. I didn’t. But it was a much needed lesson and probably the only reason that I’m still in the game. Be careful this year. Respect the lofty levels of this market and know that at some point the game will change. There will be a signal, so be attentive. Risk control is the top priority.


The first week of this new year is going to be an important one. I think we get a big run up for the first week or two of 2021, especially if there’s a favorable result in the Georgia Senate races. I closed out 2020 in 100% cash, but I’ll be putting some money in on the short side (probably IWM) if we get some type of buying climax as new money floods in to start the year. Many traders watch this “January Effect” situation, so be patient and let it play out, as it could be a good predictor of market direction for the next couple of months.


As for energy, I really didn’t focus too much on it through December. I spent most of my time focusing on the macro picture. I’ve really let my bigger picture view slide over the last six months and wanted to sharpen it again. I feel like I’m caught up there, so I’ll be posting more stuff that is energy related this year. It will be really interesting to see how energy stocks start off the first two weeks of 2021. It feels like there’s at least one more little push upward for them, but after that who knows where we go. I’m not bullish on energy at these levels and I think oil could top out soon. I’ll be trading them on the intraday level for the next month or so. I’m not really interested in trying to outguess the energy market with longer term trades.


My view on the real economy is probably more bearish than most. I really don’t think traders are focusing enough on the psychology of the public. It’s pretty depressing out there and most people have been trained better than a circus monkey with regard to this Covid stuff. I think most people have been psychologically damaged and I don’t think it’s going to be possible to simply flip a switch and undo that damage. Everywhere you go you see these masks. I don’t think we realize how much psychological damage these things are doing. It subconciously keeps the virus fear front and center every second of every day. There’s no escape from it. It’s even invaded TV commercials of all things. There’s no way in hell you are getting people to give up those masks even if things get better. I’d be willing to bet that 50% of the population will continue to wear them even when there’s no real threat left. People are going to continue to be fearful of going out for a long time. The market expects human psychology to change on a dime, but it just doesn’t work that way. The economic recovery is going to take MUCH longer than most people think.


There’s also plenty of things that can still go wrong with the Covid situation. New strains, problems with the vaccine, public perception and fear if people still die after getting the vaccine, etc. I think we’ve moved from a truly health centered problem to more of a psychology centered problem, especially for the economy. The fear is really excessive compared to the true underlying numbers. The media isn’t helping the situation, nor are the politicians. I’m really not sure if politicians even want this problem to go away, then what would they use as an excuse for all these funding bailouts and money printing? And this doesn’t even begin to consider the things we don’t know about yet. There’s still a whole world of problems that have been brewing while our eye has been off the ball and focused on the pandemic. And then there’s always the black swans we don’t know about. As I wrote a few weeks ago, this market is priced for perfection and there’s so much out there that could go wrong. Some call it a wall of worry, but this market has already climbed nauseously high up that wall, how much is left before it falls off?


Sorry for such a depressing view of the world, but that’s where my trading focus is at to start the year. I’m super cautious right now and I’m not willing to tie up money in longer term trades. I’ll be mostly daytrading over the first couple months of the year to avoid the increasing market risk. The only two longer term trades I’ll consider are a short trade on a buying climax in the first few weeks of 2021 or a long on a really big pullback in February/March. Other than that, I’ll be keeping it short term and mostly intraday. Good luck this year and keep that risk control tight!


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