Market Reality Check (December, 2021)
The market has largely been moving in one direction for many years now. This has distorted our perceptions and potentially caught ourselves out of position against possible negative outcomes.
Personally, I chase momentum until it stops (ideally). This statement is complicated in of itself, but the point is I rather follow the trend and get out when the factors which stall momentum present themselves. This is flawed in that its hard to account for timeframe. But I think that is the case with many trading styles. E.g. Do I take a 40% gain in 5 days or do I let position sit for 9 months for a 45% gain. Do I just write-off the funds and hope for the best for 10 years or do I take the cream off the top on a swing?
All said, as active participants we are funneling income into accounts with increasing position sizes and risk in order to capitalize on the opportunities. 5 years ago you likely had a significantly lower net worth and were possibly trading more conservatively. If that is true, then you are exposing yourself to increasing risk today, particularly when you look at the QQQ chart.
Given the rise of QQQ regardless of any technical analysis, would you say it is likely to continue its exponential movement or is it conceivable something may change? And if it may change - is it possible it could be a similar change down? Perhaps as far as 300 or even down to 200 (only 20 months ago)? That is a 50% haircut. And with outsized positions and risk you are over-exposed for what has increasingly become a game of chicken.
And if you didn't like the risk of losing 28% on your portfolio when Covid hit are you prepared for it to retest that price? On a million dollar portfolio a fully invested person on QQQ (unlikely) would have a possible drawdown of ~$280k.
Provided they enjoyed gains to now and never sold, that portfolio would have grown to $2.2m. If we were to retest this recovered price on 4/1/2020 (only 20 months ago), you would sacrifice over $1.2m in gains. This would be emotionally more traumatic than the 28% loss despite being generally happy and pleased with the same million dollar portfolio only 20 months prior.
Mastering your psychology is something you alone need to tackle. It can wreck portfolios - whether due to bravado, ignorance, inaction, or any of the cognitive biases which impact decision making. Using math (moving averages, gains/losses, RSI), trendlines, or whatever rigor available helps you face your reality. Use these to take action.
Sure you could hedge your positions and this may be the best option or you could unwind them. Covered calls feels like a solid option to earn some premium in this environment, but I have moved away from that approach - but it does have me thinking.
Regardless of my positioning, have you taken these protective measures? And while the influx of trillions into the markets has created a new normal, you can still lose big - so consider this a likely needed reality check.
Brent @ Mometic