Trading Update (June 2022)

June was my best month of the year so far. I shorted S&P and iron ore stocks. I actually lost money on my S&P short bets. Fortunately, my profits from my iron ore stock short bets were more than enough to cover them.

Iron Ore Trades

Iron Ore Price – 3 month chart

The price of iron ore took a dive from 140+ to 110+ in the earlier part of June. I caught probably about 2/3 of this move via shorting Rio Tinto and Fortescue in the Australia market (ASX). Sentiment turned very bad in the iron ore sector, primarily due to stimulus/demand expectations not being met.

S&P Trades

S&P – 1 month chart

I got caught by the rebound in the S&P in the later half of June. I was betting that the continual negative news flow would bring the S&P lower, but the reverse happened.

Concluding Thoughts

Loss aversion is defined as the cognitive bias that describes why the pain of losing is twice as powerful as the pleasure of gaining. It is very real for me. At the end of June, I actually did not feel happy. The pain I felt from my S&P losses was more than the pleasure I gained from my iron ore gains. This is despite my iron ore gains far outweighing my S&P losses.

Because of this cognitive bias, there is often more pain than pleasure in the field of trading/investing. It is therefore important to take care of our mental health, as we can only perform optimally with our minds in tip-top shape.

Take care everyone!

Thoughts on the Markets (3 July 22)

Since my last post one week ago, markets have dropped somewhat. S&P is now at 3825, down from 3911.

General Markets

The corrective bounce ran out of steam, and the major equity markets dropped a few percent. There was a rebound in US yesterday, and S&P went up about 1%. However, I doubt the uptick can be sustained, as there has been a constant stream of bad economic news flow applying downward pressure on sentiment.

Earnings season in the US is starting in the 2nd week of July. This is another potential source of downward pressure on equities. There is a significant risk that earnings expectations have not come down enough. If earnings disappointment + negative economic news flow hit the markets together, it would be difficult to avoid another down leg.

Commodities

Commodities are still falling. Below is the chart for copper.

There has been no relief at all for commodities, even with China’s re-opening impulse. The pessimism from the global downturn seems to be overwhelming everything else.

Is there still room for further falls? Let’s take a look at a longer timeframe for copper.

Copper is still above pre-COVID levels. To me, it feels like there is still room for further falls. Of course, things rarely move in a straight line.

Trading Considerations

I am back to favoring shorting commodities, as negative economic news flow has been relentless. Except for China PMIs which have been ok, but their economic stimulus has been underwhelming so far. However, prices have dropped a lot, so a lot of agility is needed to avoid getting caught in any violent rebound.

As for the long side, I still like bonds. Bond yields have dropped somewhat, with 10-year Treasury yields dropping to multi-month lows. Recession fears are the culprit. Just be careful and do not bet huge on junk bonds for their high yields, as recession will still hit low-quality bonds badly.

Take care and good luck!

Thoughts on the Markets (25 Jun 22)

Wall street rebounded massively yesterday, with Dow Jones up more than 800 pts and S&P up about 3%.

General Markets

This has been a good week for the markets. Economic news has actually been bad overall, but there is some hope that inflation is peaking. It is likely that markets rallied due to lowered expectations of rate hikes.

Markets are shifting their focus rather rapidly. Just recently, it was global slowdown fears. This week, it is peaking inflation hope. Next week, would there be a new focus? Perhaps. Earnings slowdown is a possible candidate. Or maybe slowdown fears will triumph again. Market dynamics are changing more quickly these days, making trading more challenging.

Commodities

Commodities have continued to fall despite verbal support for stronger Chinese stimulus. A lot has to with weakening economic data. Copper price is at 16-month lows.

Prices have literally fallen off a cliff after being in a trading range for some time It is possible for prices to continue falling, but the probability of at least a short-term bounce has increased. There are still folks believing in the power of future China stimulus.

Trading Considerations

In my previous update, my preferred short was commodities and long was bonds. Commodities have fallen a lot since, so I would not short it due to increased probability of a bounce. Bond prices have increased slightly, but I am retaining it as my preferred long. It seems likely that the economic slowdown will cap the increase in bond yields going forward.

Iron Ore Market Update (23 Jun 2022)

Iron ore has suddenly become very bearish, going down for 9 consecutive days from 140+ to 110+. Below is the 6-month price chart.

Iron ore price (Dec 2021 to Jun 2022)

Sentiment seems to have broken down. Prices have gone into fresh 2022 lows. The biggest reason is that the players in the sector were too optimistic on future demand potential. Prices were bid up based on hope, but the hope has been shown to be somewhat misplaced.

There is a decent chance of a bounce at this point, as the drop has been rather drastic. Also, a speech by the Chinese president hinting at stronger stimulus efforts is supportive. A short-covering rally may occur. Thus large short positions are risky now.

Thoughts on the Markets (19 Jun 22)

Markets have extended their extremely bearish behavior last week. S&P posted its worst week since 2020. Bitcoin is crashing as I am writing this post, going below $18k at one time. Bond prices are buckling under severe pressure.

US economic data has deteriorated, contributing to the pessimism. Chinese economic data seems to be doing fine, but it is not enough to offset the prevailing negativity.

Stock prices are starting to look more reasonable, but negative drivers of the markets may not have peaked and turned around yet. Inflation expectations are still awful, and major economies are at risk of substantial slowdown.

Commodities have been rising steadily due to being touted as an inflation hedge, but lately have been hit because of economic recession worries. Shorting commodities may be viable if recession worries do not recede. This is my preferred tactical short bet if I am intending to short the markets, as there is still quite a lot of room for commodity stock prices to fall.

On the other hand, recession worries may actually benefit bonds. If economic data continues to deteriorate and/or inflation data goes lower, bonds would benefit significantly. I like this long bet as bond sentiment is extremely low, but I would be cautious about the timing of any bets as there are still several almost confirmed interest rate hikes coming up.

Anyway, hope you folks are doing ok. Do stay safe and sane, and be rational and keep away from impulsive behavior. Good luck!

Iron Ore Market Update

Iron ore has been rangebound this year, trading between about $120 to $170.

Iron Ore Price, 2022 YTD

Currently, it is at about $146, roughly in the middle of its 2022 trading range. It has been trending up the last few weeks because of China’s COVID reopening. The reopening and stimulus impulses should support prices for the short-term. Downside risks include Chinese policy response against high commodity prices, and actual commodity demand not meeting expectations.

This is not the optimum setup for shorting. Prices need to go closer to the upper bound of the trading range first, and there should preferably be emerging signs of peaking demand. However, no one can predict the timing of the turnaround in price movement accurately, so we just to constantly monitor news flow and prices. The turnaround can happen anytime, even tomorrow or next year.

Personally, I am hoping for prices to go much higher, as the probability of successful short trades increases the higher prices go. When prices burst above $200 last year, it was a once-in-a-generation type of shorting opportunity. I don’t expect a repeat this year, but if prices can reach at least $180, it would still be an excellent trading opportunity.

Trading Update (Jan – May 2022)

Since my last trading update post, I have decided to stop posting detailed trades. Instead, I will post more generic trading updates. The reason is that getting, prepping and posting the detailed trading info is too tedious, and I am not able to concentrate on my trading. Hopefully the generic trading updates will be more useful to you.

At the start of this year, I was not expecting to trade a lot. My position sizes were small, and markets were uncertain. However, after a slow start, I realized that I was still somewhat able to read the markets I trade in. Thus I increased my position sizing.

I was on a pretty good run until the last few weeks. The recent losses cut my profits for the year by about half. Market conditions have changed, and it means that I need to tweak the trading strategy that had worked well for me this year until recently.

State of the Markets (23 May 2022)

Since my last market state update on 13 May, markets have fallen slightly. S&P is now at 3901 vs 3930. There was a bounce, but it was not sustained, and markets fell back.

Drivers of Market Sentiment

How have the main drivers of market sentiment changed? 2 of the main drivers are stated below:

  • Inflation
    • still remains a strong market-driving force
    • inflation-related economic indicators have remained high
    • Feds remain firm on rate-increase stance
    • War goes on, maintaining upward pressure on selected commodities
  • China slowdown
    • sentiment improved
    • economic data remains poor
    • but re-opening and policy action has given more hope for the future
    • china-related stocks and commodities have relatively outperformed

Overall market sentiment remains negative, though there is some improvement thanks to China news flow.

Trading Outlook

Markets are now low enough for some bulls to view as a buying opportunity, especially when coupled with the improvement in Chinese sentiment. However, inflation-related forces remain a strong downdraft. The likelihood of further market retracements is probably still higher than that for sustained rebounds, though the probabilities are more balanced now.

For me, I find it harder to short the markets. The probability of sudden unexplained rebounds has increased. Trading indices are trickier, due to the more balanced upward/downward forces.

In the commodity space, China re-opening, policy easing and the ongoing Ukraine invasion are supporting prices in spite of current weak data points. Furthermore, commodities are seen as good to hold in times of high inflation. Given the abovementioned support for commodity prices, it will probably be difficult to execute commodity and commodity-related equity shorts.

Investing Outlook

The probability of a successful equity investment has actually increased as prices have fallen. However, the central bank tightening impulse is just starting, so there may be even better opportunities awaiting in the equity space. “Expert” sentiment is starting to deteriorate, with more negative opinion pieces and forecasts coming everyday.

I have no equities at the moment, so I will probably wait for lower prices before starting to buy. There is still a good probability of prices going lower. Central bank tightening has only just started, so it is going to remain a significant downward force for some time.

Bonds are still unfavored due to the increasing interest rates. But sentiment may reverse if inflation expectations come down and/or global economic growth starts to slow down more than anticipated. It is somewhat still a contrarian play to increase exposure in bonds.

However, I still feel that bonds have a relevant role to play in an investment portfolio. Thus I actually have increased bond exposure gradually over the last few months, and fortunately they have been holding up. There are many different types of bonds, we need to be selective and choose the appropriate types for the current financial climate.

State of the Markets

Markets have dropped a lot in recent days. S&P 500 settled at 3930 yesterday (12 May), down a whopping 700 points from 29 March (4631) and more than 800 points from its all-time high of 4818. It is very close to entering a bear market (20% drop from the peak).

Is it time for a decent bounce? Probably, but news flow has been poor, very little fundamental change has occurred. This means that if there are no major news flow surprises, any bounce may be relatively small and short-lived. In such cases, agility is required to move in and out quickly.

If any positive headlines appear, there should be a stronger bounce. It is also entirely possible for the markets to just slowly drift downwards or sideways. It is a tricky situation to trade indices or stocks with high correlation to the general markets. None of the possible scenarios have an significantly stronger probability of occurring than the others. Hence there is no high-conviction outcome to bet on.

If you trade in any niche markets/stocks which are relatively disconnected from the general markets, this should not affect you so much. If you still would like to trade, please monitor news flow closely and get out quickly if any headlines pop out which are negative for your trade(s).

Maximizing Certainty In Times Of Great Uncertainty

Volatility is back in a big way. Dow Jones has had a couple of 4-digit swings, and it has been a bloodbath in many markets. Uncertainty in overlapping major risk areas is fueling a brutal sell-down.

The risk areas include:

  • China slowdown due to COVID measures and property weakness
  • Central bank tightening due to persistent inflation
  • Commodity imbalances due to Russian invasion

In highly volatile situations, I find it useful to establish as much certainty as possible, because uncertainty fuels fear and leads to sub-optimum decisions being made. Reaffirming and reminding ourselves of the certainties make it easier for me to maintain rational decision-making.

Everyone has their own set of high-conviction ideas from which to establish these certainties. Some of my own are:

1. Considering the very long term picture, it is still possible for markets to fall significantly further

S&P 500 from 1990

Looking at the big picture, recent falls do not actually look very big. Markets have risen a lot, and recent falls are much less than recent rises. It is entirely possible for the S&P 500 to fall significantly below 4000.

2. No one can predict the markets with absolute certainty

Trust no one. Many will seem to know a lot and present compelling evidence, but it is impossible to be absolutely sure about the markets. Trust no one entirely.

3. Avoid crowded trades even if they seem logical and well-recommended

When a trade has become crowded, potential upside becomes limited and potential downside conversely grows a lot.

4. What goes up a lot has a higher probability of falling a lot

No matter how compelling a high-flying stock’s business case, it always has a higher chance of falling fast to the ground. Remember that fundamentals can change, and research reports are not perfect.

Conclusion

Reinforcing your own set of certainties will help anchor yourself in volatile times, and prevent decisions being made based on more emotion than logic. To develop your own set of high-conviction ideas, do read extensively and spend time to analyze markets deeply.