05-06-2020: Today's Market Headfake

This morning, the market started off nicely on a bullish trend and popped higher by almost 1% (0.8%, to be exact) and finished the day, down 0.7%.

It's a good week to be in cash... well, unless you're in the final stages of the testing of a "Delta-Neutral" trading strategy; and in this case, we started the day 100% invested.

So... inquisitive minds might want to know:

  1. Why would you have your clients in cash and you're testing a trading strategy that is 100% invested?

  2. What side of the market did you invest? Bull or Bear?

  3. How did that work out for you today, when the market started off fairly strong to the upside and ended the day reasonably strong to the downside? How did the intra-day whipsaw work out?

Well... we made a net profit. Granted, it wasn't a big profit, but it was, nevertheless, a profit when the market whipsawed up and then back down in a single day. Here is how it went down...

  • Yesterday, at the close of the market, we put 50% of the test capital to work in a 2x bull-biased ETF and 50% of capital in a 2x bear-biased ETF.

  • This morning, 50% of our investment capital stopped out with a loss; but the 50% of our investment capital that was in the bull-biased 2x ETF was up almost exactly the amount that we lost on the bear-biased 2x ETF; so, at that moment, we were flat... no loss or gain for the entire portfolio.

  • Then, we used an OCO (one cancels other) trade with a stop loss on one side and an upside sell-point on the other. The moment our sell-point was reached the trade automatically executed and we put our profit in the bank. At that point, we didn't care what the market did the rest of the day... and, guess what... it dropped, but we had already reached our profit goal for the day.

  • This afternoon, at the close of the market, I put 50% of my test capital to work in a 2x bull-biased index ETF and 50% into a 2x bear-biased index ETF. I am 100% guaranteed to be perfectly flat (no loss or gain) at the open tomorrow, regardless of whether the market opens down or up. It can open down by 500 points or up by a 1,000 points... it will not matter. What matters is within mere seconds of the open in the morning 50% of my capital will be in cash and 50% invested in the market's chosen direction. If the market is bullish, I know that half of my portfolio will be moving up twice as fast as the market is moving up. If the market opens down, I know that 50% of my portfolio will be moving up twice as fast as the market moves down. And, I know that half of my portfolio will be sitting safely in cash.

I am still tweaking the edges of this algorithmic trading strategy. I'll keep you posted on the progress. In the meantime, I am still happy to have all of my clients in cash, except for a tiny COSTCO holding in my Tactical Growth portfolio strategy.

As for this market... It does not matter who you listen to or read... at the end of the day, it all comes down to two humongous issues that are completely beyond anyone's ability to know, with any reasonable certainty, the ultimate outcome:

  • Issue Number One: Will the economy be able to get back on its feet in spite of no vaccine for the COVID-19 virus, and

  • Issue Number Two: How many people will not get out of a lock-down mode before a vaccine is available? And, this is a huge issue... It is entirely possible that no vaccine will ever be discovered. We do not have vaccines for most viral infections and no one knows for sure if one will be found for this virus. If no vaccine is discovered, that means everyone will have to eventually get exposed to the virus and suffer the outcome, which ranges from no symptoms to death.

We can certainly hope for a vaccine, but we had better be planning for no vaccine... at least when it comes to the future of the market and your money. This economy could crumble into a massive depression if no vaccine is found and it could tumble into a depression anyway, if it takes a year or two before a vaccine is found.

I am not trying to be pessimistic. I prefer, when it comes to growing AND protecting capital, that being a realist is the better course of action. I have a bullish strategy, ready to put to work immediately if the economy/market are headed appreciably higher. But... and this is the most important part... I also have a bearish strategy, ready to put to work immediately if the economy/market are headed appreciably lower. And that, my friend, is why you hired me (or should, if you're not a client of mine!)

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