05-08-2020: Market Surges Higher on Worst Unemployment News in History!

It is quite obvious to me that you, dear reader, are a cut above most people in terms of mental acumen. Otherwise, you would not be reading these missives of mine. And, being one of the sharpest knives in the drawer, you readily recognize the difference between good news and bad news. Maybe I'm not quite as sharp as you are, but I cannot, for the life of me, see how a record (all time record, including the Great Depression) of 20.5 million people unemployed for the month of April, is cause for investors to be buying hand-over-fist today. But, they did.


And, you know what that means don't you... since the market is never wrong, those devastating unemployment numbers are simply to be ignored. Nothing to see here... move along... buy some more please...


And you know... Deep down in places you don't talk about at parties (just love that Jack Nicholson line in a "Few Good Men"), the buy-and-hold crowd is scared to death that they are plunging down a long, dark road at 190 miles an hour and have no idea if the bridge is out just around the next bend. They do not have a "bridge is out" strategy. They have no stop loss settings in place. Their money is at extremely high risk.


But... being the much above average investor that you are, you have a bridge-is-out plan and you're not the least bit worried. At least you're not worried if you're a client of mine because I always have a bridge-is-out plan... always.


Back to today's sharp move higher in the market... I'm already tired of the talking heads today trying to explain the dichotomy of the worst unemployment news in history and the market moving higher. They all have the same 'ol tired refrain that "the market seems to be able to look through all the bad data and see a light at the end of the tunnel." Of course, that light could be a freight train coming straight at them, but that part of the explanation is left out.


It doesn't matter that the talking heads don't know why the market moved higher today. You see... I know exactly why the market went higher today... and so do you. And, what's more... it really doesn't matter.


The market went higher today because it is on a trend higher and it will continue to move higher until it doesn't. That "doesn't event" simply did not happen today. The "why" the market moved higher today absolutely does not matter. I'm going to repeat that (for the third time)... Why the market went higher today is irrelevant. What is relevant is the fact that it went higher and it will continue to move higher until it doesn't. The "doesn't event" could happen on Monday or Tuesday or next month or a year from now... and if it does, you should already have a plan in place to handle the "doesn't event". I do and you should, too.


One more item before the big weekend ahead of us. Speaking of the weekend... I am always excited about the weekend because that's when all of our programs are crunching the data and will start spewing out the results about 3:00 pm tomorrow. I know... I'm a data nerd, but I do love seeing the results. It's kind of a mini-Christmas as I open the packages of results every weekend.


Here's the 'One more item...':


Update on the Delta-Neutral Trading Strategy


Statistically speaking, in the current market, when our market index of choice opens higher, about 59% of the time its high for the day achieves a gain of at least 0.5% above its opening price. Additionally, when the index opens lower, 54% of the time its low for the day achieves a loss of at least 0.5% below its opening price.

These one-day moves in the market can provide us with a potential opportunity to take advantage very short-term trends in the market. The Delta-Neutral (DN) trading strategy is designed to be totally agnostic regarding the current longer-term trend of the market. Beginning each day, the DN is 50% long the market and 50% short the market in an index ETF and an inverse index ETF (could be 2x or 1x).


The next trading day, the opening trend of the market (bullish or bearish) determines (or sets) which ETF will be managed for the day. The losing ETF is sold immediately at the open. At this point the total trade is delta neutral (i.e., the winning ETF is up almost exactly what the losing ETF is down).


From this point, the winning ETF is closely monitored with the objective of achieving a profit, if possible. This approach gives us the opportunity (not the guarantee) to make quick, momentum-based gains and then move back to cash before the end of the day.


By doing this, the strategy is ambivalent regarding the market being up one day and down the next; or up for a week and suddenly crash. It only cares about what happens during the day and not what happened yesterday or what might happen tomorrow. The success of the trading strategy is tied directly to continuity of trend, but instead of needing a continuity of trend that lasts for weeks, the strategy only needs trends of less than a few hours; sometimes a lot less. This strategy is not without risk and will only be used in the ULTRA-MAX, ULTRA and Total Market investment strategies. This is not a strategy that will work in all markets but can be particularly useful in frenetic markets like we are in right now, with no clear long-term trend in play.

As the week progressed, we made minor tweaks to the strategy, then back-tested those tweaks to confirm a reasonable level of confidence, and let the trades (with real money... my money) run. Today, the strategy worked great and generated a nice profit, but I still want to see one more week of real-world testing. My goal is to generate a profit every day and on big trending days, make a sizable profit. Keep in mind that is a goal... in real life, there will be days when the strategy produces a limited loss.


I like how the Delta-Neutral strategy rules are working and am more confident in the strategy now than ever... but I still want a little more testing before trying it out in ULTRA-MAX.


Have a great weekend and stay healthy!