Weekly Market Focus Report
Market Cycle Trend:
Down as of September 9th
Intraday broad market momentum from a week ago Friday
The chart above (click on image to enlarge) is an image of the intraday market cycle trend as of the market close the prior week from this past Friday.
Last week I wrote:
With the market cycle now flashing red and yellow for two weeks now, becoming more volatile in a down trend, I won't be in any hurry to put on any new bullish positions until the markets are decidedly less volatile and have found a bottom at some potential support level.
Intraday broad market momentum as of Fridays market close
As you can see from the chart above (click to enlarge), underneath the hood, on an intraday basis, as self directed traders, we want to take note as to how the market is performing to base our decisions accordingly.
Wednesday we traded right up to a recent resistance area, only to trade lower from there the rest of Wednesday with a large gap down into Thursday continuing into Friday market action.
What does this mean?
According to our intraday chart, based upon technical analysis that we have, we may go lower from here. Keep an eye for how price acts here at the 50 period moving average
for confirmation one way or the other.
As you can see from the chart above (click to enlarge), on November 16, 2018, when Mr. James Cordier issues a video apology to his hedge fund clients for losing their portfolios at some point during the prior week, was marked by a period of down market cycle.
October 4th, 2018 - January 7th, 2019 marked a period of higher volatility down trend in the financial capital markets, relative to recent past. While the video apology, and the loss of funds for everyone involved is not to be made light of, perhaps there were tell tale signs that were missed, which led to the demise?
When looking at the chart above, on October 4th, more than a month early, from the announcement of the firm going bust, the market cycle trend went from green to yellow, a potential transitioning state. Then a few days later, red, a day prior before the down trend really took off with a vengeance on October 10th.
Hindsight is always 20/20, but cash is a position.
How would this have worked out if Mr. Cordier's fund been in cash?
Or if not fully in cash, perhaps modified the dynamics of his trading style to take into account what was now a down trend lasting for an extended period of time (more than a month) might the financial catastrophe been avoided?
If I were to guess, since from what I understand, he was generating gains primarily as an option seller, his fund may have taken on too much risk to the portfolios through short put options either naked or through bullish put diagonal spreads, both of which can be very popular option strategies in bullish market environments, but also can produce devastating losses in a prolonged bearish down market cycle.
Whenever a put diagonal spread is going, it only works out long term when your underlying asset moves sideways to up going forward into the future.
Since the future can never be predicted with absolute certainty, there is always a risk of potential loss on any one position.
I have not found these types of strategies to have an edge that I can easily manage in a more prolonged volatile down market on a position by position basis. The only way I can think of possibly doing them is when markets are more volatile and bearish, is by doing some other additional portfolio hedge thereby adding more negative delta to the overall portfolio to compensate which may be worth further exploration, but even then it would tie up capital unnecessarily for a prolonged period for those more delta positive positions to work out.
Additionally, if you have naked puts in play in a down market, the risk here is that, since you can be put your stock at a lower cost basis, only to have the stock sink even lower before turning around (if and when they ever do?) which is opportunity cost of the capital, meaning, is this the best use of your capital, and can there be better opportunity with a different trading strategy?
What happened exactly?
I am not privy to the specifics any more than what the publicly available video provides, but maybe there is a lesson to be learned so that the calamity has less than likely chance to be repeatable.
Perhaps taking into account the market dynamics, to be trading with the current market cycle trend, and by adjusting trading strategies to either be in cash or more delta neutral to negative, when the market cycle trend is flashing yellow, and / or red, is a more prudent approach to consider when we are in a more volatile down trend is something to consider and more prudent approach to trading the markets?
It certainly appears to be a more viable approach than whatever trading strategies this particular hedge fund had in place during the same time period from our thoughtful analysis.