I trade setups, not opinions Ex–Goldman & Citi, Trader, Coach, Jeet Kune Do Instructor, author of The Tao of Trading. Helping people master markets & money
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At Goldman, and later at Citi, I wrote a desk note called "What Do We Care About Today?"
It was read by thousands around the world. I'd walk into a client meeting, someone I'd never met would light up: "You're Simon Ree? Man, I love reading your emails."
I stopped writing them when I left the institutional world
I've starting up again
Same name, same job: Ignore the headline the wires lead with and tell you what actually mattered - and what it means
No predictions. No P&L screenshots. Just the read from someone whose spent 3 decades on the desk
Free, each trading day, on the blog app 👇🏻
open.substack.com/pub/taooft…
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"Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI" - Druck
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People often wonder why the bond market is “smarter” than the stock market
It all boils down to this:
Bond traders read books filled with difficult math and go to AGMs and corporate briefings
Equity traders read magazines and go to ball games and strip clubs
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There is a ton of noise on this app at the moment. To help you cut through that, let me share some key points:
1. Long stocks (esp AI/Mag7), short yen and short vol were 3 VERY CROWDED trades coming into this. Many positioning metrics were at/near the 100th percentile in July. These positions will not get unwound in a week
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If your timeframe is 12 months or less, valuation has got NOTHING to do with stock price performance.
Even if your timeframe is 5 years, 68% of a stock's return can be explained by things other than valuation.
Many people refuse to accept this.
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Many of those companies would never have received funding in a normal market environment anyway. Their very existence was a function of free money. If private capital *can’t* fund such companies, why the hell should taxpayers?
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I prepared a deck to help some of my members understand the #bigflip framework as postulated by @INArteCarloDoss
Sharing here for those interested
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It’s not only the fact that older demographics have higher incomes, they’re also in large part the asset owners.
Millennials and younger exist in a world where they can’t afford to get on the property ladder, they can’t afford to raise kids, and so they tend to not even bother getting married. They exist largely as wage earners, hurt by inflation and left behind by policy designed to fuel asset prices.
Result? Breakdown of the nuclear family and demographic ticking time bomb in the west.
Put these fuckers back at DM averages and problem is solved.
The impossibility to act for these 20 long years is pure insanity.
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Here's what's on my mind:
1. USD has appreciated 17% in 2022. This has cushioned the US from inflation somewhat. Where would inflation be if USD had remained flat ytd? Double digits for sure.
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Everyone has de-risked ahead of CPI. Gonna be fun watching the stock market rip on a hotter than expected CPI
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If the Fed steps down from 75bps hikes to 50bps, that's NOT a pivot
If J Powell says "Inflation is no longer our primary concern, the weakening economy is, and we will use our tools to boost economic growth" now THAT'S a pivot
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There are two “bibles” on options: Option Pricing and Volatility, by Sheldon Natenburg, and Options, Futures and Other Derivatives by John Hull. They are NOT “fun” books (and Hull is not easy). But they were required reading for anyone on a trading desk at Goldman
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Potentially tricky market here
I think stocks are setting up for a rally that will destroy shorts and get bulls nice and comfortable, before destroying bulls with a subsequent huge flush lower
Never seen stocks celebrate the prospect of recession quite like this before
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It's only the 3rd time in history $SPY has recorded three consecutive open-to-close drops from an all-time high close.
All three instances have occurred in the past 18 months!
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If the dollar is set to rally from here, what does that mean for inflation? A short 🧵
Conventional wisdom holds that if the dollar rallies, US inflation will fall. A good narrative, as the US is a net importer, and imports become cheaper when the dollar strengthens
BUT...
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$NVDA has to provide the capital to its customers which becomes its revenues in order to maintain revenue growth, and the market is celebrating this?
Sounds kinda like a Ponzi to me...
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Man, I must have missed the part where Powell said they’re cutting rates to zero and restarting QE 🤣🤣
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Since 1928, the S&P 500 has only posted back-to-back negative years on 4 previous occasions
So that makes another down year in 2023 highly unlikely, right?
Well, maybe not (a short 🧵)
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Why technical analysis works:
Technical analysis is the study of price
Price is determined by liquidity and order flow
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Bulls: Believe in soft-landing pixie dust and are convinced the Fed is about to pause
Bears: Are anticipating a recession and an earnings slump
Contrarians: Believe inflation and the economy will re-accelerate this yr, putting upward pressure on rates and volatility #bigflip
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Have you ever heard the saying, "Stocks take the stairs up and the elevator down"?
It is far more common for stock prices and stock markets to fall far more rapidly than they rise. This is because fear is a more immediate motivator than greed.
Well, what about FOMO, the fear of missing out? What about job fear? That's what we've witnessed in the stock market over the past three weeks.
A powerful, near-vertical rally. It took the Nasdaq only three weeks to recover three month's worth of losses. This in itself is unusual.
Moves like this occur as a result of fear/panic. Fear of underperforming, fear of losing one's job. Moves like this happen when money is wrong, not when money is right. This is why they're called "pain trades"
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When bank stocks are tanking, we're usually not in a bull market
S&P500 (blue) vs Banking Sector (orange)
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If you’re a long-term, long-only buy-and-holder, chances are you’re going to hate this market the next 18-24 months.
If you’re a trader, there will continue to be great opportunities but you’re going to have to fight your natural instincts to avoid getting chopped up
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I’m double-jabbed AND I’ve had covid. And yet I can’t attend the Singapore Grand Prix unless I get a booster. I cannot believe we’re still playing this game 🙄
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What an unjustifiable nightmare. Most people I know - myself included - have had omicron by now. My 75yo father caught it 3 weeks after having a pacemaker fitted, now fully recovered. Totalitarianism gone mad
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3800 - 4300 looks like a good range for the next few months to chop all the bulls and bears into little pieces 🪓
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I realise nobody wants to hear this, but breadth is confirming market strength. THe advance-decline line is making new cycle highs
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If you think the stock market has bottomed while the Fed is still hiking into an inverted yield curve, you really are betting that this time is different (the four most dangerous words in finance)
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Ladies, if your man is
- acting nervous
- visibly uncomfortable
- checking his phone way more often than normal
- waking in the middle of the night in a cold sweat
- mind always seems to be elsewhere
He’s not cheating on you, he’s just balls deep in crypto
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Earnings right now don’t matter. Market doesn’t care what you did last quarter. What matters right now is the seismic repricing of money and credit globally, and the impact that’s going to have going forward
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By now you've figured out that stocks and bonds can fall simultaneously
Now stop saying "the money has to go somewhere" when there's a shitload of debt to be repaid
Especially when forced liquidation becomes a thing again
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"Never short a dull market"
Yeah, yeah, I know the saying. But what if this is a zombie market? One that looks dead but is about to spring back to life as a flesh-eating monster?
Anyway, IMO the risk/reward of going short here justifies a position. I'll explain...
a 🧵
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I love how the laptop class proclaim "this isn't a recession" or "this is the best recession ever".
Meanwhile, personal savings are at a 14y low, consumer credit is at an all-time high and 58% of Americans are living paycheck to paycheck...
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Even when "everyone" is expecting a recession, most are still caught off-guard when it actually happens.
The reason?
Our poor appreciation for and understanding of nonlinearity.
"How did you go bankrupt?"
"Two ways, gradually, then suddenly."
This classic Ernest Hemmingway quote highlights the problem.
When manufacturing activity slows down, it does so in a nonlinear way.
When credit spreads widen, they do so in a nonlinear way.
When the unemployment rate rises, it does so in a nonlinear way.
And let's not forget the stock market - its downward spirals are anything but linear!
Unfortunately, the finance industry's most preferred forecasting method is straight-line extrapolation of the recent past. No wonder we are caught off-guard so often!
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4 decades of falling yields made investing look easy. More leverage, higher returns. More risk, higher returns. It made everyone look smart.
If you were born after 1960, anything you recall from your financial lifetime is a derivative of this chart
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My feed is full of people certain a bailout is coming. I’m just not convinced the >$250k deposits of Paulo Alto tech bros are a political imperative
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3. And let's not forget the potential inflationary impulses from the SPR draw coming to an end and China reopening.
I have to think we're in for some serious economic volatility over the next couple of years (at least!)
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Post-CPI moves in stocks, bonds and FX were all multiple (3-5) standard deviation events. It was the worst day for the USD in over a decade. It was the best reaction to CPI for stocks since 2008.
One cooler CPI print and hopes of a soft landing have sprung to life
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When you stop to consider the $billions in wealth that can be created or destroyed in a mere instant, just because a CPI print exceeds or misses expectations by 0.1% or because Fed comments are interpreted a certain way...you have to appreciate the sheer insanity of this game
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I’m 100% cash coming into FOMC
I don’t have the same certainty about what the FOMC will say/do and how the markets will react as everyone else on Fintwit 🤷🏻♂️
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You’re never just one trade away from making it big, but you can easily find yourself one trade away from going broke if you’re not careful
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Every day that SBF walks free calls into further question the interconnectedness of Washington, MSM and the fraud that has allegedly taken place.
They know this. They know we know this. And they don't care
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Most people will endure a lifetime of dull discomfort in order to avoid moments of deep suck
“If you are willing to do only what's easy, life will be hard. But if you are willing to do what's hard, life will be easy” - T Harv Eker
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Successful trading is not about making predictions. It is not even about being right.
It's about consistently repeating a process that gives you a probabilistic edge over and over again, and allowing probability to work its magic over time
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How to spot the worst traders and investors?
They blame the Fed. They blame rates. They blame "market manipulation". They blame "retail". Unfollow them, mute them, move along
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It doesn’t matter what industry. It doesn’t even matter what country. Every businessperson I speak too is having immense trouble hiring staff. Where did everyone go?
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I made a quick 6-min video explaining why I think the odds favour $SPY breaking above the trend line and 200 MA this time. I hope you enjoy!
piped.video/L4I0qtfMFyk
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The Atlanta Fed’s GDPNow says the U.S. is growing at +3.8%.
But Moody’s Analytics finds 22 states + D.C. already in recession, from Washington to Georgia to Massachusetts.
So... are we booming, or breaking?
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Liquidity conditions are not supporting the $SPX rally. That said, 2019 demonstrated that such divergences can last a long while.
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When trading your own account, you shouldn’t give a crap about relative performance. Only absolute performance puts money in your account.
Having my portfolio fall “only -5%” when the S&P is down -7% is NOT my definition of winning
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A bearish key reversal is a relatively uncommon technical analysis pattern that occurs when a bar opens above the previous bar's high and closes below the previous bar's low. It shows there was decent buying pressure at the open, but the bears eventually won the day and took price down.
Bearish key reversals often lead to further downside momentum in price and when they occur at a swing high, they can help us identify potential turning points in the market.
SPY recorded a bearish key reversal at its cycle high on 27th July. It recorded another one last Friday. This has short-term bearish implications for $SPY
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Many of the books that have helped my trading the most aren't even really markets or trading books. These are my top 3 recommendations for Xmas!
1. Thinking In Bets by Annie Duke is priceless in helping the reader develop a probabilistic mindset
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"Being a bear gets you nowhere"
That comment is absolute blasphemy on fintwit, I realise
However, going back to 1945 the S&P is positive 78% of all years with an average annual return of +12%. Optimism pays in this game
(There is definitely some survivorship bias when it comes to analysing indices. Since 1999, 295 stocks have been booted from the S&P 500)
BUT...there are times when the risk/return of buying the index is low. I believe we are at such a time now
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There's blood in the water. The market is going to hunt out the weaker banks; the pain isn't over
$SIVB
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I don’t think $ROKU is systematically important and I don’t think they deserve to be rewarded for crap risk management. I mean seriously, who keeps $500m in a bank account, and at one bank?
cnn.com/2023/03/10/business/…
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Check out this little guy
@judahrhodie how do you bring yourself to eat these cute little dudes??!
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If you think the Fed hiking FFR to (say) 6% and keeping it there for 12 months is dovish because they stopped hiking, I wish you the best of luck.
Did you actually think the Fed was going to hike until infinity, and so anything short of that is a “pivot”?
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4 "buy the dip" indicators that have stood the test of time:
1. Yield curve not inverted ❌
2. Earnings still growing ✅
3. Economy still expanding ❌
4. Credit spreads not widening ❌
If all 4 of these are✅stocks have always reverted to their uptrend after a selloff
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It doesn't matter how great the technicals or market internals look, if Jerome Powell pours cold water on the equity rally next Wednesday, stocks will pull back.
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The everything rally
Biggest combined move in stocks + bonds ( $SPY + $TLT) in a year
The dash for trash
Massive moves in small caps (IWM +5.5%) and unprofitable tech (ARKK +5.1%). Can you say "pain trade"?
Biggest down move for the dollar in over a year
EURUSD +1.7%, USDJPY -0.8% (the CPI print did the MOF's job for them!)
All on the back of a CPI print that undercut expectations by...wait for it...0.1%
Expectations for a December rate hike went from 14% to 0% after the CPI print. If this is correct, the Fed will pause for the 5th consecutive month in December, and history tells us that when the Fed pauses for 5 months after a hiking cycle, the hiking cycle is over.
So we're now in the honeymoon period between the last hike and the first cut, with a year-end performance chase in full swing. At Tuesday's close, the S&P 500 had rallied +9.5% from its 27th October low. That's almost 10% in two-and-a-half weeks. Normally, people would be quite happy if the S&P managed +10% in an entire year.
A couple of words of caution, though:
1) Of the last 14 hiking cycles, 11 were followed by a recession
2) Fed rate cuts after a hiking cycle (the much-vaunted "dovish pivot") have rarely been good news for the stock market
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Imagine having a 3-day deadline to clear up 1.5 trillion worth of exposure to a truly historic collapse in the value of UK bonds. Not gonna happen
The performance of this "risk-free" asset is staggering
Long-term UK Gilt bonds have posted a total return of -52.3% since Dec 2021. An entire decade of gains wiped out.
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If you’re not making $20,000 per week in passive income from AI, you’re doing something wrong
Here’s 10 FREE tools that will get you on that path
My feed is polluted with this clickbait every day. Anyone else having this issue?
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Before you get giddy on the idea of a Santa Claus rally, remember that during the last midterm December in 2018, the S&P 500 fell -10% in December, with a max drawdown of -14.8%
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2. Everyone's anxiously waiting for the "Fed pivot" as the end to our woes. It's quite conceivable the USD will roll over if/when the Fed backs off. It's also conceivable inflation will re-accelerate once the dollar rolls over. What does the Fed do then?
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2. Japan has had zero interest rates for over 3 decades. Plenty of time for Yen carry trades to build up (estimates at $4T). Yen strength is causing a negative feedback loop as stops get triggered and overstretched carry positions get unwound. This is rattling positioning in global risk assets
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If stocks are to make new highs after a selloff, historically these 4 factors have needed to be present:
1. Yield curve not inverted ❌
2. Earnings are growing ❌
3. Economy still expanding ✅
4. Credit spreads not widening ✅
Historically unless all 4 are✅, new highs are a ❌
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Markets are easiest to trade when they are bored or happy.
How do you know when the stock market is bored or happy?
The S&P is above its 200 SMA and the VIX is below 20
When neither of these conditions are present you gotta be on your toes
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Debit Suisse issuing debt at nearly 10%. I'm surprised this isn't bigger news? @jeuasommenulle @INArteCarloDoss
bondevalue.com/news/credit-s…
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Closed out all my open positions yesterday and went 100% cash. Was net long and I’m having a profitable month, but want to approach this market with maximum clarity and without any positional “baggage”
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Germany's trade surplus with the rest of the world was literally fueled by cheap natural gas from Russia, which was used to manufacture goods cheaply, to export to the resort of the world for a profit. That gig has ended.
German recession is assured. No bueno for Europe and ROW.
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The S&P500 is just 4.5% from its all-time high
At the $SPY ATH, the effective Fed Funds rate was 0%, now it's 5.33%
US 10y yields were 1.78%, now they're 4.33%
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Thursday's candle was only the 3rd time in $SPY history that a candle engulfed the previous 3 days of price action
But remember, these violent and surprising reversals and countertrend moves tend to occur in bear markets, not bull markets
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Soft landings - where central banks tighten meaningfully without sparking a recession - are exceedingly rare.
The vast majority of sell-side research does not appear to take this into account in their 2023 outlooks.
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Major risks as I see them:
- SVB is a one-off, but it prevents the Fed from getting the job done on inflation
- it’s not a one off and is the tipping point for a larger recession where cutting rates won’t be sufficient
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It could take you years to figure this all out by yourself and you get to learn all this in 5 minutes, for free 👇🏻👇🏻
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