7. To Hedge Or Not To Hedge? “When?” Is The Question
Tried and true timing techniques are the answer
Crypto, tech, cannabis… oh my! How to hedge all this sh…tuff?
Bear market? Lasting years? A decade? Longer?
Call it what you want, but does a serious bear market result in indexes at new all-time highs after weeks (2020), months (1998, 2008) or just a few years (1987, 2000)?
The Japanese can speak with authority about a serious bear market
The Nikkei is still 33% below its high of 33 years ago.
That isn’t even adjusted for considerable currency devaluation.
Here’s a 30-year chart of real money vs. the yen:
Now the decades-long crash in Japanese equities is at risk of accelerating.
Better to think of it as a harbinger than an outlier, and if the Nikkei falls below support the global house of e-z credit cards could tumble again too.
Meanwhile, the Dow and Russell Small-Caps indexes are nearing November-December highs which may offer resistance.
Should markets climb much more in coming weeks, technicians will notice a large “bullish inverse head and shoulders” in the Dow while the NASDAQ, S&P and Russell break respective year-long down trend lines.
These are valuable patterns to be aware of. If triggered, trend-chasers will pile in while shorts rush to cover.
VIX
More important to note technically is that the VIX is at its lowest level since 2021, warning extreme complacency abounds. Another red flag flapping.
VXX and UVXY offered bears no shelter in 2022. We should see both spike far higher concurrent with hallmarks of widespread panic and capitulation at a bear market’s end. No such signals were seen last year.
A new all-time high in the Dow, unconfirmed by other indexes, to mark the top of this phase shouldn’t surprise at all. It’d make for fine irony if one of history’s greatest false-breakout bull traps caps one of history’s greatest manias. If only famed Dow Theorist Richard Russell were still alive to see it!
If it happens.
Seven Sentries
My system to zoom way out and score social mood overall - and therefore speculative fervor or fear - contains seven components.
“Seven Sentries” since it keeps my emotions in check and focused on being net long, not sacrificing capital to shorting skyrocketing scammy shite that should - and will - collapse, but won’t while it’s still evident that the reckless run riot.
The Wall St. Bets momo cult is nothing new, and that it remains active within the current cycle also signals capitulation still lies ahead.
History repeats - individually, sociopolitically, economically, and beyond.
Markets merely reflect mass psychology. Reliable, profitable patterns emerge.
Clip above from the film Pi written and directed by Darren Aronofsky.
In no way whatsoever am I even suggesting I believe in, hold, or seek to find a mathematical key to markets, much less a complicated crazy-making one like Max’s.
I just know what keeps me surviving, thriving, solvent and sane. Often enough, that requires hedges or big shorts. We can only surf the waves we’re given.
Since 1999-style madness was glaringly obvious in 2021, going into 2022 I believed without doubt the relevant analogy was Y2K. Sure enough, there’s been a tech wreck.
Layer ARKK 2022 over a Nasdaq 2000 chart and it’s tough to tell the difference.
It makes sense. As history repeats, so do its charts and outcomes.
Will Tesla be the next Amazon or BlackBerry?
Smart money’s betting it’s BlackBerry with a dollop of Enron.
That’s troublesome for markets overall given how widely owned that stock is from individuals to pensions. 299 ETFs Hold TSLA.
At this point in the cycle we at least know that 2022 was indeed very 2000:
Might 2023 then look like 2001, or 2002?
Major indexes obscure specific sources of rot, so Richard Russell would watch Lehman as a market proxy. That worked out much better than probably intended during the crash of ‘08 when Lehman collapsed into bankruptcy. Today the Nikkei and Tesla are two examples of data points worth tracking to gauge global appetite for risk.
When my set of proxies signal elevated risk, to hedge I typically roll with a mix of TZA - a levered short on small-caps - and UVXY “ultra VIX”, adding shares and calls in proportion to the severity of the signal, using part of profits booked on the way up.
I don’t care if it pays off. Call it tithing to market gods, or disaster insurance.
Into 2020 my signals were very bearish, so luckily I had TVIX calls (4x VIX) in March when it shot up over 2000% in just days as global COVID panic selling raged. Cashing calls gave me peace and liquidity to take advantage of once-per-cycle opportunities.
There’s always a next time, and whenever the next market-rocking “surprise” that happens throughout all of history at fairly regular intervals occurs, I’ll always have shorts to cover if nothing else.
Why not simply hold cash reserves? Cash doesn’t multiply exponentially during disasters and panics.
Next major swing down? We shouldn’t have to wait too long for that.
For now the score says party-on, so my hedging is “none and done”.
Seven Sentries
i13/21, +4 from last week
m10/21, flat since last week
No adding insurance or shorts.
Rising scores suggest safer conditions. More on my scoring system here.