Trading in the Lion's Den

Hi everyone

I hope you’ve all had a good week!

Its been fascinating for me as something of an observer in the past few days, as I decided to take a step back and limit my screen time having had a very active period in my own trading. Lex and I often talk about ‘mindset’ in the context of trading, and how being able to both recognise and respond to your current psychological state will almost inevitably affect your profitability. So coming in to this week, for various reasons, I felt it best to take down risk and have something of a breather. As it so happened, I closed out my equity positions on Monday evening, which by some good fortune marked this week’s high and preceded a 7% sell off in the S&P 500.

I know nobody likes a know-it-all, but I must acknowledge that my ‘gut feel’ to sell wasn’t purely based on my psyche. Sure, I was looking at some really healthy profits from last week’s trading, but ultimately I did get a sense of unease at the developing situation around the world with mass gatherings posing an increased risk for a ‘second wave’ which the market (as of Monday) was seemingly not being discounted in the price. Lo-and-behold, these very fears were realised and became the main narrative as the week went on, with US states such as Florida reporting their biggest 7 day increase in new cases, having recently eased lockdown restrictions.

I explained this all in real time in Wednesday’s Trading Club meeting, and revealed some of the speculative positions that I had been running in some of the names hardest hit by the pandemic. It seemed as though the rotation towards “value” (or ‘speculative crap’, to use the phrase I coined midweek) from growth was probably done following some impressive retracements. This first chart shows the weakening in the relative performance of the growth-oriented Nasdaq versus the broader S&P 500, which as I stated on Wednesday, looked likely ‘done’ and poised to revert to its historical outperformance (as it since has).

So here are some of the more speculative names that appeared to have had their day in the sun earlier this week. Note that following the heavy selling Thursday, these names have come in quite considerably and look less extreme at current levels. Here’s Lufthansa, which received a huge bailout from the German government and retraced right up to the 50% Fibonacci level and 2019 low (I didn’t have a position in this, FYI).

British Airways was my preferred name within the sector, and managed to reach the first target at the 38.2% fib.

Boeing, a related name that was one of the hardest hit as the global pandemic unfolded, also staged an impressive retracement up to the 50% level. As you can see from my previous annotations, I was looking for 250 ideally, but got out at just above the 50% on Monday.

Elsewhere, Safran had a similar pattern emerge following a clear breakout above 93.

Our ‘dear friend’ Booking ripped all the way through the 61.8% fib level to 76.4%, just below 1900. Like many of the other names, the shares are trading sharply lower following Thursday’s heavy selling.

Lastly, here’s a chart of Marriott, another play on the recovery in the travel and hospitality theme.

Now, the key to all of this is not to overstay your welcome in these names, when the market is highly emotional (and perhaps you are). Referring to our process, it was encouraging to see how  our Market Risk Checklist reflected positive sentiment, supporting such speculative trades.

However, we must be cognizant of the clearly opposed reading in our ‘big picture’ Business Cycle Checklist. With a  negative score of -3, by no means is this an environment to be ‘in the lion’s cage’, even if it has been fed recently (contrasting sentiment on our shorter-term Market Risk Checklist).

The message I want to impart is how it is essential to take cues from both your process and psychological state, and recognise whether you should risk going inside the lion’s cage if there might be a bundle of cash in there waiting to be picked up.  There will always be an element of risk when you trade, but knowing when and how to go about it puts you in a much better position to make it out alive, and hopefully better off for it! By following our process and taking cues from the confirmatory and contrasting signals you can make a better informed to make the big calls – whether that is sneaking past the lion, or observing it from behind the cage.

If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Enjoy your weekend,

James

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