The trading war between retail traders and hedge funds has taken over Wall Street and is receiving intensive media focus. It has taken over the radio waves, newspapers and even the more modern way to communicate …. the internet. Here is our take.
My partners and I have been trading collectively for over 120 years, either from the trading floor of the NY Commodity Exchanges, to running money off the floor for one of the largest hedge funds, or from our trading room in Santa Fe, NM, and we have experienced it all firsthand.
We successfully played the commodities explosion in the 1970's from the trading floor including when the Hunt Brothers almost cornered the silver market. We profitably traded events like the crash of 1987, the financial crisis of 2008-2009 and most recently the meltdown in 2020 as many subscribers recently experienced.
This firsthand real-world experience has helped us develop trading systems which center around highly disciplined risk management and a process that works no matter what the prevailing winds of the market will deliver.
The new twist creating the current market insanity is evolving much quicker and spreading further than past bubbles and it demands proper trade management even more so now to not get caught up in the game and get destroyed.
The "little investor" through public stock forums (Reddit) and executing on platforms that did not even a few years ago (Robinhood) decided that they could take advantage of an anomaly that they cleverly identified-attacking the float of fallen companies that were suffering from inherent business interruption from COVID or were old style businesses whose investment models no longer are rewarded in our "new economy"
The week started off with news that these stocks were climbing in an astronomical fashion and these almost dead businesses began a resurgence unlike any we have seen. You could not escape the news as all the News channels were covering this phenomenon.
This is what one refers to as a short squeeze and these small investors had ganged up to "squeeze" the short sellers who were for the most part, large hedge funds that take advantage of businesses whose stocks are on the decline.
It has cost several hedge funds many billions in losses as they were forced to "cover" their shorts at astronomical prices. One or more of these large hedge funds had to be bailed out by other hedge funds. It really was the story of David taking on Goliath. The small investor won out, for now.
The traditional long/short hedge fund plays that have dominated markets will be changed forever with the rise and power of small retail traders banding together.
With this scenario unfolding in real-time we were contacted by many of our friends, family members, subscribers, and followers to get our opinion and viewpoint. My partner and life partner, "Mish" went on Fox News (Neil Cavuto) Thursday afternoon to discuss her viewpoint of this scenario and what might happen next.
Meanwhile Some of our clients wondered if they should get into the game. We told them, as we are telling you now, we were participating, in a safe, disciplined fashion. In both our Sector and Complete ETF models, we had traded out of SOXL on Monday (locking in +45.46% return since Dec 2, 2020) and guided folks in the model to go into RETL, which had just risen to the top of our list based on our proprietary investment process.
We purchased RETL, and by the end of the day, it was up 25%. As it turned out, GME was the third largest position in the Retail oriented ETF. Tuesday was another huge day, and, in the morning, we took off 33% of our position as it hit our first targets. By midafternoon, the ETF hit our second target position and we took off another 33%.
By the close on Thursday, we closed out our remaining position using our risk process, locking in a 33% ytd gain in our Sector Model (moderate level of risk)
I guess you could say that very little surprises us that happens in the markets. We remain confident that the only way to trade these markets is to use our highly disciplined process that identifies stops and targets before we get in a position so that we do not suffer harsh negative consequences from things not working out as expected.
We are pleased you are along for the ride. Again, we highly encourage you, if you have not already done so, to get our complete set of investment strategies so that you can participate in different and disparate market segments and be able to take advantage of the continuing Drama on WallStreet.
Here are this week's latest highlights:
- Risk Gauges moved to risk off mode as the equity market retreated globally and-3.5% for the week in the US.
- Utilities outperformed key US Equity benchmarks, underpinning the current Risk Off conditions
- Large and Mid-Cap stocks suffered the biggest declines this past week with small cap stocks falling but much less
- Earlier in the year, as interest rates rose, Financials (XLF) were making a resurgence. That has been stopped in its tracks this week despite good earnings reports from this sector.
- The Retail sector (grandma retail / XRT) rocketed +17.55% led by the GME and other beat-up stocks heavily shorted by the big hedge funds
- The Dow Industrials closed under its 50 DMA and is now in a warning phase
- The S&P 500 is sitting right below its 50 DMA and we are waiting to see if this will be a bounce and the "buy on the dip" mentality wins or the beginning of a more serious correction.
- Small Caps (IWM aka Grandpa Russell) led the sell off on Friday but still up for the year while the other key indexes are flat to down YTD.
- Real Motion (momentum) resolved its divergence from price to the downside in all four key US Equity benchmarks which is bearish
- Market Internals deteriorated further with the McClellan Oscillator strongly negative, along with the New High/ Low ratio
- Volatility (VXX) bounced nicely off support levels we highlighted here last week and broke out of a three-month base confirming risk off mode in general
- IYT (Transportation), which has been bucking the rally in stocks which we highlighted last week, broke down hard under the 50 DMA
- Silver (SLV)and Soft Commodities (DBA) bucked the selloff in stocks confirming our call for a resurgence in inflation
Regarding silver, rumors were flying Friday that the "Reddit" crowd is taking on Silver which is not far off 100-year lows on a relative basis to equities.
In closing we wish to remind you that many of our investment strategies, especially those using stocks and targeted sector ETFs are heavily in cash. This is the direct result of our highly disciplined risk managed process (RMP). We strongly support our subscribers using a blend of all our strategies for enhanced success. Let us help you diversify your risk.
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Best wishes for your trading,
Keith Schneider
CEO
MarketGauge
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