Edition #212
Correlations & Hedging Strategies
Investors,
During times of extreme market sentiment, both euphoria & fear, financial markets can experience significant counter-trend moves. Thinking back to mid-June, the market was the most fearful that I could remember since February/March 2020, yet somehow managed to experience a massive upside rally. As we’ve discussed in the past, bear markets typically experience high-magnitude rallies. In fact, I’ve argued that these violent rallies are a key characteristic of a bear market:
These aggressive price swings to the upside fade in momentum and the market creates a new low within a broader downtrend. For example, here’s the Nasdaq-100 $NDX since Q4 2021, highlighting the extreme market rallies over the course of this bear market:
With the market close to retesting the June YTD lows, investors are getting stressed about the implications of a potential breakdown below the lows. Key pivot levels, like YTD lows or highs, are deeply engrained in investor psychology, so investors are justified in their level of concern right now.
My general market bias has been that we continue to remain in a bear market so long as inflation remains historically elevated and the Federal Reserve continues to embark on a monetary tightening regime. Unfortunately, the Fed isn’t the only central bank to be tightening monetary policy. As such, there is a global tightening of liquidity that is putting pressure on markets. I believe that the Dow Jones breaking & closing at new YTD lows on Friday is foreshadowing more downside pressure for the S&P 500, Nasdaq-100, and Russell 2000, though I acknowledge that extreme sentiment can lead to extreme counter-trend moves. As such, I generally expect to see heightened volatility in the coming weeks.
In specific moments, I’ve tried to time these counter-trend rallies but with mixed results. On Friday, September 16th, I took a position in the Inverse Ark Innovation ETF, SARK 0.00%↑, which I sold on Friday September 23rd for a net gain of +12%. Generally, I’ll attempt to use heightened volatility to my advantage with a short-focused orientation. This was one of few trades that I’ve made this year, along with (chronologically):
Long SARK, the inverse Ark Innovation ETF (net loss -11%).
Long SQQQ, the triple-inverse Nasdaq ETF (net loss -6%).
Long YANG, the triple-inverse China ETF (net gain +20%).
Long AMC, a meme stock (net gain +19%).
Long BTU, a coal & energy related stock (net gain +11%).
Long HUT, a bitcoin-mining stock (net loss -12%).
Long CLSK, a bitcoin-mining stock (net loss -14%).
Long SARK, the inverse Ark Innovation ETF (net gain +12%).
In the remainder of this exclusive premium report, I’ll focus on key correlations that I’m paying attention to, analyze underlying trends in the S&P 500, and discuss how the carnage in the bond market is directly impacting stocks & crypto. As always, I’ll be sharing exclusive charts and data in these reports that I don’t share on other platforms. If you haven’t already joined the “Premium Team”, consider taking advantage of this 15% discount code in order to access:
Weekly analysis specifically focused on my research of the stock & crypto markets, highlighting the key market-moving dynamics that you should have on your radar.
Bi-weekly research reports, sharing what I’m buying for managed accounts and why. In these reports, I’m analyzing the 15 individual stocks & ETF’s that I’ve been DCA’ing into during this bear market.