Everyone Panic. Part 2.
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Everyone Panic. Part 2.
I’d like to start this post off with a little humor for a few reasons:
a) Thinking rationally in times of heightened volatility is the key
b) We’re not going to get doom and gloom here – there’s money to be made, so let’s make it. Leave the doom and gloom BS to the macro guys who try so hard to sound smart….
Now that we’ve got that out of the way let’s get into it here on this special post to start a trading week where the sea of red is here. One, I’m not going to do the I told you so think (I’ll leave that to Michael Gayed and the rest of the “Head of Macro” folks who love their egos stroked) – I care about P&L, returns for our clients and putting out actionable research that isn’t for the ego stroking.
After all, I started in this business on a futures trading desk so the volatility and chaos is what I know and welcome because it does away with macro, data and focuses on price and price alone.
Most situations like this is when everyone panics. I’ve been through this my entire life and for the first time when I was in a 500sq ft office at my first Company I started back in 2008 trading on the original version of Think or Swim before they sold it out to all of the degenerates who pretend to trade and use it today.
I’ve also been there during the flash crash and then once again During Covid (awesome market) and now again. The last thing I ever want to do is panic – sure, in 08 when I would listen to Uncle Ben on the TOS SPX squawk and pretending I knew what was happening, I panicked.
But since then, I’ve been through this and other events where it all becomes the same, at least that’s how I try to treat them so that I stay pragmatic and focused. And that’s what has helped me more than anything: to have a plan, stay calm and try to ignore the banks, macro guys and the rest of the noise.
I’ll explain to you why that matters to me (and it relates to this entire post).
The banks/broker-dealers are not on your side. Their research seems cool to new investors as they pass it around to their Discord buddies as if they are in possessions of some secret sauce material that only they were able to get. So, avoiding any of their market calls on when/if the Fed will cut by 50/1 or even emergency cut is the key – that leads to forecasting the market and not trading the market a concept that investors who punt and guess would benefit to dwell on a bit.
It’s the same narrative that Online Trading Academy pushed to their students that “The Big Boys” were trading against you and moving markets – another sham of an idea.
For those of you still under idea that the banks/broker dealers are trading against you it’s a farce. They’re not trading the standard products most trade (stocks/options/etc) – it’s just one more of the narratives pushed as truth that plaque things. None of this matters though (for some of you it will because arguing instead of making money is your role), what matters is that these banks/broker-dealers are not on your side and to continue to listen to them as a voice of reason is a detriment.
A few weeks ago when I wrote the weekly article Inflection & China Third Plenum, I brought the photo below up and talked about it. What I questioned (as did the original poster) was why they would put that out then given the market cycle? Well, it’s like anything: it’s narrative and the larger banks push that narrative down the chain which ultimately ends up in the hands of their retail financial advisors to then use for talking points to their clients.
And no offense, that’s the same narrative real estate agents are going to ramp up with here again soon with an interest rate coming: “If you’ve been waiting to buy your chance is coming now” – except it’s not (more on that below).
Just like most financial advisors like to run with the idea that diversification means a 60/40 portfolio or that the markets have dips and that in the long-term it works….that idea works and it’s an easy line to run, until it doesn’t work.
And given that most of the markets are driven by passive investing which is a larger portion of the markets.
A year ago I wrote this quick blog called “The Debtor Era” – it’s a quick 5-minute read but what I said there is what many have been saying; debt is out of control, inflation is raging and the consumer is in trouble. There was always a chance that we came out of this cycle okay, at least in my view – and despite what might seem my pessimistic nature, I am actually optimistic about most things just quick to call bullshit when I see it.
However, the data changed rapidly and that change in data has caused major technical levels on: The Nasdaq, SP500, Dow, Nikkei and even Bitcoin to drop. In turn, that creates selling pressures from market structure then you throw in the Yen carry trade and we’re now in a full-blown meltdown. That meltdown started with tech stocks which I talked about at the start of June for readers of the LongVol Report and its created a domino effect across the markets and when you have markets that are passive, crowded into one trade it can change on dime like we’re all seeing now.
Those are some of the charts/insights I posted from three weeks ago. In particular, the color given on July 11 there was the start of this.
I talked about it on the show as well because it was the same time we put out the report looking for risk-off on a lot of names and here we are.
Housing is In Trouble Whether You Realize it Yet or Not
One of the sectors I’ve talked about for over a year has been housing.
I had relatively large, short on was/is home builder stocks. I remember when I spoke with a few journalists (literally at this time last year) about housing. A few didn’t publish what I had to say but some did – and when I said I thought that home builders would be in trouble they asked how much of a correction? I’m always cautious to give numbers out, one because I don’t want people taking a statement with no context and running with it – by the way none of this is investment advice – and two because if you’re wrong it’s like telling a friend their girlfriend/boyfriend has been unfaithful and if you are wrong you’re in deep shit and if you’re right you’re still sort of not the most favorite person at that time.
I also brought this up again last week in the article of the week and discussed it on the show.
I wrote a special section of this week’s LongVol Report again on housing as well and I’ll reiterate it here again.
- The consumer is tapped out and they have been.
- Yes, people are in sub 3% mortgages and maybe didn’t want to sell but those who realize cycles are part of life did, cashed in, maybe rented, maybe downsized and will make it out alive. – Again, that was the smart thing to do but we live in society where you need the big house and other nonsense to pretend you’re a baller.
- The consumer has been in a WWE style chokehold for a few years with high interest rates and high inflation which has led to cost of living increasing.
And now, we have a market correction across the board. Those who were up on the year and cashed in are looking like Lou Pai right now and those who didn’t are in trouble which may or may not get worse pending the coming weeks. Now, you add that in to the mix and the last bastion of captial/savings/equity in people’s homes are now being attacked. And should people need to access that liquidity (which is already starting if you read the prior article of the week) it creates oversupply on the market.
This is a plus for those who have been waiting and a negative for sellers who were too greedy to sell. Which, brings me to a quick quote that Angelo Mozillo told a crowd in Los Angeles in 2006 when I was still in undergrad: “Something is only worth what someone is willing to pay you for it”
So yes, I do think home builders are in for a large correction – whether that spills into the real housing market, who know’s but I think it does especially if these markets remain like this into the end of the year and the next. And before anyone runs with narrative on this blaming one or other political party let’s be real fucking clear: it started back from the mess in 09, failure to take the medicine then and policies on both sides that have only exacerbated any of this.
So, what matters in any of this for me as we head into a volatile week in the markets?
One, not listening to CNBC, other hedge fund guys or the banks is a start. None of that ever translates into any real P&L it’s just cope for those without a plan of action to execute with. So, if you’re reading this and are sorting it out that’s my first piece of advice. Two, avoid the macro guys and their views – they all are going to do victory laps and talk about things that, again, don’t translate into P&L but sound good.
In my view, and it’s the same every market correction (really), you trade the price-action level-to-level. I start to use Index options more to express my ideas in case we get larger than expected rallies so that I can carry both the actual futures, sell them, but hold on to calls in case we run and I simply put: just trade. Now, of course there are many names in The LongVol Report that are now near technical spots of interest. Names to which have been tracked in that report for months where we understand the fundamentals so there’s no need to now to start building a stock list because we’ve done it. It now just becomes a question of: “Do these levels hold, what size am I going to structure the trade and with what duration if we’re using LEAPs or DITM calls to express the view”.
That for me is the easiest way to not panic in markets like this and it always has been. Again, I’m not the guy that is going to say “Buy stocks you love and they’ll be higher in a few months” in my experience that guy is the guy who is coping because they did just that and are trying to rationalize their decision before their wife asks how they’re doing in this market.
Like I said in Issue 29 and 30 of The LongVol Report – right now is not a time for bottom calls: it’s a time for trading and l hope, if I can get it right, to start putting positions on from The Swing Monitor that we’ve been tracking for a few months.
There’s a wide world outside of the shiny-object stocks like Apple, Nvidia, Tesla etc. you just have to turn over some rocks to find them and thankfully for us we’ve been spending a lot of time the last few quarters turning over rocks to prepare for this inflection in the cycle.
Best of luck out there this week and try not to fuck it up.
Dan
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About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital Management L.L.C., a multi-strategy investment management firm based in San Juan, Puerto Rico. He has over 10 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
