DECEMBER 2021 DIP – HOW TO STRATEGIZE YOUR PORTFOLIO

In December 2021 we saw a market pull back from several all-time-highs, retracing back to the 20/50 day moving averages. I was expecting a pull-back in December (therefore closing most, if not all, of my trades in November and taking profits) because when I analyzed the technicals of the charts, many indicators pointed towards the market being way over heated, many tickers were in the overbought zones despite trading above fair valuation. What I did not expect was, the emergence of the Omicron variant which further exacerbated the pull back even further; which means it caused the markets to dip even more. The FED has also been discussing and sharing plans on slowing down their buy backs on bonds by a fix/progressive amount each month ($15Bn / month). Tapering the economy will lead to an increase in interest rates which in turns leads to higher cost of borrowing.

This trifecta of: overbought technicals, Omicron and Fed Tapering has evidently resulted in a market drop due to Fear, Uncertainty, Doubts (FUD). A market drop from time to time is always a healthy sign. Even if the stock market wants to head up higher, it would achieve it through a series of higher highs and higher lows. A price chart which shows prices only heading higher and higher without a chance to “breathe” (going lower) is something to always be cautious about.

Here are 3 sample charts which shows extremely unsustainable increase in prices:

When we talk about sustainability, we need to consider 2 major elements:

1. Time horizon

   1. If the stock price rose 2x , 3x, in a time frame of <3-6 months it should start to alarm your bells and you should start to be cautious. If the stock price doubled or tripled over the span of 2-3 years and did it in a gradual fashion with ups and downs (and not just one-directional upward movement only) then it shows a healthy movement.

2. Price Action

   1. Are the candlesticks mainly green ones which consecutively trade higher and higher without much room to “breathe”? If so, that’s a red flag because all we have now are buyers aggressively buying up the shares at record rates. To a certain extent, it could also mean sellers are getting short squeezed or stopped out of their positions. Either way, it gives the impression what the stock will continue to head up, and once it reaches a certain tipping point, sellers will unload all their shares and sell them off, which usually results in a sharp drop in prices. This is what we call “a falling knife” in the common phase “don’t catch a falling knife”.

Chart 1: $NET – price increasing from $108 to $221 from 1 Oct 2021 to 18 Nov 2021.

Chart 2: $ENPH – price increasing from $143 to $282 from 6 Oct 2021 to 22 Nov 2021.

Chart 3: $VIAC – price increasing from $36 to $102 from 28 Dec 2020 to 15 Mar 2021. This is an older historic example, but it was one of the most impressionable and impactful trades I ever traded / studied. Also, I made $2,500 on a $600+ capital which made it extra memorable due to its insanely high ROI.

In parallel I would also like to share an informative graph which you should learn to be familiar with. Essentially it shows us 4 phases of a stock price chart: Stealth phase, Awareness Phase, Mania Phase, Blow off Phase.

Try to see if you notice any similar patterns in the charts I have shared with the chart above.

The direction of the trend is important, but the key element is in the steepness of the incline. That is the one key common denominator and key insight you should draw from when analyzing these similarities.

People who started buying shares in 2020 (Mar-Jun Period)

2020 was an unrealistic year for many new investors because the market hit a lowest point and almost any stocks bought would have made an easy 20-40%+ return. You can literally buy almost any stock and expect to make money. It is like shooting a fish in a barrel.

You can try googling these charts (just to name a few):

- $SPY

- $VOO

- $DIA

- $MSFT

- $SPY

- $NIO

- $TSLA

- $ENPH

- $FSLY

- $CRWD

- $VRTX

- + any other tickers

However, 2020 was not a good reflection of how the stock market works and the trajectory it usually moves at historically. The rate of increase in stock prices (with the help of the Fed’s printing), the gradient of increase was truly unheard and unseen of. It would be a good opportunity to make an easy profit in the short term spanning a couple of months but the pace of the increase was simply unsustainable and unrealistic – you have companies making huge losses, zero net profits, no innovation, no scalability trading at insane Price to Sales multiples (P/E would not make sense in this case because earnings is negative). It was an extremely valuable experience for those who monitored and participated in the markets and a lot of learnings to derive from it as well.

It was the year of hype, “perceived” value triumphing “actual” value, a lot of jumping on the bandwagon without understanding what is going on at a micro and macro economic level.

What are the struggles of these target group of investors budding from 2020

• Lost – they realize the stock market isn’t as easy as it seems. One does not simply pick any random stock and expect to make 50-200% returns forever.

• Unsure on how to manage risk.

• Unsure how to optimize portfolio.

• Emotional stability likely to have taken a hit when they first experience a huge red day, especially if their portfolio comprises mainly growth / tech stocks and less so value stocks.

When 2020 made it seem almost all too easy to make a profit off the stock market, beginners do not get the opportunity to develop critical thinking and analytic skills. The environment did not encourage people to be sharp and keep them on their toes; they weren't ready to take on a market downturn, which we saw firsthand happening on Dec 2021 (and to a smaller extent in Q1 2021 I believe). It is therefore paramount to stay consistent and well-prepared even in seemingly easy times disguised as a illusionary trap to trick you into thinking that the markets will always go easy on you... No, it is a war zone out there and it is best to constantly sharpen your skillsets and mindset - always embrace yourself for the worse.

Current Market Analysis (Overall technical analysis) [snapshot 24th Dec 2021]

Let’s look at the Nasdaq futures (snapshot 17th Dec 2021)

Context:

• Taper, Inflation, Omicron variant news (all priced in), VIX @20.60

• Benchmark: $NASDAQ

• Pivot: 15600, above which market remains bullish, below of which market is bearish

What I am expecting:

• As long as 15600 holds, the breakout of 16300 to 16400 will be the key to opening at a higher target, this target will be the bull trap, which is the high of the longer term channel 17300-17400.

• Forward looking plan: a sell off might happen; reason factors include:

• Huge Capitalization

• Potential Funds rotation across sectors

• “Bubble”

• More inflation (CPI Data)

• Raising Interest Rates (if throw to us as a surprise with no time to prepare)

Should we be worried?

The short answer is No. However, if you keep watching news or tweets you will worry every single second. We should enter trades with limited risk should we still choose to participate. Else, just wait, be patient and once we see signs of reversal, we can enter in more aggressively again.

Additional Charts to analyze to gain high level overview:

$RUT (Russell Index)

$ES1!

$SPX

Summary (as of 25th Dec 2021)

• Indexes have reached the key supports: Nasdaq 15600, Russell 2140, SPX 4550 and bounced off nicely

• 20th December’s session is extremely important and it has shown that market has not entered bearish sentiment basis the bounce up on the key support levels.

• Market is looking to head higher

• Booking trades will start from the last days of December and 1st two weeks of January

• My General Plan is still intact with my original thesis on the sell zone of the Nasdaq and SPX:

• Bullish until 4930 on SPX

• Bullish until 17300-17600 on NQ

How to capitalize on the current market

What I did and what you can do -

• Dollar cost average (DCA) the best time to do this is when there is a considerable reduction in prices

• Sell cash covered puts on stocks you want to hold long term

• Buy 100 shares of a stock you like and then hold and wait for price appreciation, and then sell covered calls to collect premium and reduce cost basis and risk

• Collar Strategy: or you could sell a covered call AND buy a put to hedge; you set receive a net premium but give up some of the premium to hedge the downside.

I personally would stick towards owning 100 shares (either directly buying or via sell put assignment) and then patiently wait before doing a covered call or collar.

Given the above analysis on the key support levels I have also initiated some lower/limited risk option trades:

• Simple long calls

• Risk reversal trades (these are good for long term)

• Bull call spreads

These will be cheap now because the market is at a low.

It is extremely important to initiate these positions with ideally >6 months of DTE (days to expiration) to maximize your probabilities of winning. If you account size allows, >12 months is even better. I opened trades with 300-400 days out and just let it ride. At any one point within next year all it takes is for the market to head up higher momentarily and I can exit with a nice profit.

Godspeed,

Mr.Arete