I’m flying today so I wanted to send out a note early. What a whirlwind the last few months have been. I think alot of the chaos we’re seeing is simply the crowded ai trade unwinding, but having such a volatile President who is so public with his rhetoric while also flipping back and forth between peace in the Middle East and ending an entire civilization on a daily basis is not helping. Look at the moves just yesterday with solar up 8% and oil down 8% while Semis broke the 200 day. These are incredible moves and they’re happening more frequently it feels like because we have more pods than ever along with a President who also moonlights as a trader placing thousands of trades year to date although he knows nothing about said trades. When these pods all pile in a factor whether it be ai, oil, you name it, they all overdo things in the direction because of inertia and then the unwind happens and the violence to the downside is spectacular. Just look at this past 90 days where the ai trade has completely fallen apart and instead of realizing it, most people are buying the dip thinking they’re buying deep value.
I’m in my 40’s and I’ve been through alot of bubbles in my career, the first was obviously the GFC in 08/09 then in 2015 there was a biotech bubble where like today with ai, everyone was a biotech bull and you can’t really step back and look at some of these charts because the companies are de-listed but many a mid cap name was wiped out with quickness. Then of course we had the 2021 saas bubble which ended with the 2022 wipeout there and now we’re looking at this ai trade unwinding. I don’t want to call the current ai trade a bubble because alot of these companies are printing money, like Nvidia, but it was a time of irrational exuberance and silly extrapolation of fantasy numbers into perpetuity. What we’re seeing recently in the equities is the pricing in of a scaling back of those expectations, many think that is wrong and that is what makes a market. As a trader, my job is to look at charts and flow to dictate where to place bets, not to pontificate about the potential long term multi year outcome of a trade. What we are seeing in many ai names is just classic distribution. What is that? That is simply where names trade in a range for a long time then begin to breakdown from there. Many think it is a buying opportunity but it is really the beginning of the end. If you look back at all the saas charts from 2021, you see the same charts forming as you’re seeing in the ai names.
A perfect example of this chart is Amazon in 2021, below. Look at how it flagged sideways for months on end and people thought it was building for a leg up because we were in the middle of the covid buidout. Look what followed, a selloff right to the 100 month where it based and recovered, 50% lower. You could feel something was wrong with these ai names when everyone kept posting how low the P/E ratio on Micron was and all it has done since is go lower.
Do you see how once it broke the light blue line, the 21 month, it was a cascade lower that stopped right at the yellow line which is the 50 months and then it eventually settled at the white line, the 100 month. These moving averages are very really and they’re where the computers do the majority of the buying and selling. Lots of these ai darlings are coming into their 21 month right now, watch those levels and if they don’t hold, get out of the way, do not be dense about.
Trading is damn hard, I hate these guys posting on twitter after the fact making it seem so easy then not showing you what they’re in or telling you they’re just waiting in cash. Do you know how hard it is to size your bets up? I love when people write a long thesis on a name then disclose they hold a 2% position. What is the point of that? Do you not believe in yourself? I do believe myself and if you’ve been here over the last near 5 years you know I’ve sized a handful of bets on Twitter, Amazon, and Intel because life only gives you so many opportunities to really swing for the fences and if you see it and don’t take it you’re going to regret it forever. Taking a trade book from a little over $1.4m to basically $13.5M today with what I took out last year is not going to happen if you’re sizing up into the wrong names or making little bets. It is damn hard to outperform like that
Do you remember when I closed up my massive INTC 60/80 call spread in late September? I had people asking me James why didn’t you hold it for another 2 months there was still $300,000 or so left in the trade. If you remember I closed those with Intel at $125 for $19.20 or something with a max value of $20 if I held till November and it closed over $80. Here we are on November 5th and the stock is $57 pre market. There is a legitimate chance that trade that I cashed in 4,000 contracts of a 60/80 call spread for almost $8M just 5 weeks ago might be worth $0 in 2 more weeks. I’m tooting my own horn but I closed right at the apex of a trade after 6 months and then deployed that cash long casinos which at the time seemed insane, but here we are over a month later and that was the right call as they’ve materially outperformed Intel and tech in general. That was really really really hard to do looking back. I hate when people on Twitter give all their opinions about how a trade was so simple to see and won’t show you what they exactly did or in what size at what time. You see my transparency here, I think they make a mockery of trading and frankly I don’t get who pays 90% of these people for their opinions. I’d only want to hear from someone showing serious skin in the game. Lots of people have ideas, but I’m betting my own money on my ideas in serious size. Why waste your time listening to people who sound smart but won’t disclose their bets. It takes 2 seconds for them to screenshot their book the way I do everyday.
So what am I getting at? This year has been rough for alot of you, I read all your emails and dm’s. I get it, the majority of people were very long the ai trade and it frankly has been awful for months. Lots of funds underperformed this year because that was the factor they focused on. The Nasdaq and SMH are both negative over the last 6 months but surprisingly both the S&P and Nasdaq are up double digits year to date although it really doesn’t feel that way for most investors. I myself have faced a big struggle these past couple months but I’m still up 45% ytd. Look how erratic the chart of my performance is, leverage cuts both ways and the chop has been difficult for me to navigate.
You have to judge yourself on your performance over time. A 6 month period doesn’t define you, very few people outperform on every time frame. Even I struggled going back to when the chop began on June 1. I’m up only 8% since then while the S&P is up 2% and the Nasdaq down 4%. Very few people did really well over the last 6 months, I consider myself lucky but sometimes you just have to survive these periods until we get back to easier times. We’re heading for our 4th straight double digit year in the markets so it’s funny to say these are hard times, but the last 2 years have basically involved 1 big burst followed by months of chop.
Trading is a very difficult game, maybe the most difficult game in the world. Look at the Tesla investors, they’re sitting in what they consider the most fascinating growth story humanity has ever known and they’re negative over the last 5 year period. Trading is psychological warfare on a daily basis. You have to be in underfollowed names right as they’re starting to see flow and their charts are turning. Once your name is a consensus trade like Intel this year, you’re finished. Remember when Intel was $35-40 and the flow was off the charts daily while the story was weak. Then the stock goes up 300% in 2 months, retail piles in near the top and they rugged all of them. Look how we entered this year with Google as the consensus ai winner and now it is apparently the biggest ai loser while Microsoft fell 30% then rallied 50% all within a matter of months while narratives flipped there. This game will test you on a constant basis. You have to have thick skin, you cannot be mentally weak or you will fail. You have some of the legends of the game negative this year in this chaos. All what matters at the end of the day is did you outperform indexing while wasting your time doing this. If you didn’t, you had 1 bad year, pick yourself up, learn from your mistakes and make adjustments. If you did outperform, congratulations. Just remember 1 bad year doesn’t mean you’re a failure at anything you do in life, sometimes you’re going to run into difficult times. It’s what you learn when you get punched in the mouth that separates the eventual winners from the failures. Learn why you overstayed your welcome in ai if you did, look at the charts, burn those images into your brain for the next time you’re in a good story.
Have a great day today, I’m attaching a link to the database below that will be open until monday, there will be no recap today or tomorrow. It is our 15th anniversary, I’m taking my wife out of town today without our kids for the first time ever. So we’re getting a tiny break from life for once and I promised her I wouldn’t sit in the room on my screens all day. My help will still be here logging all the trades today and tomorrow, all that you won’t get will be a recap. I gave everyone access to the link the live users get. Utilize it for the next 2 days see if you like it. You have the live tape in the database on the daily chart page as you can see below where you can just have it open all day long as the flow comes in and filter it however you’d like to see only what you want to see. I will see you monday.
Great post. WWJD. WHAT WOULD JAMES DO?
Happy anniversary! Today is also my 15th anniversary.