Shorting Equities

The absurdity of taking a trade

Well I think this will be an interesting edition

Let’s start with the comment I made about the S&P and opex in the last article. I said that I wouldn’t be surprised to get a short signal from my model going into opex next week.

Well, we got a short signal! There were a number of other factors early on this week that confirmed things for me but basically every day this week I’ve been accumulating puts on SPY.

Basically, right now the market is pricing in that nothing bad is going to happen. The VIX is incredibly cheap here. VIX is the price of liquidity and primarily reflects individuals hedging their downside exposure.

Anytime the market prices in an overly optimistic and overly pessimistic scenario that is unrealistic, you want to take the other side of it. It won’t work out every time but the risk-reward is exceptional for shorting equities here.

Sentiment:

I am not a huge sentiment guy but when all my models are saying you should open a short and you see this, it’s just confirmation that I’m on the right side of the trade.

Why Shorting Is Evil?

Generally speaking, people don’t like to hear that someone is short the market because most people are implicitly long via their life, 401k, and brokerage account. This is where the absurdity of the market comes in. Anytime you trade, you're taking the other side of someone else’s trade. A market only works if there are two people. So when I short the market, there is someone on the other side of the trade who thinks the market will go up.

When there are people on either side of the trade, your functionally saying, “I am smarter than you and have more edge than you.” This is why intellectual capital goes for a premium in the financial market. It’s pure decision-making and thinking. Generally speaking, when money is involved, we don’t like hearing we could be wrong. We usually ignore disconfirming evidence.

Intellectual Capital and Putting It Together:

The one thing I really enjoy about financial markets is that we are all dealt the same hand. We all have the same information and data. Sometimes there are private data sources or information but generally speaking, they are only useful on very short timeframes. Everything comes down to your ability to interpret data correctly and pull together the moving pieces.

While it takes me seconds to execute a trade, making the right trade is incredibly challenging that requires constant refinement of the intellectual capital I possess. This is the same thing in any domain of life. Leverage simply amplifies our form of capital. Leverage could be in the form of margin in a brokerage account but it can also be people working for you or even social media. Anything that amplifies your impact. Leverage will also reveal the abilities of an individual faster since it is a compression of time.

Financial Products:

Alright, something a little more tangible, there are some amazing financial products out there to allow investors to expand their exposure. Generally speaking, most investors have 60/40 exposure but after last year, people are finally realizing the risks of it.

A new release is this ETF which has a lot of really good companies and guys backing it: https://www.returnstackedetfs.com/

I don’t recommend financial products and any ETF can theoretically blow up. But in my opinion, this is a great product to have in a portfolio depending on the specific goals you're trying to achieve. Again, go back and read my first article on this!

Random Rapid Fire:

If you want to know more about the VIX, this is helpful: https://www.spglobal.com/spdji/en/vix-intro/

If you want a good intro into macro, this is a great book: https://www.amazon.com/Long-Good-Buy-Analysing-Markets/dp/1119688973/ref=sr_1_1?crid=1N4EU1QPEXU98&keywords=The+long+good+buy&qid=1676055224&sprefix=the+long+good+buy%2Caps%2C145&sr=8-1

If you want to get more technical on markets, this is the best intro I know: https://www.amazon.com/Strategic-Risk-Management-Designing-Portfolios/dp/1119773911/ref=sr_1_1?crid=2SH6ND0ORX7GX&keywords=strategic+risk+management&qid=1676055292&sprefix=strategic+risk+mangemen%2Caps%2C148&sr=8-1

Right now I am reading a lot of papers by this guy at the BIS. I am trying to build more of an understanding of international capital flows because when sovereign defaults happen, you want to be ready for their impact: https://www.bis.org/author/claudio_borio.htm?publs_list=b2JqaWQ9cHVibHNfbGlzdCZwYWdlPTEmcGFnaW5nX2xlbmd0aD0xMCZzb3J0X2xpc3Q9ZGF0ZV9kZXNjJnRoZW1lPXNpbXBsZSZtbD1mYWxzZSZtbHVybD0mZW1wdHlsaXN0dGV4dD0mYmY9YXV0aG9ycyUzRDcyJnZpZXc9c2hvd19wdWJsX3R5cGUlM0R0cnVl

Thanks for reading!