My Thoughts On The State Of The Markets
Spoiler alert: its tough out there
The markets have entered the strongest seasonal period of the year. However, it feels more like a bonfire than a Christmas party.
Under the hood, the Australian market has been particularly soft for weeks. Breakouts have been sold into, negative news keeps coming, short setups are working once more, and the market is stuffed with blocks and capital raises. The grind of the Banks and “Big Tech” stocks has kept the headline index chugging along to new all-time highs but we finally reversed at the start of the month. The sell-off has now started to accelerate.
This was not the end to the year many were hoping for.
I have found these recent conditions challenging. This sentiment seems common amongst trading colleagues and is well reflected in this tweet by my friend Nick Fabrio here.
No doubt I have taken my share of unlucky beats of late. The Australian market has been particularly frustrating. However, what is equally true is that in a bid to chase performance, I strayed from the very lane that has served me so well. I looked offshore and saw the feverish bull market conditions that US traders were experiencing. I thought we were set for more. With this belief, I superimposed all types of playbooks and overnight trades to replicate those settings. This inevitably opens you up to huge variances and situations you cannot control. Some examples include:
→ an IPO in DGT to play the “AI” theme. This turned out to be an overvalued FOMO index rebalance trap.
→Overnight momentum in beta names. These were all sharply sold into such as APX, NVX, SLX, and ZIP.
→Discretionary swing trades in Resources to play a China stimulus trade or a trade tariff theme. Antimony, Graphite, Rare earth, and Iron Ore all fizzled.
→Cap raises in speculative stocks which dropped the price on resumption.
These trades all led to deep losses.
To be clear, some of these were rational and planned. I have put these on in the past and made money. However, the reality is these trades need good markets and real money flowing in. They are extremely high variance and random. I was blind to the good luck in previous market cycles. This current regime remains very different from the giddy days of 2020 when you could do no wrong.
In a bid to make it back, I overtraded lower-quality intraday setups. The drawdown increased. The “keep gambling meme” did not hold.
So what are the big lessons from this experience?
The job of a trader is not to predict or forecast markets. Instead, it is to capitalise on your edge and what is in front of you.
You cannot control the opportunity set. US and Crypto markets are having their time in the sun. It is impossible to be across it all so accept your lane and timezone. FOMO compounds problems.
Earn the right to trade new playbooks and riskier strategies. Test, be small, and let the market give you feedback before extrapolating. Be quick to cut it all back if not working. Pick up on the subtle nuances and clues from the broader conditions as inputs for your strategies.
The market structure has changed. The outperformers have been index-related big-cap stocks. Accept this is not my trading sweet spot.
The corporate market
The health of the market can often be characterized by the returns from corporate actions. Unfortunately, it remains a graveyard out there.
Here are a few examples to better illustrate.
IPOs
The Digico IPO was heralded as the savior of the ASX capital markets. Led by the fund HMC which seemed invincible, the company raised approximately $1.6 billion at $5. It was the biggest float in years. The pitch was simple - the REIT is a diversified owner, operator and developer of data centers which are the engine room powering the global AI phenomenon. It came at a lofty multiple but would charge straight into multiple indices just like SIG and GYG. However, on Day 1, the stock broke the price and ended down 10%.
It remains almost 15% below the issue.
That is a lot of new money up in smoke.
Capital raises
The most recent capital raises include:
SBM raised $100m at 38c. Trading 30c last or -20% from the issue;
VUL raised $164m at $5.85. Trading $5.33 last or -8.5% from the issue;
NVX raised $52m at 62c (from a 96c previous close!!). Trading 64c last for a 7% win (but no stock for the common folk);
LRV raised $30m at 52c. Trading 45c last or -13.5% from the issue;
SVL raised $20m at 9.2c. Trading 7.8c last or -15% from the issue;
PAR raised $15m at 40c. Trading 37c last or -7.5% from the issue;
TTM raised $20m at 44c. Trading 34.5c last or -21% from the issue;
SPR briefly looked like a decent winner raising $220m at $1.32. It shot to $1.60 but is now trading at $1.27 after the stock came out or -3.5%.
This is the last window for companies to raise before the market shuts for holidays so there is an element of a cash grab. Nonetheless, holders are underwater in more names leading to continued negative sentiment.
Blocks
Some funds thought it would be a smart idea to buy 50% of founder Larry Diamond’s stake in ZIP (40m+ shares) at a measly 2% discount to the previous close at $3.35. The stock held for a whole two days before breaking sharply to $2.83 last for a -15% hit.
Another sell-down took place in high flyer PME at $256 for $500m. This is after the stock ran from $150 to $270 in 3 months! The new owners are only currently down 3.5% on this block. Time will tell.
IPOs are not holding, cap raises are dropping as soon as the stock comes out, and sell-downs in the strongest names are also breaking the price quickly. This is all the evidence you need of a fractured and weak underlying market.
It is these conditions when short-term traders need to bring it right back to basics. Reduce positions and focus on easy money playbooks. That is the strength of our business model. You don’t need to be in the market.
Winners and Losers from the year
A brief look at the winners and losers from this year in the ASX300 shows how pre-dominate the passive flow has been.
Winners:
It is mind-boggling to see some of the biggest percentage gains this year in Banks, REITs, Defensives and Healthcare. These stocks have market caps over $ 20bln yet are trading like momentum junkies.
“Tech” has been the other beneficiary most notably ZIP, NXL, 360, and TNE.
Losers:
The losers have been a complete sector rotation switch. Indeed, Resources and Biotech have been sold aggressively. Unfortunately, these are the speculative sectors that we traders thrive on!
What’s Next?
It doesn’t do you any good to wallow in self-pity.
Tough markets, bad beats, and mistakes are always going to happen. The only solution I have ever known is to accept conditions, cut back, and realign with underlying strengths once more.
The same tough market conditions also produced the following intraday trades this month:
ILU
10% sell-off open to close on the rare earths update
VNT
22% sell-off open to close on the ACCC investigation
DTL
6% sell-off open to close on changes to Microsoft rebate arrangements
MSB
27% rally open to close on FDA drug approval.
Big catalysts. Simple structures. The same repeatable patterns for the intraday trader. You just had to do the work and put yourself in the right mental and physical position to capitalise.
After these recent experiences, here are some steps I am taking:
Treat these financial losses as an emotional force- often the best way to get through painful experiences is to let it out and seek support. Vent. Write. Talk to colleagues. This all enables a grieving and then healing process. Use the emotional force of the experience to never go back to this place.
Let losses be lessons - you can't move forward unless you have dealt with the underlying problem. Rip every variable apart and question your decision-making without hindsight bias. Internalise clear failures. Then build new solutions.
Break then get back to basics and strengths - rebuilding confidence comes from executing one good trade and getting green. Identify the best practices for when you trade the best and the plays where you make money. Cut out the variance with overnights that you cannot control.
Realize there will always be opportunities - the examples above in December clearly illustrate that there are always great intraday trades during my timezone that fit my edge and skills. I just need to be patient. Who cares if bitcoin hits $100k. Who cares what US traders are posting on Twitter? All that matters is what is in front of me and how I execute. When I get envious, I drift from the lane that serves me so well.
Final Thoughts
It may feel tough out there, but that is the cyclical nature of the business.
The beauty of the intraday trading model is that you do not have to be in the market. You can sit it out. Soft market conditions may lead to great short opportunities. It may also lead to capitulation events. No one knows. All you can control is defining clear playbooks that have an edge rather than recklessly punting. I have learned my lesson and I am back in my lane.
What are your recent experiences?