2021 Letter to Subscribers

31 gru 2021

What’s up traders!

As we close out 2021 I wanted to write a letter to my subscribers to recap the year of 2021 and put forth my ideas for 2022. I hope everyone had a great year and wish everyone a Happy New Year!

I would first like to thank everyone reading this. Via Tradingview, Discord, or Youtube you have found this humble trader that just wants to share ideas and experience in hopes that other traders’ journeys will be successful. I appreciate everyone that has joined the conversation to share ideas. I set out to create a trading community free of scams and full of actionable ideas. In the little under a year since I started the Discord it has grown incrementally and comfortably (rather than exponentially and chaotically). I would count this as a chief success of 2021 and once again thanks to all that made it possible!

2021 Portfolio Performance (yours and mine)

2021 was a bullish year for literally “All The Things.” I came out of the year positive and my hope is that everyone else did as well. Just as the New Year is a time for making fitness resolutions… make your trading plan resolutions.

Don’t compare yourself to a benchmark. Measure your progress in terms of how you followed rules, controlled emotions, and sought opportunity. Believe it or not, if you are a new trader and came out positive net of commissions you have achieved the first milestone on the path to consistent success. Your next step is to widen that gap of profitability. Go back and look at all of your trades or at least your biggest winners and biggest losers. Figure out what you are doing right and wrong. Do more of what works and less of what doesn’t. It can actually be just that simple.

If you did not come out profitable then wtf did you do? Before you jump into 2022 it behooves you to go back through your trades (or at least your biggest losses) and figure out what went wrong. Create an IRON rule for 2022, phrased in a single sentence, and post it with tape to your trading computer monitor.

Cryptocurrencies

2021 was a great year in cryptocurrencies. Many expected Bitcoin to reach six figures, Ethereum to be over 9000, and Shiba to hit 1 cent before EOY. These price anchors did not pan out for them. That does not mean that hope has been dashed for all budding crypto billionaires. Twitter abounds with bullish projections and Stock-to-Flow Model revisions that assure readers this is a brief pause. There is still plenty of hopium being smoked.

My analysis is much more simple and has remained in effect since mid November. Price should have broken out Q4 with strength and momentum to go higher. It did not. My position remains net short following the failed breakout. This means I am overhedged to the downside on the primary coins I like; Bitcoin, Ethereum, and Monero. If these break their all time highs with a good solid Weekly close then I am wrong. If I am correct that the top for this crypto cycle is in and a bearish trend has begun then 2022 is going to be a painful year for HODLers.

I will expect the bearish trend to go on through 2022 and possibly into 2024 with a long term target of 17k Bitcoin which represents a conservative -75% drawdown from the All Time High. This would be the 5th such move in Bitcoin’s history. Crypto as an asset class is highly correlated and I would expect nearly every coin to have a similar trajectory but Bitcoin to actually be the least volatile. Historically it has proven to be the “safe haven” cryptocurrency asset of bearish cycles. I would expect there to be bullish rallies throughout the trend but none recapturing the All Time High in 2022.

Psychologically to get someone to buy Bitcoin at 69k they need to promise themselves they will see far higher than 100k. That is why anchors are a fallacy of trading. You also need a whole fresh set of investors lacking all hesitation and memory of drawdowns to continue the move. Through 2020 and 2021 everyone, their aunt, and their grandmother knew about cryptocurrency. Who is left? Latin American countries I am told. Is it such a good idea to tell citizens already in some of the poorest of circumstances to put what meager wealth they have into an asset with a history of no less than 4 drawdowns of over -80%? Rhetorical.

When Bitcoin is once again (for the upteenth time) called dead, when it is no longer seen as “the future of money”, when everyone and their grandmother is frustrated they only lost money, and when optimism has completely given way to disgust… then Bitcoin can bottom. I’ve seen it time and time again.

Stock Market

Fun fact: 2021 is the first and only year in history for the SPX (S&P 500 Index) to post a new ATH every month. (1995, 2014, and 2017 missed with only 11 ATH months). I did the check myself in a spreadsheet this week to write my letter before it was published by any FinNews sources.

Asked by a friend in December 2020 if I thought 2021 the stock market would go up in 2021 I said, “I am betting that 2021 will close higher than 2020.” My friend seemed dumbfounded by the audacity of this claim but I simply cited statistics in favor of this view. It was highly unlikely that we would see a bear market in 2021.

Statistics

Human nature has a tendency to overweight recent events in decision making so I do not fault the untrained observer for assuming a “double crash” was going to happen. The COVID crash was a once-per-decade crash of greater than -30%. Just because the “reason” was a global pandemic does not make it an outlier. Such an event was actually 2 years overdue post 2008. What that means is that statistically we should not see such a crash happen again for many years.

Another statistic had to do with politics. 2021 would be a post-election year where the President and both houses of Congress were unified. When this has happened in history it was strongly bullish for the stock market. 2021 reminded me of the trading year of 2017. Both had price action up-and-to-the-right with statistically expected average of 3 -5% corrections through the year. That is what ended up happening.

A statistic that was wrong in 2021 was the “January Barometer” which I posted about when the first month of the year closed negative. This is statistically bearish for the following year but in 2021’s case it fell outside the higher probability.

Statistics are just probabilities. There are no guarantees but they are useful to filter out the useless unsubstantiated FUD (Fear, Uncertainty, and Doubt) that is published by the financial media on a daily basis.

FUD

I have been extremely critical of social media personalities that draw a huge following feeding into FUD (Fear, Uncertainty, and Doubt). Early in the year I counseled someone against liquidating their portfolio based on the recommendations of a religious leader that forecasted total economic collapse. Opportunities to help guide people away from bad ideas such as that are the raison d'etre for my public speaking.

That being said, now that we have had a record-breaking year, cyclicality favors 2022 having some significant event. Trading strategies and systems come and go. How people get used to trading the market changes. When traders do not adapt to new market conditions and continue trading in the same way they often give back all their gains and more.

What I think is most likely is a strong beginning of the year. At some point the 50% chance of a -10% to -20% event will catch up to the market. From my gut feeling and experience (non statistical reasoning) I would speculate this event may occur in January/February or August/September. That event would kill the elated optimism which will trigger a range bound year. I think that 2022 will still close higher than 2021 but it will be less fun for trend traders.

Meme/Theme Stocks

I was able to catch wind of the “most shorted squeeze” as it was happening and profit from the calamity in January. I did not trade GME and AMC directly but saw another example of the adage “the market can remain irrational longer than you can remain insolvent.” I coined my own interpretation of the WallStreetBets effect, “never underestimate profitzied autism.”

During this period I tried hard to find ways to short the hype. Shorting shares was what got hedge funds into the mess. Buying Puts did not make money because IV was too inflated. I never centered on a strategy I liked to profit from the highly predictable crash. The money is made on the upside if you can engage your “risk on” behavior early enough.

Every year has its meme. “Most shorted” was 2021’s meme and it came early. 2020 had EV stocks. In 2018 was “Blockchain.” Before that was marijuana stocks. Be aware of the themes and memes going on because there will be a lot of money to be made on the hype. 2022 will likely have its own theme. Try to identify it as early as possible. Unfortunately that means being aware of social media buzz and occasionally reading the highly emotional WallStreetBets. Just remember, “if you gaze into the abyss, the abyss gazes also into you.”

Oil

Back in April 2021 the price of Oil “went negative” in the futures market. At the time this trade seemed obvious. Oil is energy and nowhere in nature is energy free much less is one paid to take it. I had to be long.

That’s not to say the trade was without doubt. I used USO as a vehicle to express this trade. During the chaos of the futures market going negative it was widely reported that USO as an ETF may collapse and stop trading. I remember for a week being inundated with negative news articles about how retail investors using it as a vehicle were stupid. My broker even called me prior to the reverse split to encourage me to close out my options before they would be converted to non-standard options. It was almost as if external forces were testing my resolve. I could take no other action but to hold my trade. It was one of my big wins of the year. It also taught me a lesson about holding conviction.

I am bullish neutral on the price of oil for 2022. Oil is a forward looking commodity that is sensitive to economic speculation. If the economy is strong it needs more and more energy to run. The price of oil is pricing in a good future economy. Some efforts are being made by governments to go Green but we are not going to become a full zero-fossil fuel world economy in 2022 or 2023 so demand will continue to increase. The price now is well above breakeven for most of the world’s producers so supply will keep up.

Real Estate

Back in 2020 as I sat around a cookout with a group of lockdown defying friends many of them shared the desire to “finally pick up cheap houses.” Many people saw this economic event as the catalyst everyone had been waiting for since 2008 to buy houses at a discount. At the time I told them, “the fact that you are eager to buy houses means that there is demand. A true crash is definitely the lack of demand.”

There was no crash and still has not been one. People are still waiting. People are still “short term renting.” There is still a lot of pent up demand. I expect any significant correction in real estate to be bought up by desperate home buyers that could have been waiting years to own their home.

I am still seeking investment properties in 2022. I tried to pick up a Zillow held house recently but found despite their corporate losses and write downs they are still well capitalized enough to refuse low ball offers. The institutional money that has been investing in houses is well aware of historic real estate trends. If you can buy and service your debt long enough (even if it takes a decade) your real estate value will come back. It would behoove everyone hesitant to buy at “these prices” to remember this.

Inflation, The Dollar, and The Fed

I find it funny when people opine, “so much time has passed!” Time passing is literally one of the most predictable things in the universe. Inflation is another predictable thing. Inflation is a known known but the rate of it is a known unknown. I can understand people being afraid of hyperinflation but early in 2021 the thesis “The Dollar is going to zero” was and is extreme. It was more of a rallying cry to put dollars into cryptocurrency than a well founded investment thesis.

If you want to see some ultra-modern hyperinflation, bring up a chart of USDTRY (the Turkish Lira) which lost half its value during the last quarter of 2021. That is a very bad modern example for a currency of a moderately developed country. To see how the dollar is actually faring look at the DXY (the Dollar Index) and you’ll see that in 2021 it hit a support and rose. What that tells me is despite all the fears of hyperinflation other countries around the world still value and want the Dollar and it has not broken into a hyperinflationary trend.

A lot of traders are busy speculating what the Fed is going to do about bond purchases and interest rates. Many expect 2022 to be a year of tapering and rate hikes. Fundamentally I think these are good things. Like it in principle or not the Fed has the power to lift the economy with the tools at its disposal.

The “easy money” time we are in right now has created a lot of wealth in asset prices (paper or realized) no matter if you own stocks, real estate, or crypto. Employment is so good that we are seeing what is called “The Great Resignation” of people quitting jobs they hate and service industry employers struggling to find workers.

The Fed at some point has to scale back the tools so that they are available when we invariably hit another economic downturn. Otherwise the Fed would invent new tools as it did during the COVID crash since interest rates were low and it was already buying bonds. Not many people noticed the significance but what the Fed did then was entirely new. The Fed began buying corporate bond debt.

By a derivative the Fed propped up the price of stocks by buying publicly traded company corporate bonds. What that signaled is a new mandate of the Fed to support the stock market. I don’t agree with it in principle but it is the new reality. One of my favorite memes of the last few years was the NPC saying “The market is RIGGED but the Fed!” to which he is asked, “So you’re long the market, right?” It’s a funny meme because it’s apt.

Jerome Powell is not going to give me a personal call to tell me when and by how much he is changing policy. So I am not going to worry. If and when the Fed talks action I will expect the market to throw a fit in the short term and probably stop out some long trades that week but the overall trend of the stock market to continue. The Fed will act to prevent a major stock market crash. Let’s hope for our portfolio’s sake it works the next time.

Gold and Silver

On precious metals my theory is that despite all the awareness and concern about inflation the lack of performance on precious metals is due to a whole generation of younger investors being less keen on owning metal things and more keen on owning digital things. Ultimately gold and silver, like all assets, are worth what people are willing to pay. If people do not want an asset there is less demand. I would expect gold and silver to appreciate at just the rate of inflation over the next year.

The next crash?

Talking heads have been citing inflation as the catalyst for the next crash all year. The nature of crashes, Black Swans, is that they come from where no one is looking. That everyone is aware of and hedged against inflation and Fed policy makes it the least likely vector for a crash in my estimation. The nature of a crash is that panic comes out of some unexpected vector. "No one saw coming" the two formative crashes in my lifetime: 2008 and 2020. They came from major external world events that threatened the very economy we all live in and rely on.

As a trader you just need to be constantly ready for what the market is telling you and react. There will be plenty of opportunities for trading on the way down and investing on the way back up. Volatility will explode and the stock market will become a playground for options traders.

I should be more precise and say that a “correction” is more likely in 2022 which is defined as something between -10% and -20%. There likely will not be a “reason” except what the financial media generates as believable content ex post facto. Keep “dry powder” in your account, ignore the opinions of the media, and keep your emotions in check.

Methods and Opportunities

Do more of what works and less of what doesn’t. I will continue looking for themes throughout the year and technical setups every day. Opportunity can come at any time and from any market. I will continue to hone my technical analysis tools; Ichimoku, 50% Retracements, and Spikes and share what I find is valuable to the community. These have served me well and profitably in the past and I see no reason for the tendency of price action to cease respecting these methods. Not every trade will be a win but I will continue to improve my trade selection and share my experience on Tradingview and Discord for actionable opportunities. I encourage everyone to find methods that give them confidence in decision making and hone their skill through consistent application.

I look forward to doing this letter again next year to see what I got wrong and what I got right :D

TL;DR

Everything will probably be OK in 2022.

The SPY will close 2022 higher than 2021 but has a high probability of a -10% to -20% correction. Avoid being YOLO long at all points during the year and keep some dry powder ready.

Cryptocurrency has entered the bearish phase of its cycle. 2022 may present trading opportunities but not yet optimal investment entries.

I don’t really care what The Fed, whales, Michael Saylor, or Cathie Wood are doing. I am focused on my trading, finding opportunities, and helping other traders in 2022.