All posts by T3 Live
Assume the Crash Position
There’s an old Wall St. legend that Joseph Kennedy Sr. kept the family fortune that he amassed from bootlegging by getting out of stocks just before the 1929 crash. His opportune timing was the result of his astute observation that even his shoe shine boy was giving him stock tips. Kennedy reasoned that if even the most uninformed shoe shine boy was levering up in stocks, there was literally no one left to buy stocks. I was reminded of that legend last week standing in line at the bank. There was an octogenarian at the only open teller, and I was next in line. While patience is the only virtue I possess naturally, and abundantly so, even my heroic levels of patience wore thin as I waited for this elderly gentlemen to figure out how to use the card reader to allow the teller to access his account. He was completely oblivious to the line forming behind him as he recounted his stories from opening up his first bank account in the 1970’s while the teller came out from behind the booth to operate the card reader for the old man. His stories went on, and he divulged many details about his financial life as the line grew longer behind me. He was there to transfer money from his RMD, the required minimum distribution, from his IRA. He was heavily in stocks and quite excited about all his gains that allowed him to now consume in his retirement. He struck me as someone whose enthusiasm for the stock market was far greater than his aptitude in operating in the stock market. This was my shoe shine boy moment. I saw embodied in this old man the spirit of a hapless shoeshine boy whose entire fortune is resting on hopes of a greater fool to come along and buy his stock from him at a higher price. This was the moment my bearish inclination hardened into a firm resolve to short this market. The market breadth has been bothering me for some time, and I’ve been in about 75% cash for a while, but this short setup is too perfect to pass up so I’m reflecting my increased bearishness by shorting. I’ve been laying out my bearish case for over a month. Nothing I’ve seen has changed my mind, and it remains this: I think the 2026 market looks awfully similar to the 1987 and 1929 stock market crashes. We saw a summer rally, a break in late August, and now we are in the rally back up to the break level. All that remains is a failure to recapture the breakdown level, and then an October crash would complete the template. The signal I’ve been waiting for occurred Wednesday this week. The signal I wanted was a follow through day to the down side after a failure at the breakdown level. Tuesday, the Dow Jones Industrial Average got rejected at the $53K level on bank earnings. Wednesday is what I’m considering the follow through day. I’ve got a low risk stop right above the 50 day moving average which is 2% higher. A good crash could see a 20% down move so this risk to reward setup is too good to pass up. Here’s a pro tip, if you ever get a 10:1 odds payout, you take that trade every single time. I win on only 60% of my trades, so there’s a 40% chance I get stopped out of this trade at a loss. I’ve accepted the terms of the trade, and I’ll live with the consequences. This is a trade I like because I think I’ve got an edge here. That edge is my knowledge of historical precedent for a crash. I like to read old newspapers from the 1929 era to get a feel for the zeitgeist. Recently I’ve been reading the Financial Chronicle. One thing that stands out is how commonly accepted was the inevitability of a crash due to all the speculative excess that was occurring for two years leading up to the top. Back then, as will be this time, blame was placed on the Fed’s easy money policies. Back then, it was understood that the Fed’s credit creation was leading to all manner of unprofitable business venture that served no purpose (read the Oct 26, 1929 edition of the Financial Chronicle). Today we have crypto currencies, and there is untold amounts of time, talent, and treasure poured into this enterprise of dubious value. Nothing has changed in a century since the last big crash or since the South Sea collapse three centuries ago. Human nature remains the same today as it has been throughout all human history. We tend to over estimate the benefits of the future and look for ways to get rich quickly. This is what allows bubbles to form. Like all bubbles, this one too must eventually pop, and my view is that this one’s time has come. Of course the pundits will blame speculators when this bubble pops. But of course it’s not us speculators that cause the bubble. It’s policy makers that create the incentives for bubbles to inflate. This time around, with the Internet, there will be a permanent record (until it eventually gets scrubbed) of all the warnings since 2012 made by market participants that policy makers were setting us up for some terrible bubble to form that would eventually succumb to market forces and pop. The pin that pops this bubble could be a foreign central bank move. Either the Bank of Japan or the People’s Bank of China are likely culprits. The pin could also be an Anthropic IPO. This would suck up massive amounts of speculative capital and unleash tons of new shares into the market. The AI trade in general looks vulnerable with a topping pattern in the SMH. It looks like a double top to me. The last top at $630 also has an island with three days of isolated
Continue Reading -->Brace for Impact
I’ve been trying to catch the bottom in TLT and the top in rates since March. Thrice I’ve thought I’ve seen a bottom, bought, and have gotten stopped out for a loss with the third attempt occurring this week at $77 on the TLT. Rates should have spiked out in the last Fed meeting and be sinking back towards 3.75% by now, and the market should be breathing a sigh of relief. Instead, rates on the 10yr remain “bid”, and the 2-10 yield curve is re-steepening. This is a pretty wicked bear steepener at a moment when we should be seeing a bull steepener where the short end falls as the business cycle enters into the contraction phase. The facts that Warsh raised at the last meeting and that there is talk of another hike this month are alarming. I’m not saying the Fed is doing anything wrong, as I think they really just follow the bond market where it wants to take rates rather than set rates themselves (which is the way it should be in a free market system), but the fact that they keep seeing a need to hike means that the natural path for rates is higher even at these elevated levels. The dollar agrees with rates as its uptrend remains firm. Every penny above $101 on the DXY is pulling demand from financial assets like stocks and broadcasting the slowing velocity of dollars in the real economy. While the real economy is not in as terrible of shape as people feel, the financial economy is in a far more dire situation than prices would suggest. Stocks are far too expensive for any real capital allocators to step up and bid even if we get a 20% correction. I think the odds of an October crash are increasing with every tick higher in the 10yr yield. In real life, it’s irresponsible to yell “fire” in a crowded theater, but when my irreplaceable capital is on the line, my policy is to panic first and ask questions later. I can always chase stocks higher if I need to. There will be wave after wave of sectors and stocks in those sectors that setup and breakout if this spurt higher in the S&P and the NDX has legs and the market gets away from me while I’m in 75% cash. I’m wondering now if even that much cash is too little… Policy makers have staved off a normal correction at every turn since 2012. Capital allocators have never forgotten, and prices seem to have a memory as well; the SPX tagged its 2014 highs in the March 2020 spike down as a form of declaration that the move from those levels has significance. Like water in a container after a perturbance, stock prices will want to level out at a natural equilibrium, but we have no idea where that is after a decade of central planning. I’ve been waiting for a rally back to $53,000 in the DJI for a chance to short, but now I’m wondering if I’ll get that chance at all. The way I thought this story of a market top would play out is a nice looking, although unhealthy breakout in the SPX and NDX and a bounce in the DJI and RUT near their 200 day moving averages; all being the result of a normal bounce in the US Treasury bond long end as rates peaked then sank lower. There still may be a chance it plays out that way, but the TLT would have to bounce hard in the up coming week. We’d want to see the bonds rally as SPX falls as that would indicate a normal end of a cycle and maybe a 20-30% drop in stocks (which wouldn’t alleviate the expensiveness of stocks, but prices of all things may never get back to pre 2020 levels). I was expecting that level of correction to happen pretty quickly in October which would give it a “crash” feeling. But if rates keep going higher, and assuming I’m correct in my view that stocks reset lower this month, it means we have something else on our hands entirely. There are exactly zero market participants that have a working memory of trading through a market when both stocks and bond are declining. That’s the scenario we could have in front of us if the TLT doesn’t start reversing hard this week. The last time stocks and bonds declined in unison was in the 1970’s, and to viscerally remember the experience of trading through that, a trader would have had to have been in his 30’s then, which would make him in his late 80’s now. We don’t have any 86 year old traders now that Buffett is retired. The only source of knowledge we have on that period in market history has to come from books. Buffett’s annual letters are the only source I’ve read on the topic, and it doesn’t sound like an environment in which traders conditioned to a decade of central bank intervention could thrive. We are all products of the environment in which we grow, and while it is possible for a skilled trader to adapt to a new market environment, the unfortunate reality is that a bull market makes many traders more successful but undisciplined. I’ve known traders that came of age in the bull market in the late 90’s and got rich. They were professional traders that made it through the .com burst and kept winning into the 2008 burst, but they struggled to adapt to the QE era starting in 2012. Some of those guys were amazing traders, pushed through their obstacles and are still winning consistently in the market today. One saw even more success in 2021 than he ever had in decades of successful trading and retired from full time trading with a massive account in the 8 figures. These guys are proof that we can adapt and thrive in any market environment.
Continue Reading -->Desperation for Dollars and Liquidity
The Nasdaq 100 has gone nowhere for 4 months. Trillions in market cap is simply treading water. The price weighted Dow Jones Industrial Average has been declining for 2 months. Its two largest components are GS and CAT at $900 and $800 respectively. Both topped out over two months ago. The next largest component, MSFT, is a $500 stock, and it put in a 52 week high almost a year ago with a double top completed in Oct, 2025. While the SPX and NDX are near highs, the number of stocks making new 52 week highs is sinking lower with every rally in the averages. The number of new 52 week lows is expanding with every impulse higher in the averages. This is an unhealthy market. Insiders in many of the stocks I follow have been selling their shares all year while they use shareholder equity to do share buy backs of the very same shares they themselves are selling out of their personal holdings. The insiders know what their stocks are worth, and they are voting with their own money. Valuations of stocks in every single sector are far in excess of the average earnings power an owner of those shares can expect to receive over 15 or more years. This is an expensive market. It’s the banking sector that is most troubling from a valuation perspective. As the rate on the 10yr US Treasury Bond rises, the assets that sit on the regional banks’ balance sheets deteriorate in value. In the depths of the SVB crisis in 3Q 2023, regional banks were holding unrealized losses of $675B on their books vs $2T of equity capital. Rates are now higher than they were then. We changed accounting rules for “held to maturity” assets then so we could pretend our banking sector was solvent, and we must continue to pretend now even though their assets are presumably worth even less than during the SVB crisis. We’ll have to wait another month to get the total unrealized losses sitting on regional banks’ balance sheets after this most recent rise in rates. The potential exists that one third of our banking system’s equity is impaired in long duration assets they can’t sell from their books. This is exactly what happened in the S&L crisis in the 1980’s. The savings & loans went bust, and the banking system created the collateralized debt obligation security market to package up all the low interest rate loans no one wanted to buy in a high rate environment. We later realized this was in part the origin of the 2008 GFC, as the CDO market went into overdrive by the early 2000’s. This time however, the impaired assets aren’t held by a niche corner of the banking system. The impaired assets make up a major portion of all regional banks’ balance sheets. The stock market seems to be in a state of suspended animation. The SPX and NDX seem like they want to breakout higher. The DJIA, DJT, DJU, and RUT aren’t in a mood to follow. The market needs a catalyst to move in either direction. I think there’s only one bullish catalyst that could propel the market higher: an end to the Iran situation and a resumption of trade relations with China. There are rumors leaking out now that indicate we could see that, but even if that news does come out soon, the market should look right past that to post midterms when the conflict is almost sure to resume. Any rally on Iran or China news should bring the DJIA back up to the $53K level I’ve been watching to short. In fact, I’m counting on a rally in the next couple weeks to test out my theory on an October crash. A failure for the DJIA to trade above $53,700 before Halloween makes a crash a high probability event by my analysis. While there’s plenty to dislike in this market, there’s three interrelated forces I see driving the current environment. The stock market is being ruled by a triumvirate of higher rates, a higher dollar, and lower liquidity. Rates are going higher across the developed world. Only China is not seeing rate increases. The most common explanation for the higher rates is that global growth is picking up, but I can’t see any indication of that accelerating growth in the stocks that should be benefiting from growth. The growth explanation to rising rates floats like a lead balloon. The real reason rates are going higher is simple: asset holders are selling their bonds to raise the much needed dollars to keep up with rising borrowing costs. As the DXY rises above $101, we are witnessing the scarcity of dollars in real time. Every penny above $101 is another tranche of demand pull away from financial assets. A plethora of dollars means lots of potential demand for financial assets that can go into stocks and support prices. A scarcity of dollars implies the opposite. Without the willingness to freely supply dollars, liquidity in the financial system is drained, and asset prices are vulnerable. No asset is more vulnerable than an absurdly expensive stock market that has to compete with short term US debt for income. Long term holders of stocks are sitting on massive gains. They’re eyeing the real rates they can get by switching into bonds now. Real rates are over 2% now and increasing. Due to these higher real rates, bonds are acting as competition for increasingly scarce dollars that need a home. Gold is sinking as real rates rise. Gold is showing us the future path for stocks unless policy makers respond with liquidity creation soon. I’ve always followed the gold signal, and right now, gold is telling me there is a deflationary event on the horizon. It’s been my view for some time that the deflationary event is the end of the current business cycle. The business cycle is obviously entering into the contraction phase, but Warsh
Continue Reading -->Bull or Bear? Pick a Side and Fight
Have you ever wondered why we refer to the daily battle of buying and selling that takes place on Wall Street as the bulls vs. the bears? I think it has to do with the nature of each beast’s relationship to man. A bull sees its target, puts its head down and horns up, and charges ahead no matter what obstacle is in its way. A bull doesn’t stop until it either kills or is killed by the matador. A bear spends much of its time in hibernation and hiding, and it only makes its presence known at the moment of attack. A bear keeps away until a victim enters its territory. In trading we’ve got to take the same approach as these two beasts. If we do the work and determine that we should be bullish, we’ve got to charge ahead on the long side and disregard obstacles. If you’ve ever been long a stock that was charging higher, you know how great the temptation can be to sell early and lock in profit to make sure it doesn’t slip away. Ignoring the negatives in a real bull trend higher is a difficult skill to attain, and perhaps the best we can do is try to hold on a little longer each time we’re in one. In the same vein, if we do the work and determine the appropriate stance is bearish, we’ve got to wait for the market to come into the area we want, then attack and leave. Bulls charge relentlessly, and bears maul swiftly. This is the proper way we should think about our own trading. Each one of us has to determine for ourselves whether we are bullish or bearish. There’s much work that goes into that conclusion, but once we’ve chosen a side, we must use our capital to fight. As for myself, I’ve determined that the appropriate stance for my irreplaceable capital is on the bear side. I’m in 75% cash and waiting for a spot to short. I’m waiting for price to come into the area I want, about $53,000 on the Dow Jones Industrial Average, and then like a bear, I’ll attack. The market is leaning bullish now with the SPX and NDX breaking higher so the DJIA could get nearer the $53K level in the last weeks of September or by the first couple of weeks in October. I’m looking to short the DJIA ETF, the DIA, at around $530 with a tight stop above $537.75 which is the high for September. Above $540 on the DIA and I’ll flip to bullish and scramble to get long something. I’ve also incorporated a time stop into my trade plan: if stocks haven’t started to decline by Halloween, I’ll abandon the bear side for the rest of the year. I’m not going to hold on to a losing position just because I’ve done a thorough analysis and decided I’m bearish. DIA Trade Plan: But what exactly are the facts that give me a reason to be bearish? Merely being “concerned” about stocks’ advance is not a rigorous analysis. Professional speculation requires real analytical work, especially when trying to pinpoint a bull to bear turn. I’ve done the work that leads me to the conclusion that there’s a near picture perfect analog to the 1929 and 1987 crashes. I’ve kept a checklist of signs to indicate when the turn in the business cycle is approaching, and I’ve been keeping an eye out for the anecdotal evidence I remember from the 2008 crash like constant road construction as municipalities rush to spend the record high tax revenues from a previously booming economy and signs of excess like the Hummer EV, which is a nearly exact replica of the sign of excess of the Hummer H2 I saw in the housing boom leading up to the 2008 crash. But a proper analysis requires more than just anecdotal evidence to be taken seriously. So I’ll present my bear case here for anyone to pick apart. Below is a video showing my analysis of the 1929 and 1987 crashes and how they resemble the current market in 2026. 1929 and 1987 Comparison to 2026 video: In addition to the historical October crash analogs, I see further evidence that we are in the early stage of a bear market when I look outside the popular stocks. Aside from several mega cap technology stocks, the underlying market health has been deteriorating for some time. The transports and utility stocks are not confirming any of the bullish narrative. On the contrary, they are looking more like tops. I’ve never seen a bull market in stocks work out with the transports and utilities in a compromised price structure like they currently exhibit. DJT: DJU: The housing stocks are also showing stress. Housing is a major driver of consumer spending which is 70% of our economy. With Warsh’s latest rate increase, I don’t see how housing will pick up without a major move lower in house prices. Neither higher rates or lower prices are going to be supportive of higher economic activity in the short run. XHB: Warsh’s latest rate hike also reminds me of 1987. Alan Greenspan was selected as the new Fed Chair in August of 1987. He thought that business activity was too hot and consumer prices were about to skyrocket so he took rates from 6.5% in August to 8% by October 1987. The rate hikes proved too difficult for the bull market to charge through. The rate hikes were the banderillas thrust into that bull market’s back to wound it, and Treasury Secretary James Baker’s October 18th remarks that he would tolerate a much weaker dollar in response to the Bundesbank’s rate hike was the estocada, the fatal blow delivered to the bull market. Stocks crashed the next day. So far, Warsh’s tenor as Fed Chair is a great analog to Greenspan’s just before the 1987 crash. Aiding my bearish stance is the fact that we’ve
Continue Reading -->Bottom-Up Roadmap for Stocks Over the Next 6-9 Months
Every trader, in order to be successful, must have some systematic process for identifying, entering, and exiting trades. Each trader’s specific process is going to be unique to their own experiences and beliefs. My own process has been developed over almost 20 years in markets, first as a hobby while I was a telephone salesman in a cubicle for a big tech company, next as a trader on a prop desk, then as a professional equity portfolio manager for a small RIA, and lastly as a refinement when I completed the CFA exam. Because I operated in both the trading and investing worlds, my process is a combined approach that incorporates both fundamentals and technicals. Similarly, I combine both a top-down and bottom-up approach to asset, sector, and individual stock selection. In previous posts I’ve explained my top-down reasoning why my view continues to be that we are in the contraction phase of the business cycle. This week I’ll present what my bottom-up analysis reveals to us as we try to anticipate price movements in the stock market over the next few quarters into 2027. As opposed to a top-down approach which starts from trends and works down more granularly to individual stocks, a bottom-up approach starts with individual stocks and works up to extrapolate larger themes. A bottom-up approach is a wonderful antidote for the narrative heavy environment in which we currently find ourselves. An analysis of individual stocks often reveals that a popular narrative is not gaining traction in the stocks that should be strong if the narrative were true. As a naturally born contrarian, I’m skeptical of any popularly accepted narrative, and I rely heavily on scrolling through thousands of charts a week to verify that the prevailing narrative is being validated by price. Thankfully, we don’t have to go over thousands of stocks to get a workable roadmap for how to deal with this market into 4Q 2026 and early 2027. A smaller sample of stocks is enough so I’ll keep my bottom-up analysis contained to a manageable list of sectors and stocks in this week’s post. I’ve taken the leading stocks in the sectors that are most crucial to the US business cycle at the moment: semi-conductors, transports, industrials, utilities, chemicals, and basic materials. The industrial sector contains seven sub industry groups: aerospace, automotive, construction, distribution, electrical equipment, building products, and machinery. I’m focusing on just the leading stocks in these sectors because I think they are a full representation of the most influential narrative in the stock market today: the AI buildout. I want to analyze the individual stocks in these sectors to discover any clues they might tell us about the future path of the AI buildout, which will dictate the path of the US business cycle, which will ultimately influence stock prices. We start at the bottom and work our way up to get to our goal: anticipating the movement of stock prices. The sectors and stocks we’ll analyze seem like a lot of material to digest, but I’ve distilled the information down to a basic form that is easy to absorb in a short amount of time. It’s a useful exercise for anyone risking their capital in the stock market. These are the stocks we’ll be analyzing in each sector; semi-conductor: ADI, AVGO, MRVL, MU, QCOM, TSM, and TXN; transports: UNP, NSC, CSX, JBHT, ODFL, DAL, and UAL; industrials: aerospace: GE, RTX, BA, LMT, GD, HWM, TDG, LHX, and NOC; auto parts: MGA, BWA, and MOD; construction: PWR and FIX; distribution: URI, GWW, and FAST; electrical equipment: ETN, VRT, and EMR; building products: TT and JCI; and machinery: CAT, DE, PH, ITW, CMI; utilities: SO, NEE, and DUK; chemicals: APD, DOW, LYB, SHW, ECL, PPG, and DD; and basic materials: BHP, RIO, FCX and NEM. I’ll begin on the fundamental side and analyze the valuations and end with a video on the technical side to show what I think the price and volume structures are warning us about. The only goal I have when analyzing fundamentals is to answer the question “do I want to own this stock?” That means I like to think as a business owner would if he was considering pouring all his family’s capital and his life’s energy into a business. I like to take the 15 year average of pretax income as a rough estimate of what the company would be able to earn on average over a business cycle, in other words, its earnings power. If the market cap of equity is 10 times the average earnings power, I know that stock is probably below fair value. If 10x is below fair value, 20 times the average 15 year earnings power is about the top of the limit. 20x means there’s very little room left for good price appreciation from an ownership perspective. Stocks that trade this high are for rentals only, not ownership, as they are mainly earnings growth stories that can experience temporary, but powerful price movement in either direction. The market cap to earnings power ratio over this 15 year time frame is what I refer to as the PE15. I like to see lots of sectors with low PE15s because that means too few positive outcomes are priced in, and any good development will cause money to flow in. If enough sectors of the market have low PE15s, it means the market is attractive as a long term asset. Long term buyers are what create price trends that last. However, if the market is unattractive to long term money, I would not expect a new price trend higher to materialize in the next 6 to 9 months. The PE15’s for each group of stocks by sector and my assessment of the potential for a proper trend higher are listed below, but if you want to jump to the conclusion without any of the detail, here it is: with a couple exceptions in mainly chemical commodities, natural resources, and small auto
Continue Reading -->Any Trade With a Stop Is a Good Trade
There was one change that improved my profitability as a trader and had more impact on my account and my life than anything else I’ve ever done. That was my decision in 2022 to stop allowing negativity and pessimism to form my beliefs. Instead, I chose to constantly find something to be bullish about, get long, and let price show me when I was wrong. My initial foray into the stock market almost 20 years ago was not a profitable endeavor, partly due to the fact that my desire for wealth was greater than my skill in attaining it, but largely due to my persistent negative mindset. In retrospect, I can see now what I could not see then: my beliefs were not aligned with winning. I was reminded of my old habits recently while talking with friends who insisted their money troubles were due to “the system” being set up against them. I certainly won’t dismiss their valid concerns about the systematic devaluation of our money, but as I pointed out to them, gold has already compensated us for the risks inherent to our fiat currency system. While, in general, I sympathize with their feeling that the necessities of life are becoming less attainable due to “the system,” what I find far more problematic to their particular situation is a negative mindset, a belief that gaining wealth is impossible, which leads to behaviors that ensure that it is. Once you believe you can’t, you’ve ensured you’ll miss all the opportunities that prove the contrary. I recognized immediately my own former limiting beliefs in their expression of concern. When I believed the system was aligned against me, I traded like it. I took small wins out of fear the market would take them back. I allowed losers to take up long term residency on my position statement because I was certain with a little more time I would be proven correct. I was trading poorly, like someone with all manner of insecurities and unhelpful attitudes towards money and that views themselves a victim of forces beyond their control. Belief is a powerful force that can allow you to see the positive or limit your mind’s eye to only seeing the negatives life brings your way. For reasons I’m still trying to pin down in my middle aged years, my former beliefs in my youth had created a negative bias through which I viewed the world and my trading. With such a negative bias, I wasn’t able to see the market for what it is: an endless stream of opportunities waiting to be exploited and a means to a better life. The way out of this negative bias is simple but not easy; it comes down to a choice each of us, as traders, must make for ourselves. I had to make the choice to trust in my ability to consistently show up, wait for setups I recognize, get in without hesitation, and get out without regrets. Of course this approach required an immense amount of study and practice before I was able to deploy my approach at a large enough scale for professional speculation. My study included analyzing thousands of my trades over many years. The main takeaway from my analysis is this: stops keep my account in tact. I need my account near all time highs to aggressively allocate to whatever trend I find developing. There is only going to be one, maybe two big trends a year that I can take advantage of to pump my account to new levels. There will always be uncertainty as to exactly when a new trend is developing, but with stops, I can limit my risk of loss and try repeatedly to get into what I think is a developing trend. But what is the next trend? All my analysis leads me to conclude that the underlying forces that will create the next trend are building underneath the surface level of index prices we see on the tape. It’s still my view that we are in the contraction phase of the business cycle, and because of this, we should see economic and inflation pressure subside within the next three to six months. That should bring down the long end of the yield curve, but the market doesn’t agree with me right now. I’m not fighting it. I’m letting my analysis of price structure take me out of a losing trade with TLT. Was it a bad trade? Absolutely not. I followed my plan exactly, and I did it in the appropriate size, which has always been my weak spot. As long as I follow my process, I’m not going to get overly concerned about losses. New opportunities will come, and having the confidence to move aggressively when I see a setup I recognize is what will get me in a good trade. For TLT, I’m out with a small loss, but I’ll keep stalking this for a better setup to get long when the market is more agreeable to my view. My account is still within a stone’s throw of all time highs, and I plan on keeping it there. Until I take them out and spend them, the dollars in my account are simply ammunition in my armory that will be needed for battle. A big trend that will pump my account to a new level will come. That’s what the market promises, that prices will always move. When the forces align that move prices in a trend, that is the time to engage in battle. Until that time, I’ll defend my account with small skirmishes that are required to not take any more losing months this year. March was my only down month, and that was due to TLT as well. I’ve had to sell off my positions in fertilizer and energy stocks to offset my loss in TLT for September, but I’ve done so after concluding that locking in good gains is more important than positioning for me
Continue Reading -->Knowing When To Press Your Bets
Last week I laid out my case for a top in long rates on US Treasury Bonds. This week, I’m growing more confident that an important low in the price of US Bonds has been made. However, I’m still a fair weather fan, so I’ll be out in a heartbeat without remorse if my stops are hit. It’s been my view that we are in the contraction phase of the business cycle, and if that view is correct, we should see growth and inflation expectations start to come down for 2027. This shifting dynamic is what can finally put a bid under US Bonds. This is because there will always be demand for income. When I was running an equity portfolio for a small RIA shop, I had to stretch way out the risk curve far beyond where I was comfortable playing to get the portfolio yield just barely into the 3% figure. I was buying foreign telecom OTC equities to get there. This was during the financial repression of the QE era, and it was not a good time to be a dividend portfolio manager. Today, we are being offered higher yield, even above what I had to stretch for back then, in a money market. You can lock in way higher than that if you are willing to extend duration a decade or more. The TLT, my preferred way to play the top in yields, pays a monthly div of ¢33, about 4.7%. This may not look exciting compared to the gains you can get from a well placed equity trade, but believe me, 4.7% return with no risk is nothing to shake a stick at. The unfortunate reality is that at the moment, there is nothing more attractive than US Bonds for my irreplaceable capital. I’ve been in about 75% cash since March, 2026 when I peeled off the last of my gold miners I was willing to part with (I’ve still got my core position in the big 5 miners) so I’ve been looking for another core position in which to allocate. Stocks are just not attractive other than trades right now because they are all trading at about 20x pretax earnings across the board; no matter what sector you look at, every single stock worth owning trades at basically 20x what you can expect it to earn every year. The only exceptions are the oils like XOM and CVX which trade about 15x and my favorite fertilizer, NTR, which trades about 12x what I estimate is an average of earnings over a cycle. These names can still offer potential for reward with the small chance of an energy or grain price spike, but the risk is shifting to the downside as the Iran conflict seems to be nearing a conclusion, or at the very least, a de-escalation. Any way I analyze the attractiveness of stocks for ownership, I come up lacking any justification for anything other than renting specific names for a trade. In an environment like this, it’s best to just stick with the easy trade, and for me, TLT is the easiest one out there. If the lows of this week hold in TLT, then my focus will shift towards deciding where to add. Proper speculation requires only averaging up, never down. Stan Druckenmiller said the key to his success was forming a trade idea, putting on a position, then really stepping on the gas and levering up when his position started to work. I want to apply the same logic to TLT. The first step is seeing the TLT hold the lows of this week at about $81.75. The next step would be to see some strength above $83. A weekly close above $83 on strong volume would be some indication that it would be time to press on TLT with tight stops below $83. This TLT play feels a lot like my gold trade that won me the ability to trade for myself, but this time, I’m going to apply the lessons I learned from that campaign. I did almost everything wrong during that speculative campaign: I averaged down, didn’t have a trade plan, didn’t use stops, had no risk control, etc. The only thing that made the trade work out for me was size. I was 90% long in one sector because I was confident in my analysis. I used 8th grade math to plot the dollar value of US debt going back 50 years, and used an R-squared regression to get a y=mx+b equation. I plugged in the year 2030 for “b”, and got $45T for our debt. I then took the current portion of foreign held debt outstanding at 20%, and I asked, if even 1% of that dollar value shifts to gold, what would the supply and demand balance look like? It turns out, that at the time I performed this basic analysis in 2023, the new demand for gold would be 4.5 tons at the $2,000 price gold was then, and new supply would be only 2 tons by 2030. It was a no brainer, and the trade worked out. This time around, I’m going to still rely on my analysis that we’re in the contraction phase which means growth and inflation should be coming down, but I’m going to adhere to strict risk controls to put on my TLT allocation. Each time I see a higher low hold, I’ll treat that as a new tactical spot to buy stock to add to my strategic core position. Like Druck’s playbook, if the trade starts to work, then and only then will I add. The reason I can be so confident in my analysis that we are in the contraction phase, is because all the signs I’ve been looking for are appearing. I’m relying on signs to form a checklist approach to pinpointing the turn in the cycle rather than hard data points because a data-driven, statistical modeling approach is notoriously wrong at turning points. Modeling
Continue Reading -->Are You In The Biggest Trade In The USA?
There’s an aspect of human nature that makes us want money for nothing. Even the workaholics among us would gladly find more leisurely pursuits for their high-strung energy if the money rained down and into their coffers. Speculation is hard work, but many novices get into trading thinking all they’ve got to do is turn on the computer, open a brokerage account, and the money will come pouring in. If you’re reading this, you know that’s not how this works. As traders, if we want to make money, we’ve got to do the work and take risk. Taking risk is hard, because it makes you vulnerable to loss, but risk is a necessary part of reward. There is simply no way to earn a profit from the market without taking risk… Or is there? The concept of the “risk-free” rate always bugged me. They taught us this concept in university finance class, but I always thought it was a little bit bogus. It never made any sense to me that you could earn profit without any risk. I always felt the professors were neglecting to teach us about the real risks hidden in the risk-free rate. If you’ve gone through graduate or CFA level finance curriculum, or just used common sense, you’ll agree that my suspicion was correct. The truth is, even in the asset that we call risk-free there is still risk to your wealth if you own it. Of course I’m referring to US Treasury Bonds as the risk-free asset. When you buy a bond, you know exactly the return you will get if you hold it to maturity, so in that sense only is it a risk-free asset. The real risks you take on when you buy a bond are duration risk and reinvestment risk. If you buy a short term bond, there’s very little duration risk and some reinvestment risk, but with long bonds, there’s absolutely tons of duration risk. But for a trader, anytime you hear risk, you should think reward. There is no reward without risk, so when you hear risk-free, you should think “reward-free.” Short term US Bills are fairly risk-free, so that doesn’t interest me. However, the question I keep asking when trying to determine how to allocate my irreplaceable capital is: does the risk inherent in long duration US Treasury Bonds currently represent a great reward-to-risk setup? The best trades are the ones where the perceived risk is way higher than it actually is. Right now, we have a bit of a paradox occurring in the market: the supposedly risk-free asset is perceived to have the highest risk of any asset out there. Every conversation in the financial media is now centering around the riskiness of the risk-free asset, our debt. There’s too much of it is the oft repeated phrase. I agree, but the problem is, that was a concern for 2023. The time for worry has passed. Gold has doubled, and with that move from $2,000 to $4,700 (which I think will prove to be a short term top followed by a trip down to $3,825 before price moves much higher by 2028) we’ve already gone through the pricing in of a bad debt situation. Markets don’t price something in twice. We were already compensated for the risk of an out of control debt situation by owning gold since 2023. The debt level shouldn’t be traders’ focus any more, but interest rates should be. My view is that we are in the contraction phase of the business cycle, and if I’m correct, we should see long rates come down as they price in lower growth and lower inflation next year. This is where duration risk can become duration reward for a willing trader. The TLT has tons of duration. Being a 20+ year bond ETF, it has the longest duration of any of the heavily traded bond instruments. You’re getting paid for taking that duration risk as well. TLT pays a monthly dividend from the underlying bond coupon payments of 4.7%. That’s as close as you’re ever going to get to “money for nothing” in my opinion. But how can a money for nothing opportunity exist? It’s because too many market participants are on the same side of the trade now. Everybody is bearish on US bonds and thinks rates can only go higher. Even Lacy Hunt finally threw in the towel and said he’s bearish on bonds. Where was he in 2020 when rates on the 10yr were 0.4%? From my vantage point, that was the time to be bearish on bonds, not now when they are at 4.7%. We haven’t seen rates this high in a long time. When rates on the long bond were last here, it was October 2023, and the Fed had completed its first full rate hike cycle since 2008. Inflation was out of control because checks were getting sent to every American man, woman, and child. Nothing remotely similar to that is happening now, but virtually all market participants are of the mind that inflation is coming, and more money printing is about to commence. The liabilities of the US Government have no where to go but up, they say. I’m not sure whether that’s true or not, but what about the asset side of the balance sheet? No one ever talks about the assets that back up that debt. It would be like talking about the guy with $350K mortgage debt, without ever mentioning the house that backs it up. The debt is only one half of the equation; the other half is the assets. The USA holds vast resources that exist as part of the invisible asset side of the balance sheet. Those assets include both natural resources and our productive labor. The physical assets of our country are in need of some capex maintenance, to be sure, but a conscientious revamp of our country’s federal land use policy, fiscal policy, regulatory policy, interstates, water rights, and airports would
Continue Reading -->This Is What Market Intervention Looks Like
It was many years ago, I can’t remember where (maybe in Market Wizards?), when I read that trading an equity position is like surfing: you feel the wave form underneath you, stand up on your board, and go along for the ride, shifting your balance to stay on long enough for the wave to carry you to shore. I was impelled to believe in the veracity of this mental image because it presented an idea of what trading was that naturally appealed to me: a skill that could be learned by doing. There was something so wholesome about the idea that markets are organic, bound by unseen natural forces; that they conform to natural rhythms to which we can attune our senses and predict their ebb and flow and thus, that they can be capitalized upon by simply being in tune with their rhythm. Back then, I believed that guys who pulled wealth out of the markets were the ones that were best able to feel the current of liquidity in the markets, put on a position, and just ride the currents of capital flows in a primal, visceral way, stripped down from all intellectual embellishment. When I finally made it to a trading desk in 2013, I was sitting next to the guys who “surfed” the market. They got rich by reacting to their natural instincts, formed over many years of operating in markets. But something changed that summer. That was the beginning of the QE era, where the natural forces of markets were overwhelmed by the dictate of central planners. Everything about the nature of markets started to change that summer. That is when almost all trading converted over to algorithmic trading. Instead of riding the waves of capital on the open ocean, if you wanted to survive, you had to abandon your instinct to feel the wave form underneath you, to be in tune with the tides. Instead, trading became a game of waiting for the signal from central planners that liquidity was on the way. Like a wave pool at a water amusement park, we had to just get in and wait for them to turn on the wave machine. Our waves became man made, precisely controlled, and merely imitations of the powerful forces of nature. Even the seasoned pros on the desk were struggling to adapt to the new environment. We had to find new tools to help us regain a sense of balance. It was the on the trading desk where I first learned the value of Twitter as a trading tool. Each of us had one of our six monitors dedicated to our lead trader’s Tweet Deck feed. He had a curated feed of the most important accounts on Twitter. Over time, as we were forced to adapt to the new market environment, we learned which accounts were the most valuable for their ability to cut through the noise and draw our attention to the signal. The lead trader’s favorite account back then was RedDogT3, Scott Redler’s Twitter handle – on my honor, a true story. Red Dog was one of the first guys to flag a signal, a sort of poker tell the market would show before it succumbed to the algorithmic robots, bent to the will of the central planners, and began the grind higher for the day. Back then the signal was AAPL. Every day, no matter how bearish the set up was, no matter how weak the entire market was, if AAPL went green, as Red Dog would point out, we knew it was time to cover shorts and scramble to get long something. After I left the trading desk, I ran an equity portfolio for a small RIA shop, and Twitter was still a useful tool if you knew who to follow for the signal. There was an account called BamaBroker that got popular because he was one of the only guys to pinpoint another signal that became the market’s tell during the Yellen Fed. He called it the “Bat Signal” and it was the early morning, pre-market, 8:00 AM yen smash. If he saw the USD/JPY flash green at 8:00 after a spike down move, he knew it was the central planners’ signal that market prices were being supported that day by systematic yen selling. Back then, policy makers wanted a weaker yen to induce more of the yen carry trade on a daily basis. The yen was much stronger back then as it took only 113 yen to buy $1 vs the 160 yen it requires now. Here’s a Bama tweet thread from Oct, 2017: And here is the USD/JPY on the morning Bama’s tweet describes: Below can be seen the correlation between the USD/JPY and the S&P futures back in October 2017. On days when the USD/JPY was bid up, the market was strong. When USD/JPY fell, the market couldn’t make upward progress. USD/JPY vs SPX in Oct 2017 (with yen intervention days annotated in green): Bama was an anonymous Twitter account until he got doxed one day. It turns out his dad ran a fancy RIA. Bama was rumored to be trading the ES in huge size and making clients good money, but his tweeting about it was a bad look for an old, blue blood, Southern gentry type of advisor. Bama’s account went dark and never returned. For many years I haven’t thought about the lessons I learned from his tweets. That is until this week. A couple weeks ago I wrote about Bessent’s intervention that squeezed me out of my SPY short. That was the first sign that bearish conditions would not be allowed to develop, and this past Wednesday, early in the pre-market, I saw the Bat Signal once again. USD/JPY this past Wed, Aug 19th: S&P 500 futures at the same time: This time, however, the Bat Signal is just the reverse of what it was in 2017 when Bama brought our attention to it. Now, the yen is
Continue Reading -->Your Unique Talent Is Your Greatest Asset in Trading
“Money grows when it’s allocated deliberately, not constantly.” – Jessie Livermore Professional speculation, at its core, is a game of questions and deductions: questions are posed, deductions are made, and bets are placed. We know we’ve deduced correctly when a profit is shown and wrongly when a loss occurs. It’s always been the difficult questions that lack apparent answers that have interested me. In the act of deductive reasoning to answer difficult questions is where the profitable opportunities lie. Life outside the stock market has the same quality: it’s in searching for answers to the existential questions that are difficult to answer where the most opportunities lie. The most difficult question I’ve ever had to think about came from a friend some years ago. Over lunch he asked me a seemingly simple question, but I fumbled for an adequate response: “what is your talent?” That question sent my neurons jumping across synapses in all directions inside my brain, but none were able to come back on a return path with the correct information to articulate a clear response. I ended up blurting out something rather incoherent about being “able to interpret reality properly.” The cynical look on his face betrayed his genuine incredulity that my response had been formed with any modicum of introspection. That question was posed to me over seven years ago, but now I have a veracious reply: it’s patience. My talent is that I’m able to exercise extreme patience after I’ve deduced that an outcome is certain. Scrolling through thousands of charts a week, I’ve deduced several certain outcomes are now developing. Below are three charts of prices that want to move higher: the TNX, the USD/JPY, and the AW futures contract. TNX, (10yr yield): USD/JPY, (the quote of this contract is inverse of the convention so the price is actually yen per dollar; the higher this price is, the weaker the yen): /AW (Bloomberg Commodity Index Futures): The difficult question the speculator must ask is: “will these prices be allowed to move higher?” In the case of the dollar/yen and the 10yr yield, it’s obvious after last week’s intervention that the answer is a hard NO. That leaves only commodities as the most fertile ground for the speculator to toil in. Commodities are the only asset that policy makers cannot influence indefinitely because they are tethered to the physical world, whereas fiat and bonds are purely abstractions. While the appeal of commodities is probably obvious to most market participants by now, their risk is perhaps less frequently discussed. I’ve learned that professional speculation requires one to think risk first. If one produces enough well-reasoned trade ideas, managing the loss on the incorrect ideas will ensure a steady profit, given enough repeatable trials. Speculating in commodity stocks requires an extra degree of focus on risk because of the commodity producers’ pronounced boom/bust cycle and tendency to trade with valuations inversely correlated to the cycle. This means that buying commodity producer stocks is not as easy as buying a growth stock and holding. Commodity stocks have to be bought deliberately and sold intentionally. Theoretically, they should be bought when their trailing twelve month PE is highest or even negative, because that will be an indication that they are being bought at the bottom of the cycle after economic weakness reduces their earnings to almost nothing. They should be sold when their earnings are accelerating after a period of increase. Ostensively we can look at the gold miners as a recent example of how commodity producers should be bought and sold. In 2023, NEM had lost $2B but traded at about a $40B market cap. The sky-high PE was due to many years of depressed earnings with a gold price that refused to move above its cost of production. This was the time to buy. In 2025, NEM made $11B in pretax earnings, and traded at a very cheap 10x PE. That was the time to sell. I had the trade of a lifetime in gold miners from 2023 to March of 2026, and while I’ve still got a chunk of my original position in the big 5 miners, I’m in no rush to build back my position. If metals and mining stocks aren’t yet in the right buy point of the cycle, why is the Bloomberg Commodity Index drawing my attention? Here’s the question the astute speculator must now ask: “with the business cycle clearly entering the contraction phase, why is the Bloomberg Commodity Index trying to break higher?” The answer to that question is that the largest components of the index are energy and agriculture. We all know the reasons crude started it’s ramp this spring. Normally, after a move up on conflict escalation fears I would be inclined to dump my energy stocks like XOM and CVX and my agriculture stocks like NTR, but not this time. In fact, I’m waiting with patience for the right spot to add. I’ve also written about my inclination to bid on pipeline stocks recently. I’ve studied food and energy price spikes extensively this year, and there is one thing in common that all food and energy price spike periods share that the astute speculator can key in on: a long period of supply drawdowns followed by a sudden supply crunch. In 1971, Nixon introduced price controls on domestic oil, which caused a supply drawdown as it was unprofitable to increase production. The real oil price spike didn’t occur until 1974 when Arab oil was under embargo. This is the pattern: sustained supply draw down for a couple years, then sudden supply crunch, followed by a price spike. The pattern also plays out in food price spikes. While the pattern is similar, the motivations and human nature are more readily observed with the grain price spikes of the past. In 1988 there was an extreme grain price spike, and it fits the template: a sustained period of supply draw down starting in 1985 when agricultural legislation was passed
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