2022 EOY Letter to Subscribers

3 янв. 2023 г.

What’s up traders!

As we close out 2022 I wanted to continue my tradition for the second year with a letter to subscribers. In this letter I want to look back on my 2022 speculations to see what I got wrong, what I got right, and what fell down the middle. I will recap the themes of the year and present my outlook and speculation for 2023 to come.

Thank you all for reading and being a subscriber. It has been interesting to watch the decline in activity and engagement on financial social media over the last year as the optimism has waned with the price of all things. This is the cycle of human emotion when it comes to trading and investing. Ironically, this in itself is an indicator. The lowest point of interest is often “the bottom.” If you are still following the markets and looking for opportunities you will be a step ahead of the masses that only chase once jumping in seems "safe."

As a personal milestone, 2023 marks the start of my 10th year as a dedicated full time trader. I remember the first trading day of 2013. I had quit my job in IT and the new year would be my first as a professional trader working with a group of Ichimoku traders. Our office was in Buckhead which is widely considered the “Financial Center” of Atlanta. I was filled with excitement as I drove down the darkened Highway 400 before sunrise. I saw the lit towers of Buckhead come into view and I was happy to be on this journey of mastering markets. Through the years since I have seen ups and downs with the market but I can say that the fascination with this line of work has never abated.

What I got wrong

"The SPY will close 2022 higher than 2021…"

That did not age well. This statement was based on the almanac of stock market returns across history. Generally speaking it is best to assume that any given year will be an up year. 2022 ended up not being an up year. What I got kinda right:

"…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."

Remember that 2021 was unique in that every month saw a new All-Time High in the S&P 500. This had never happened before and may not happen again for a long time. Up and to the right was certainly not going to be the order of the market for 2022. What I did not foresee was the influence of rising interest rates having such a profound negative effect on risk asset valuations. I hindsight, like everything, it was obvious.
During the pandemic, the Fed took actions such as buying corporate bonds to prop up the stock market. I took this to mean that they had expanded their mandate to keep stock valuations high. It seems more likely the Fed took this action to stave off a crash but they were less willing to go all the way in keeping portfolios up forever. This is a good thing to let markets sort themselves out organically.

What I got right

"I will expect the bearish trend to go on through 2022 and possibly into 2024 with a long term target of 17k Bitcoin"

This statement was very controversial but one in which I had the most confidence. I thought it might take a bit longer but I knew in November of 2021 when Bitcoin failed to break higher with momentum that the bull cycle was done.

"I am bullish neutral on the price of oil for 2022."

Oil ended up being the breakout trend of early 2022. Now as 2022 closes out oil is up a modest +6% on the year so I ended up being correct on both accounts.

The year of busted narratives

2022 was truly a year of failed narratives. From “cash is trash” to “cryptocurrency is the future” just about everyone’s surety of the future was demolished by price action.

What I found most astounding was the narrative around the US Dollar. It was true that inflation would be a major theme of 2022 but almost everyone assumed this meant the US Dollar would lose value. That was not the case because by mid 2022 the US Dollar, measured by the DXY (US Dollar Index) was one of the best performing asset classes of the year. This was due to the somewhat forgotten fundamental tenet of forex that interest rates and differentials drive relative valuations. I say forgotten because no one has really focused on forex trading in a decade because interest rates across the world have been close to zero which allows for no real trends and because cryptocurrency has satisfied that 24/7 degenerate trading mindset.

Even though when I would point out to people that the US Dollar was one of the best performing asset classes they would cite inflation at 8%+ the reality was if one had held cash that cash would presently buy more of All The Things than it did at the beginning of the year. It was ironic that the narrative “cash is trash” was utterly incorrect.

The pandemic trades completely unwound with Peloton, Docusign, Zoom, and Netflix. These are quite obvious in hindsight but can serve as lessons on not chasing the big thing once “everyone” acknowledges how it is the big thing.

How low can it go?

One of the common dangerous tropes of investing is, “it can’t possibly go lower.” The corollary to this dangerous statement is “how much lower can it go?” In 2022 we got the answer to that question from several instruments. I have developed a canned response for when someone asks this question again, “-50% lower”.

Back in late 2018, following the former last All Time High, the price of Bitcoin stalled and consolidated for many months. Investors assumed that the low was in after Bitcoin had falled from 19k down to 6k. Then came November 13th and with leveraged long positions at all time highs the bottom fell out and Bitcoin descended to the 3k range. When many assumed “Bitcoin could not go lower” it still had another -50% to go. Throughout 2022 as the dream of cryptocurrency replacing the TradFi system faded as did the prices many bought the dip of cryptocurrencies assuming that they could not go lower. Lower they all did.

A pivotal moment in this meme was the earnings announcement of Facebook in February. The stock gapped down -24% overnight making it a record market capitalization devaluation of a blue chip stock. Across social media I saw people saying “it can’t possibly go lower” and people bought the dip. As a consistent contrarian this gave me a rock solid bias that it would, in fact, go much lower. From the opening price of that earnings drop down to where it closed 2022 was -51%.

So what is coming in 2023?
Inflation
I think the rumors of the financial system’s demise are greatly exaggerated. By published economic indicators inflation has peaked. Real estate agents have very little business because interest rate hikes have killed people’s desires to take out mortgages. Prices of goods have noticeably increased but wages have not yet caught up. We will likely get a few more rate increases in 2023 but I reject the extreme cases that the Fed will have to go full Volker to double digits to get it under control.

People have been worried about the current inflation cycle for all of 2022. The real problems that shock a market come from unexpected vectors. I tend to not focus too much on what most people are fearing. Most of the time if market participants are worried about something they are busy hedging against it.
For regular folks that do not see their paychecks increase inflation is a big problem. Companies that are able to raise their prices with inflation for the goods and services they produce will be fine. Investors with their money in those companies will benefit.

Stock Market
I expect a market recovery; a return to “normal” albeit slowly as emotions take a while to shift. The rampant “Buy all the things” of 2020 onward into the turn of 2022 will not be fast to recur. If and when we do see a recovery look for people to doubt it and insist this is just a bear market pullback. I would assume, statistically, that 2023’s stock market will close higher than it began. A 23% recovery back to the all-time high is not unrealistic but it is also not statistically guaranteed as the velocity of money coming into stocks is reduced.

The price action of the last quarter of 2022 for the S&P 500 has been very interesting to me within my method of analysis. The October 13, 2022 CPI news signaled a spike reversal to go bullish. This spike reversal happened right at the 50% Retracement of the COVID low to All-Time High.


This bullish trend from October lasted until the December 13, 2022 CPI news which signaled a spike reversal to go bearish. This spike reversal happened right at the 50% Retracement of the All-Time High to the October low.


As we closed 2022 the price of the S&P 500 stubbornly moved to and held the 50% Retracement of the October low to December high. It’s a 50% into a 50% into a 50%. It is a fascinating confirmation to the most prominent method of price action analysis I have developed.

I will presume that the December spike reversal signals a retest of the October low. From there we will see if the low is broken and the bear market continues. Should the October low hold I will then be looking for the market to retest the All-Time High through 2023.

Cryptocurrency
Currently the cryptocurrency market is in a state of cope. I found it amusing that following the collapse of FTX in November the “Rainbow Chart” of Bitcoin had to retire their first version and redraw the model to fit the permabull trajectory.

This is the fifth bear market cycle I have witnessed and traded. I was able to call the top of Bitcoin back in November 2021 and projected the down move to at least -75%. Now I think “the bottom” is a matter of time more than price. Investors still hold onto a shred of hope that this bear market will be short lived. I do not think this will be the case. I expect the bear market to persist for another year or two. It is also worth noting that Bitcoin, having been invented in 2009, has never existed through a true recessionary environment nor rising interest rates.


At some point in the next year perhaps we will see a bear market rally that will encourage a great deal of FOMO. These happen when something has fallen from bubble territory. There will be a sharp and active rally but it will not come close to recovering the full bear cycle. It is important to trade this wisely with stops and profit targets rather than buy and hold the narrative “here we go again!”

Bonds
Bonds have been hit hard as nearly two decades of low interest rates are being unwound and long term debt issued at nearly any point is priced lower. However, I see an upside to this trend. As interest rates rise certain low-risk savings options will become viable again. You might just get a non-zero interest rate on a saving account. You might be able to find 30 year municipal bonds from 5-7%. The Fed still has a target rate of 2% for inflation and while many think the Fed may need to raise this target to 4% there may come a time this year or next when the average investor can lock in a truly decent rate on long term, low risk products.


Opportunities

I am always looking for the next meme. Every market seems to have one. 2021 began with the “most shorted stocks” meme and then just continued the winning of tech and other pandemic trades. 2022 the meme was “being short the hype” and also rejecting the “cash is trash” narrative to remain patient for opportunities to deploy capital.

Cryptocurrencies
With the anger over everyone’s dreams of crypto richest not coming true many newcomers will seek to save their egos by blaming others for losses rather than their own personal risk tolerance. Expect to see more calls for “justice” and regulation in 2023. I believe this will reinforce the use case for privacy in cryptocurrency.

I continue to watch the price action of Monero XMRUSD, a privacy coin, and its relationship to Bitcoin XMRBTC. At the close of 2022 the price of XMRBTC was just shy of 0.009. I have noticed and tried to raise awareness of the privacy use case of cryptocurrency becoming more apparent. My favorite quote of the year was, "if you are not buying Monero under $200… you would not have bought Bitcoin under $200."


Bank Stocks
I like the prospect of higher interest rates for banks and lending organizations. The classic business model of a bank is to borrow money at one rate, loan it out higher, and pocket the difference. That model has not existed for many years but with broadly higher rates it should again.


Healthcare Stocks
Healthcare seemed to be the only sector that had broad gains in 2022. I think it remains the prospective winner for the next two decades. Baby Boomers as a generation are the wealthiest in history and will want to stick around as long as they can. I expect them to put this massive nest egg they have saved into prolonging their lives and so health care will be one of the primary recipients of this wealth transfer.


Inflation Stocks
Companies that are able to raise their prices for goods and services that people want to buy will do well if inflation persists. The price of something is just a measurement of the value people are willing to pay. The value itself is what matters. Consumer discretionary would be the sector I would watch as the market begins to rebound.


Forex
Forex has been ignored by traders for nearly a decade. I think the reason for this is that every central bank has kept rates at or near 0% which has not allowed any real trends to develop in exchange rates. I would expect other countries to follow suit with the United States and raise rates in the near future. This should create real movement in the forex market and thus opportunities. Remember that higher rates should equal a currency increasing in value versus lower rates.

2023
I am committing myself to following rules of proper setups and risk management going into the New Year. 2022 gave me the opportunity to refine my skills and tactics. 2022 also gave me many reminders about why you have to cut losses short, ignore mainstream narratives, and focus on the BEST setups. Keep your mind open and question the mainstream narratives. Focus on doing more of what works and less of what does not. As always, trade wisely!