Bull Volatile Regime

We knew this was coming, the volatility. 

If you are new to this game or been around for a while it should come as no surprise that markets can go from relatively calm and peaceful to extreme volatility quickly. 

The last part of 2019 and first month or so of 2020 was the Bull Quiet regime, which is low volatility, nice easy drift to higher price levels. It’s very easy to trade, you simply buy for any reason and hold because prices, even if they drop, will resolve higher in short order. This is when you as a trader, as long as you don’t get too cute with the sell button, can make the most and easiest money in the markets.  

As the saying goes, it’s easy to make money in a bull market, and the Bull Quiet market regime is exactly what they are talking about.  

What makes it even easier to make money in a Bull Quiet market regime is that we DON’T have a real market top happen in a Bull Quiet regime. This is important because knowing this you wouldn’t be looking to call the market top and get short the market, on the absolute most perfect looking sell setup ever. 

Another great characteristic of the Bull Quiet regime is that the best looking sell setups, FAIL!

Armed with this information when you recognize the Bull Quiet regime, instead of being a hero and trying to short the “obvious top of the market” you would simply wait for a dip to buy, or buy a breakout, or buy because it’s a random Tuesday. 

Bull Quiet regimes are pretty fun and easy if you can keep that little voice of logic in your head that says “this is nuts, the market is way too overvalued, it has to come down” at bay, and just happily buy it up, you will be great. 

Now let’s talk about the Bull Volatile market regime. 

One of the most important features to know of a Bull Volatile regime is that this regime is required to put in a market top. Markets don’t top in Bull Quiet regimes, or sideways or any of the bear market regimes, they only top in a Bull Volatile regime. 

Where it gets difficult is that markets can stay in a Bull Volatile regime for a looooong time or turn on a dime after just a few days/weeks in Bull Volatile. 

As the name Bull Volatile name implies, volatility goes through the roof. And it seems extremely excessive since you’ve had to travel through the Bull Quiet happy party to get to Bull Volatile and you are not accustomed to seeing such big moves, both up and down. 

This past week was the most obvious case of what a Bull Volatile market regime will feel like. Volpocalypse in January 2018 was another great example of a Bull Volatile regime and just how quickly the madness ensues. 

The reasons these markets rip around so violently is because everyone has been buying and buying in the Bull Quiet regime, they are fearless, they are continually rewarded for buying dips and holding so they increase their position sizes and exposure because why would you take money off the table when Nasdaq 10,000 is in sight?

Then you get weakness and people are over levered and start getting stopped out or worse, margin calls, quickly. 

So greed is quickly replaced by fear, then hope of a bounce, which fails to arrive, and the margin calls come in and your account is liquidated a few days after seeing the most money you’ve ever had in your account. 

It happens quickly. 

And when all hope is lost, you’ve flattened all your positions and take the rest of the day off, a 3% rally in 10 minutes show’s up and thoroughly trolls everyone. 

This weeks correction in the Equity Markets was as violent and emotional as any other dump I’ve experienced in over 20 years of trading. 

So congratulations, if you are new to trading and this is your first correction, you just got to experience the same thing (generally) as all those old salty dogs talk about when they tell stories of the day the down dropped 25% etc…

Each time is different, to be sure, the cause, what gets destroyed, who survives, and all that. Each cause is different, sub prime, portfolio insurance, 9/11, Lehman, duh machines, but the reaction is similar and that’s what we want to focus on. 

We can better quantify price action, levels of support and resistance, position sizing, exposure, and analogous historical comparisons to those items. Rather than focusing on the news, Tweet’s, guessing, hoping and praying or other subjective strategies in an attempt to predict the future. 

Using a systematic approach for market regimes, trade setups and position sizing we can go back to other bull volatile regimes where we had >10% selloff in a week and apply our well tuned tools to see what our best course of action would be.

It is easy and exciting to try and catch the bottom, or short the top tick of the market but that’s not the best course of action. 

First and foremost you need to keep in mind that the market will always be there. If you miss buying a pullback that rallies 3% in 10 minutes, that’s ok. Over the course of 1,000’s of trades there will be times when you do catch an outlier move like that, but more importantly there will be a lot of small easy to manage, well sized 1R or 2R moves that pay the bills. 

This past week, I was trail stopped out of every position I was in, putting an end to a valiant bull run that I had been riding since December. 

Then the rest of the week I simply watched the market trade until taking 1 trade long GBPUSD in the last couple hours on Friday. 

If you understand position sizing, you’ll understand why. 

The ranges on every potential setup were too wide for me to trade my normal 1% risk even 0.5%. The volatility was extremely high, as measured by my Risk ( R ), entry price to stop price.

This is the power of using a systematic approach to trading and why I stress position sizing as the most important aspect of trading. 

My Systems Trading Checklist (free) is what I use to keep from doing trades that are, well dumb! 

Get it here http://bit.ly/31E0aTc

Even if you are trading a negative expectancy system, that is there is no edge, at least having a good position sizing strategy will delay you from eventually losing all of your money long enough for, hopefully, you to develop a positive expectancy system.

And finally...

The new ETF based Global Macro portfolio that I have been building for the last few months will soon be launched. 

This is a long term strategy originally designed for 401k, IRA, and wealth management customers for taking care of your families long term growth. But after completing the backtest and out of sample testing it became something utterly impressive. 

Not only did it dramatically outperform SPX (buy and hold), backtesting the last 25 years, but then I decided to backtest 150 years of historical data and it performed as well. 

As I said, we will be rolling this out soon at Macro-Ops, but here’s a little taste. 

Current holdings long:

QQQ

SPY

GLD

XLP

EWL

Despite the sheer chaos this week, none of these have any sell signals but to be fair, the average hold time is over 2 years on winners.

As always if you have any questions for me, just hit reply to this email. 

Also be sure to check out all my videos on YouTube, I’ve been live streaming my trading pretty much everyday lately. We’ve decided to make it a real product again with Macro-Ops so they won’t be live streaming on YouTube soon, we’ll have our own platform that is a lot faster and better quality, YouTube is delayed like 30 seconds. 

Here’s the link http://bit.ly/2UB3SeU

If you are struggling with trading and don’t have a system, my Profitable Systems Blueprint course is cheap, under $50, and includes the FVBO and VBO systems as part of it. This is the course I wish I had when I first started out, instead I spent 10’s even 100’s of thousands of dollars losing money trading and learning the hard way. I can’t recommend this course highly enough! 

http://bit.ly/2SaJEqE

Enjoy your weekend!