The LongVol - What You Missed This Week
Good morning. Here is what you missed this week.
Chinese equities had a big rally this week - great for our BABA 0.00%↑ long
Oil is about to really start to take off after another draw
TSLA 0.00%↑ disappoints but NFLX 0.00%↑ doesn’t
Real Prop Trading is finally live with a great team to run it
Weekly Market Recap & Thoughts
Last weekend when I wrote the recap I posted that Chinese equities were something that came on to my radar after a few decisions there.
I also discussed oil potentially breaking out above $75 and added 3 new energy stocks to the Swing Monitor in the LongVol Report.
One of those stocks was VLO 0.00%↑
What I am going to explain is two different frameworks that most Retail Traders and investors fail to separate (buy and hold v. day trading momentum).
When you have a Professional Trading framework you have systematic process that allows you to run a process of generating long/short ideas both short-term (day trading) and long term.
Idea Development (Top Down)
Take the VLO 0.00%↑ long above from this week. The stock has notable fundamental drivers that make the company more valuable and in turn will drive the price higher.
Share buybacks (over $1B)
Dividend increases
Positive demand for oil and gas
Those are corporate catalyst/event-driven drivers (depending who you ask). The Government policy (as seen in cycle changes above) is not friendly the last 4 years to oil and gas and in turn that has driven many CEOs to increase share buybacks and dividends.
I talked about this last September to US World Report and News.
Government policy and or business cycles have a cause and affect on certain sectors and how companies operate - oil and gas stocks are no exception.
So, that is your fundamental tailwind and this is called a Top Down investment approach - using macro and fundamentals to drive an idea.
Then, you apply technicals to the idea, or at least I do, so that you are not sitting in dead money. Valero was a trade in the report from last Summer and it made a lot of readers a lot of money but we exited near September.
Technicals now tell us that we want to enter and because we have a top down fundamental approach and understand why price SHOULD move higher we can trade the idea:
a) More confidently
b) With more risk
The typical Retail Investor (especially the day traders) lack a repeatable process like this, or really, just fail to understand how business cycles/government policies/corporate policies will drive the value of a stock higher or lower.
And why does that matter? Most larger investors (hedge fund/value funds) pay attention to the things I listed above, that’s what they watch - not MACD or moving averages.
When you can understand the markets from a Top-Down approach first it generates investment ideas because you are looking at the world/markets/companies from 40K feet above and can see how things should play out.
That generates an endless amount of investment ideas that you then can narrow down, or just use DeltaOne to let us do it for you.
Moving on….
Chinese Equities Long - Idea Development/Trade
China did a few things that drove prices lower and then two weeks ago the announced a short-selling ban. That’s a special-situation catalyst that made me pay attention even further. At that point, the fact that Chinese equities were lower based on bad fundamentals keeps me shy but when you add that in and technical factors - the idea then gets boxed into a ‘short-term trade’ and I put my ‘Active Trader’ glasses on (not like VLO 0.00%↑ where I have investor glasses on).
BABA 0.00%↑ and a few others were driven lower because of what:
Government policy change (China statement a few weeks ago)
Business cycle
So, with technicals and potential for a slow-down of forced selling (short-ban) I took a position.
Then last week you had the Chinese government talk about a potential bailout plan of $300B - that’s all it took and you have a short-term, tradable rally.
That is a trade. You get in, you size smaller and you get the F out.
How both Fit in A Portfolio
Most Retail Traders have 1-3 positions on at a time, are dependent on trading the news (v. anticipating it) and only really look at momentum and short-term trading to make money.
The trade above are two entirely different things; VLO 0.00%↑ is a large position that will be held for months while BABA 0.00%↑ was smaller size and held for a week (and maybe a few more).
And as that graphic says above:
Short-term trading can generate tactical gains to compliment and optimize the core portfolio holdings as to maximize the capital in your portfolio.
Professional Trading should be comprised of both active-trading and longer-term investment ideas so that you are not forced to have to day trade daily to make money and on the other side - are not forced to have to hold a stock for 5 years just to generate a return.
This is an optimized approach using a systematic, repeatable framework.
I had a friend from Australia message me last night about trading and he asked why I thought so many failed - there are a lot of answers. However, the main one is what was just explained in this post:
Most do not have a systematic, repeatable investment process.
Scanning for stocks each day to trade is not a process - it’s wandering aimlessly which most Retail Traders tend to do until they have an actual framework.
And for you futures traders reading this - just understanding things that are off the price charts (like trading the right hours or avoiding quad-witching) will help you as well.
Next weekend I’ll discuss the framework & glasses worn when day-trading, which I do a lot of and which makes a lot of money as well but an ENTIRELY different approach.
But remember this post because I’ll show you how you can still day-trade VLO 0.00%↑using the top down approach explained above next weekend.
Thanks for reading and enjoy the weekend.
Dan
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