Apologies to Readers for week long absence and unannounced vacancy from your inbox. I was mightily struggling to compile this master piece of market lesson for 2023 ( and 2022 year end ). Because there’s just too much events, emotions and lessons which can make you go into a verbal drivel, and that will makes this blog entry a difficult read. It’s still not an easy read no matter how much I edit and synthesize, but here goes…
2023 Account return final review
The Final return percentage on December 29th, 2023 is not much different from Dec 22nd, 2023 return, in fact it’s slightly lower ( about 150% and 240% for savings and income account respectively )
The lesson learned from 2023 can be broken down into following 4 sections,
Section 1: Recognizing conditions and characteristics of bear market, Bear market bottom, Bull-bear market transition, beginning of bull market ( Winter – end of winter, winter-spring transition, spring season )
4 season conditions are the best analogy I manage to come up with to describe the stock market phases,
Bear market and bear market bottom ( winter – end of winter )
Conditions
one will experience heavy snow, ice accumulation, freezing temperatures and wind chill in winter season.
Characteristics
Heavy snow ( extremely negative market internals and technical signals )
ice accumulation ( slippery conditions, one wrong move and you slip into negative balance immediately )
Freezing Temperature ( Account drawdown )
Wind chill ( wrong footed by the wild swing ).
Bear-Bull market transition ( Winter-Spring transition )
Conditions : Frequent switching in weather between Balmy and Frigid temperature conditions, such as Sunny, Gusty wind and stormy rain.
Characteristics
Gusty wind : wild choppy consolidation, deep pull back
Stormy rain : Downtrend may seemingly resume anytime while Bad news are coming in thick and fast , casting doubt on Market recovery.
Sunny : All clear for take off
Initial Bull market ( Sunny Spring characteristics )
Conditions: One finally experience longer day time in the spring climate, temperature warm significantly, and market climb the wall of worry with seeming aplomb and finally jump through hoops of fire amidst worrying stares from spectators
Sunny Spring characteristics :
1)temperature warm significantly : risk on appetite, favourable technical signs
2)new plant growth to "spring forth" : Offensive sectors leading growth
3) all clear for take off : impulsive upthrust rise.
Frigid spring characteristics (Bull market “doubt “)
Conditions: Spring is not all sunny and rosy, temperature could turn colder and windy seemingly out of nowhere. Doubt will be cast as the previous dominant uptrend rally turn into countertrend rally, perhaps previous uptrend from bottom was a short squeeze/bear market rally, and we have viewed everything with heavily rose tinted glasses.
Frigid Spring characteristics :
1)Gusty wind : wild choppy consolidation
2) Stormy rain : Downtrend may seemingly resume anytime
Lesson and Remedy for market navigation during each market phases
Bear market : identify and Recognize the bear market characteristics, lookout for signals from other asset market to corroborate stock market internal signals and implement risk-off procedure.
Bear market bottom and bear-bull market transition : design a bear market bottom, bear bull market transition technical models to navigate an enter position in gradual stages, in the most advantageous position.
Spring market : identify characteristics and assess whether position has been scaled appropriately to take advantage of the upthrust in price and to take profit/scaled appropriately when the frigid spring weather inevitably arrived.
The most crucial takeaway is this , scale-up your exposure strictly in accordance to defined technical parameters in your trading plan during the bear market bottom phases. This will serve to keep your emotion and account gyration to the absolute minimum.
Section 2: Inability to flow with the market, Overtrading and bleeding account
If you’ve been in the financial market long enough, you will have your unlucky streak, period, where one could not catch the market tempo , keep getting wrong footed and making losses. Worse still, it could have happened while everyone else is making money&catching the dominant trend while you’re cursing yourself at how in the world did you not see the trend.
This is where I turn to the age old market axiom : Markets go from small ranges to large ranges.
looking at daily chart (above), large ranges give way to small ranges. The lesson to be learned is that after large range days the market is going to consolidate. Wait for the consolidation, then when that cycle is about over, expect it to be ready for trending cycle.
Here's the real interesting thing, it is the large range days that attract the public to the marketplace. They see an explosive move in the market, then they start to get into the market. This is exactly when the market goes into a trading range, causing them to get burned out or blown out.
It is the natural market reaction; that following explosive large range moves, market will consolidate over the next few sessions. Keep that in mind, and your trading will become much more successful.
Lesson and remedy for not catching market tempo and overtrading
Overtrading and getting it wrong are by far the most frequent occurrence of market navigator and the hardest of all to get out of, remedies are as follows,
1) Learn to fall in love with the chart review, analytical process instead of trading.
2) Drawing lines and fibs, publishing market monthly, weekly, daily high, low.
3) Dedicate times to do studies on how each indicator behave during each market phases and cycles.
4) Dedicate time to learn new concepts and how cross-asset relationship affect stock market
5) Dedicate time to read some section of book daily ( if at all I have the time )
6) Develop multiple entry techniques and patiently wait for the signal occurrence to enter a new bull market
Section 3: Investments mistakes
As good as my 2023 return record, I committed stupid mistakes. The most famous of which was holding on to Tesla from mid May – Mid October, during the period it has drop from 300 dollar mid July high in and mid September 278 dollar high.
What happen ? I have committed the no.1 transgression of money manager and fell in love with the stock, best selling EV brand, high margin, intelligent founder, high free cash flow. ( stock price already reflected all of these aforementioned info ). But high margin was getting eroded, sales dropping, ultimately causing the stock to significantly underperform the market.
I was extremely lucky to get out while I’m still alive, managed to gain some , lose some in both my account.
To quote a famous analyst, Walter Deemer, a stock is not the same as company. Below is the excerpt from the book he wrote.
Also a corollary that I derive from this phrase, stock owner is not the same as company owner. Do not for a second lull yourself into the thinking you’re a Tiny (speck of a dust) owner of the company, after purchasing the stock.
As a stock owner, you’re only entitled to 2 things, capital appreciation and dividends ( frankly speaking, dividend does not even cover loss of capital and loss of opportunity cost )
While as a company owner, one is entitled to Capital appreciation, dividends , Director fee/salary, stock options, cumulative/retained profits. ( the last 3 of which ARE NOT eligible to stock owners ).
Lesson and remedy for getting one out of wrong stock/investments
Cut the losses while it‘s small or get out with a tiny profit. This the best way for one to reassess the situation with unbiased, objective, and open mind. Cutting losses early is the best way to avoid 2 types of behavioral finance biases , namely endowment effect bias and confirmation bias. ( endowment effect bias : one places higher value on what the person owns, and consequently ; Confirmation Bias : Tendency to seek information to confirm existing belief/position and ignore information that contradicts it )
But let’s be real, there are situation where one cannot cut losses despite hearing all the preaches about best trading/investing practices. ( again falling prey to one of classic behavioural finance biases : Loss aversion bias )
In the event that one cannot cut the losses, the following measurement is the alternative route to redemption ,
1)restart the review of the stock in new clean slate. Redraw the trend line, MA, recalculate the Fibonacci retracement measurement. And do it over several days . (While in the interim search for hedges which can mitigate losses, and size it as close to exiting position as possible)
Lesson 4: Actual market situation is very different from current economic situation ( market leads economy by 4 - 9 months )
Economy and stock market remains strong despite all the bearish narratives( even when everyone thought it’s going down the drain, in Q1 and Aug - Oct 2023 )
Why did the market not tank despite all the usual warning signs/narratives ( yield curve inversion, interest rate too high, oil price too high…etc. ) This is a deep topic that deserves a deeper examination in the future blog entries. But suffice to say that strong market performance can be contributed to the following 3 reasons,
1) Government Fiscal deficit spending
2) Stealth Liquidity program by Fed even when they are hiking interest rate.
3) Unemployment remains low ( employed person prop up consumption and contribute to 401K/IRA account -> invest into Indices ETF -> inflow into stock market )
There are rolling weakness from different corners of the economy from 2H 2022 – Q4 2023, but because of Fed stealth liquidity program running behind the scene, therefore there’s no credit risk from SVB fallout and financial conditions did not tighten significantly (post SVB fallout ).
Lesson and remedy
I almost fell into depression when I was reading news from financial media, but luckily I learned it’s the financial conditions index ( liquidity signal) that determines market action, not the economy implications of ABC that determines XYZ ( again Economy lags the benchmark financial market by 4 – 9 months )
As always, we will continue to monitor the charts, assess the bullish/bearish evidence day-by-day to make appropriate capital allocation and investment decisions.
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/