Ho to ride the bull... (Quad 1-2)
In the last week and especially yesterday I had discussions about if this tape is still bullish or if it is time to sell.
Well, first of all, the tape is bullish!
My answer to the question is: what is your strategy and your time horizon?
If you have a longer time horizon and want high total return with the price of volatility, this is not the tape to sell.
If you want a smooth capital curve with lower total return and see “well the easy money is gone”, then sell.
Have a look at the following cap curve of my system book:
Do I expect that it goes on like this? Of cause not! It will consolidate and pull back, but as long the tape is bullish it will take a breath (sometimes for a 2-4 weeks) and then go on up!
So why should I sell here?
If you want total return in a bullish tape, you need to be able to stomach pullbacks.
This looks easy right? Quad 1-2 hits and off we go! —>
Well in real life it is never easy and was never easy!
At that time (June 11th, 2020) Fintwit and the media was full of doomers that had very, very (!) good, extremely convincing and super smart sounding macro arguments: “China lockdown”, “Covid will mutate badly and strike harder than ever before”, “the vaccine will take years to come”, “this is just a bear market rally, we will test the lows again”, “all that debt will kill the dollar”.
Within this bull run in 2020 and this strategy book there where 3 (!) 10% drawdowns (while the doomers where in your ear the whole time: “sell, sell, sell, you have to sell”!)
And the drawdown in June of 2020 the tape stayed stong (e.g. Quad 2 stayed during the drawdown, no (!) warning before the pullback):
(Above a 7% drawdown without a warning: the tape stayed strong in Quad 1-2!).
So, what I mean by that: Riding the bull does not mean, that you will not face volatility.
If it would be easy, this edge would not exist!
The question is always: good volatility (e.g. the tape stays strong in the pullback) or bad volatility (the tape changes to a bad tape in the pullback)?
My take is: this is not the tape to run, it is a tape to ride the bull with some volatility.
Yes, that can change week by week, but as long the tape stays strong, I have no reason to change anything.
Ask yourself: you are a strong poker player, and you sit at the table with drunk tourists that play badly: Do you expect to win every hand? Do you expect not to have bad beats? No! Bullish tapes are like that.
The moment a shark (somebody playing better than you, the shark is a bad tape Quad 3 - 4) comes to the table, you get up and leave. Not before, even when you lose some hands and have a bad beat because you had AA and the tourist had 3 3, she went all in with a small pot relative to your bankroll (the one at the table!) and you called, and she hits a 3 and you wait for the A but it does not come —> Next hand until the tape changes!
And yes, before I know the tape has changed to a bad tape there is a high chance that I will be in a 10% drawdown and then I have to bite my tong and hedge after the fact (if I am lucky, my strategy book stays strong, but that happens more in difficult tapes than in strong tapes). And I will look stupid as hell and the doomers will tell me: I told you so!
But that is the name of the game.
I stay 110% long until the tape changes ;-)
All the best and best regards
Andreas
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