Samwise Quick Reference Handbook
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Hi Sam,
Why does a drop to the 50-day indicate a correction? Is that what usually happens at the start of the correction? What is the technical basis? More curious than anything.
Thanks!
So it’s not so much the 50 day, it’s really more about follow-through and going down to a critical support line
That’s what it’s about. It doesn’t have to go to the 50 day exactly but we should see penetration down into the 580s.
There are so many instances when you’ll have the market sustain one single day of heavy selling and then reverse course.
One day does not a trend to make.
That little last bit in the update above where I pointed to the February correction is probably the most important Takeaway.
You want to see the market sustain 2-3-4 days of heavy selling. The selling needs to be off trend where it looks clear that this isn’t just a segmented pull back but more a heavy correction.
Right now at only 2% this could very well just be a segment to pull back. A small short term 2 to 4% pullback.
It’s very possible that that’s what we’re seeing. Without another big heavy red bar like we have today, we don’t have a correction.
We have all of the big indicators, pointing to the fact that the market should be topping right now. At 130 days or 16 days past the previous record. The QQQ reached 613 a share, which is a very common place to top.
We’ve actually used the phrase 613 before. That’s because the QQQ topped at $313 on a previous century test and we’ve seen lots of stocks push past the century mark to around that $X10 – $X15 range.
So we have a lot of indicators telling us that the market should be peaking right now, but we don’t have confirmation of that until the QQQ actually shows follow-through.
What we really want to see today the most important thing for today is that the QQ closed a few points under 600
597-598. That would be a really strong indication that we’ve started a correction.
Then we want to see the QQQ open under 590 on Monday
Really important that we gap down below 590. That would be another big indication.
Monday morning we open under 590 to QQQ immediately slides to like 578 and then rebounds to close the day around 584 that would be an indication that we’re in a correction
That’s like the normal course of conduct. Within 10 days the QQQ should be down at least 8% from its highs.
Realistically when we get down to like 580 to QQQ should be oversold enough having dropped around $33 to rebound.
And it will be on that rebound that doubt as to whether we’re in a correction or not will creep in because low 580’s is where it would bottom in a regular segment.
Anyway, hopefully that gives more context. It’s really just about follow through. What we don’t wanna see is the market up eight dollars next week or something like that or the QQQ reverse course and close the day marginally lower today.
QQQ nlod $594 almost $20 off hod
No. The smallest segmented rally is 4.5%. You can look up teh table. We do have a bunch of 5-7% segments. The average is 8.67%.
High-End = 15.13%
Median = 8.48%
Low end = 4.50%
Note that only 1 segment is I the 4’s at all. The other low ends are above 5%. Only 5 segments going back to the start of the bull market are under 6%. So most of the 32 segments are 6%. 27/32 to be exact are 6%+.
This rally went from $588.50 to $613 or 4.16%. So it would be the lowest segment on record if we counted it as such.
And really if the only pulls back 2-4% here, then it is a segment. We’d count it as the smallest segment on record. Especially since it lasted 10-days.
So far, this sell-off is 3.1% which is the bottom third of the segmented pull-backs.
First off, a drop of 9% in 6 days would bring the QQQ to $545 by Oct 17, not saying not to pull the plug, but the value of those is over $3 if the QQQ hits $550 at any point between now and 10/16.
Similarily, the Oct 31 would be over $4 if the QQQ reached $545 at any point between now and 10/31
Lastly, Nov 21 would likely be over $5 if $545 reached anytime between now and Nov 21.
QQQ weak, next stop $592
QQQ nlod; SPX nlod
We may very well hold Oct 31 to expiration and take the $10. If this is the peak and we go into correction, we’ll probably take that risk and use the November spread as an off-set to the entire trade.
That’s because the odds of a >10% correction is really high in this correction and so there’s a good chance the Oct 31 spread will be fully in the money if the correction started today.
Just to give you an idea, the Covid rally correction lasted 12-days. IT took 12-days for hte QQQ to go from $293.94 to $252.28 or -14.17%.
Applied to today, that would be like the QQQ dropping to $526.29 a share by October 27. It was down 12% in 6-days or the equivalent of the QQQ trading at $539.58 on October 17.
^that’s what would happen if the QQQ followed the Covid playbook.
Right and QQQ $539 on Oct 17 would take the Oct 17 to $10 and the Oct 31 to $5
SPX nlod if it breaks 6600 could be catestrophic
SPX lost 6600 nlod
Selling pressure relentless QQQ could close down 3%; QQQ $592 critical level still 30 mins left but rebound looking unlikely; Trump speaking after hours and heading into the weekend
QQQ nlod next level is $592; SPX might lose 6600 oof
Sam your analysis never fails to amaze me. just yesterday people were full of doubt thinking that it’ll run higher forever similar to how Chris doubted you back in the Feb correction that it wouldn’t end. Cheers for your insight!
QQQ nlod; rebound looks unlikely although 25RSI on the hourly, might just ignore it and head lower; 592 is a critical level, if 592 is broken next stop 580
Trump speaking after market close
Aggressive correction level selling pressure; look at that bar:
% down from the new highs made today:
QQQ 3.86%
NVDA 6.43%
Closed near lod; smells like a correction, let’s see what Monday brings
I thought QQQ breached 4%. $613.18, got as low as $589.06 and closed at $589.49.
Not that it matters a whole ton, it was brutal either way (month’s worth of gains decimated in a single session btw).
Ah good catch, I was calculating off the closing price, not the lows of the day
All the dip buying and slow grind back to all time highs just went away today. the 600s and 590s altogether in one day demolished
Looks like the closing hourly RSI is 21 for QQQ and 33 for NVDA. Wonder if that’ll spark a bounce or if the oversold (or in NVDA’s case, almost oversold) conditions will be ignore
Sam don’t we have a Oct 17 and Oct 31? what about NVDA Oct 24?
Hi Sam,
Could you clarify what you mean by
What do you mean by “any value north of $0.20”? The Oct 31 550-540 put spread is trading for $0.9 in the market. If we gap down on Monday wouldn’t the price of these put spreads only go up in value? The text is suggesting the gap down would make the put spreads worth more than $0.20, but they’re already worth more than that? Is there an implicit $1 in front of the 0.2?
Thanks!
same question, which Oct put spread ?
this is the oct 17 spreads since those are so close to expiring worthless
October 17th spread.
Teh trade was broken up into four positions:
Sep 31
Oct 17
Oct 31
Nov 21
We’re going to close out the Oct 17 as a way to indirectly reduce the ultimate cost of our Oct 31 spread.
But it looks like both Oct 31 and Nov 21 are going to carry the day. Correction does it look like it started and if that’s the case, the trade is likely to end up profitable. Between the gains from the oct and nov 21 spreads, they will more than off-set all of the losses in the sep and oct 17 spreads.
In fact, those two could conceivably produce us a total return of 100% on all capital invested in the spreads.
Smiley, did you make it?
looks like we shall be in the money on some spreads by Monday even, yikes
Let’s hope they poke the bear some more over the weekend. October 17 put spread redemption arc ????????
Hi Sam,
Appreciate the write up as always.
Question about your statement:
Are you referring to strategies that aren’t the core long term thesis? I’m assuming this doesn’t apply to the Sam Weiss strategy of “going long at bottom of corrections” because in essence we are highly allocating towards the rough thesis of
“The market always has an imminent rebound off daily oversold 30 RSI and the market will always retrace back to ATH (excluding bear markets)”
Right?
Our strategy is to allocate long 55% QQQ leaps. One might argue that is a heavy allocation, but my understanding of this statement is to not over allocate RELATIVE to the allocation size appropriate for the type of thesis being made. In this case, the allocation size is appropriate because that is an allocation size appropriate for the long term thesis we’re operating under.
Does that sound correct?
Thanks!
Not sure if this is a loaded question, but maybe a relevant follow up question: How does one determine what an “appropriate” allocation size is based on the thesis because I assume not all theses are created equal.
Well, the first question you have to ask yourself is whether you’re hedged and if you’re diversified.
The question regarding diversification is covered pretty extensive in investing basics.
When we buy the QQQ, we are inherently diversified across tech. We lack certain levels of diversification, but are well diversified in other ways by being in the QQQ.
But if you read the chapters on diversification, you’ll find that I generally believe that hedging is more important than diversification. And that’s because diversification cannot hedge out systemic risk.
That’s not to say that diversification doesn’t play a critical role in risk management. It’s just that I think hedging plays a larger role.
Because our core positions are so well hedged, they aren’t subject to the same allocation problems as would be an unhedged position.
And the core strategy is not just well hedged but we also consider an address the very small risk of the market going sideways by selling cover calls.
Part of the reason why we sold calls against our position when the QQQ reached 520 a share is because we have to constantly reduce our cost basis to hedge against the risk of the market going sideways
In our strategy, if the market goes up or goes down, we make money
Like if we get a crash, we’re gonna make money. If the market rallies to new all-time highs, we’re gonna make money.
One of the scenarios where we could take a hit as if the market trades sideways for an extended period of time, causing theta decay to both our puts, and our calls.
Hence, the need to sell cover calls against our position to reduce basis.
Allocation is a risk management tool and it is most important in situations where a position is unhedged.
When it comes to determining allocations, it’s really a case by case situation.
In our case because we had just come off of a highly successful trade, and because we were up so much we looked at what type of position we could take that would be acceptable as an impact to the portfolio
A position that would produce returns in a big way, but that if it didn’t work would have no real meaningful impact
And that’s how we got to the 3% allocations at different levels
Notice we only get to 12% if the QQQ goes to the extremes.
Originally our plan was to allocate around 6% total maybe 9%. It took extremes for us to get to nine or 12%.
We capped at 12% because we didn’t want to start eating into our gains and because we know that in future trait set ups like this, we will need to take roughly equalized positions for this to work. The idea is that we capitalize on the cumulative total of all events. If we’re confronted with the same situation 10 times in a row, we’re gonna win on like 8 to 9 of those.
Three standard deviation events are extremely rare. And even in three standard deviation events, we might come away with gains, Like look at this specific situation we’re right now we might come away with a profit in the end. If the QQQ follows the typical correction playbook we end up with gains. There’s a good chance that both the November spread and the October spread trade north of four or five dollars each. We invested around four total across all trades.
When it comes to determining allocation, what one has to consider, especially when a position is unhedged is you don’t want a position or any specific trade to cause so much damage to the portfolio that it sets you back.
Like we wouldn’t want to put up an allocation that would take the Arryn portfolio and return it to 100 K that would be a disaster. We will have given up all of our profits for the past year.
Having made 140k in 12 months which was 40 K past our target a 28K bet doesn’t set us back in any meaningful way.
What’s your current outlook on nvidia? Has anything changed from your previous briefings?
No. If the NASDAQ 100 falls 10% there’s a good chance. The video is going to accelerate to the downside.
It did a really good job market performing on Friday, but I think that’s going to change if we start to get really bearish.
A one day hard sell off doesn’t create a lot of bear sentiment. It’s when things start really sliding, and people start questioning whether we’re entering a recession that things start to get bearish from a sentiment standpoint. This is typical and most normal corrections.
It’s usually when sentiment starts to turn negative the high growth stocks like Nvidia start to sell off.
Especially given the amount of built-in profits, there are in the stock right now and the number of times the stock is attempted to break out to 200 but failed
I remember you once mentioned using speech-to-text sometimes for posts and comments and I always get a kick out of instances where there’s a translation error between what you said and the text that is output
Sam, thanks for the analysis at the end there. I’ve said this here before but my hope is seeing a “never-ending rally” immediately after a “never-ending correction” really puts things in perspective for everyone in the future. “It would never end” and then we blink and 4% down like it was nothing.
Thank you for the analysis and doing your best to keep us grounded in reality.
Hey Sam, thank you for your writeup. I agree with all your points, especially overallocating and its effect on people’s psyche.
I also get why you are glad not to have panicked comments for a while. But at the same time it is also important to recognize that many here aren’t as experienced and we did just have 2 events (third largest correction and longest rally ever) back to back. So I think people can be excused to freak out a little.
Like you said: This rally falls in the 99,5 percentile of rallies, if we assume 200 rallies for 100 years we can statistically expect 1 such rally for 100 years. So it truly is a once in generation event. It’s not something just a little remarkable, it literally should only happen every 100 years statistically. And we had this rally after we just had a really large correction. So just as some context for why people were getting especially nervous. And like you said, if we all had allocated correctly even that should have been fine.
Just to add: considering all that it really was a strong stress test for the trading strategy and seeing as we might come out ahead on our spread trade and also do look good in the portfolios, that’s pretty remarkable. So here’s hoping we get a bit more “normal” stuff in the future.
Although I do remember you saying that things seem to get more extreme lately, so maybe this is also becoming more common in the future..
To add on to this, I think going into shorts as a way to make money instead of just as a hedge had people trusting that this was a sure thing. Sure, you eventually were right, but how many people put more into shorts on day 80 because of your analysis? You can tell people not to put too much into these positions, but what a lot of people likely saw was you were so confident the drop was imminent that there was more money to be made.
I’m not saying this as it’s your fault. There are clearly people here that subscribe to Wallstreetbets, and when the idea of making a killing on a setup like this happens, people without your experience are going to have a very hard time resisting putting more money in than they should. I’ll admit, I’m one of them. I lost a lot more than 3% on the September NVDA puts and 9/30 QQQ spread. Just something to consider when going into these short trades in the future is that people can’t resist the idea of “free money”. I don’t know what you could really do outside of your warnings, just my opinion on why it got so anxious in here.
I mean Sam has repeated again and again that one shouldn’t allocate too much, that this was only a small position of a bigger portfolio.
People will do what they will do, at some point no amount of warnings will help I think
I recall there was multiple days of analysis and theorizing on what approach to take with the put trades. Risk vs. reward was actually laid out in excruciating detail from what I remember. There’s only so much you can do if some people choose to buy into the reward side of it while ignoring the risk which actually encapsulates the totality of the trade.
If someone sees that we’re putting on future hedges but ignores the flashing red sign that signs “12% MAX FOR XYZ REASONS” and decides to go 50% hedge, there’s only so much anyone can do.
I think I need a chapter on allocation. So I’ve hinted at this number of times for the last couple months, but allocation plays a critical role in success. It really does.
Like you essentially never wanna be in a position where it a trade fails, it results in you losing all your profits or sets you back in a big way
Because that will eventually happen. There will always eventually be outlier situations that cause a trade to fail. This is very true. I mean, I can count at least 20 instances where I have been confronted with outlier situations in the past 15 years
And so the only way to avoid the eventuality of a trade, utterly failing due to outliner situations is to ensure that you are either hedged or allocated in a small way.
It wouldn’t help anyone at all if the Arryn portfolio were to rise to $2 million over the next five years and then based off of one bad trade ended up at 90,000
Despite all of everything else we did over those five years we’re down $10,000. All of the other good stuff we would have done at that point doesn’t even matter.
If there’s one critical thing, I think new investors can learn to become really good at this. It’s this one thing.
Every veteran Investor goes through this. Some of them pick up on this sooner than others. First, you have to learn that you’re not the protagonist in the universe’s story Bad shit can happen to you and most definitely will happen to you in the stock market. Once you’ve truly come to grips with that reality. That you could be the one in the one in 7 million plane crash. The next thing to do is to realize that “on a long enough timeline everyone’s survival rate drops to zero.”
Meaning at some point in time there’s going to be a bad trade or a bad something that can definitely have the power to derail your entire account. The only way to avoid that happening is by ensuring that each and every trade you make is allocated to such a degree that it can’t have that impact. Or if you’re gonna put on a big trade, you have to ensure that it is hedged to such a degree that if it goes against you, your hedge will carry the day.
It’s making sure that you’re never invested in a way that will set you back. Each and every time we put on a trade we have to go through this analysis. It is of a Paramount importance.
I think we’re gonna add a chapter to investing basics on this issue of allocation and and then maybe we need to add this as a disclaimer every time we ever put on an unhedged trade
Like if you look at the Arryn portfolio, there’s nothing we’ve ever done in the past year that would have caused the portfolio to take any sort of a major hit.
Because virtually every position we ever owned has been very well hedged or has been a very small allocation
And we will have to do this with perfection deep into the future. We can’t make that mistake even once.
If you want to be a successful investor long-term, then every single time you’re confronted with a trade you basically have to do one of those two things.
We’re always either well hedged such that even if a crash happens or even if the trade goes against us, we’re gonna have insurance money to back us up
Or two we’ve invested such a small amount of money that even if it goes against us, it doesn’t matter
As the spread is concerned, we went about it the latter way.
And that’s because the first way was not viable. there were no hedges to be able to purchase to offset any losses to long dated put options. So we decided to limit our losses by setting a cap to a put spread trade.
I think we just need to make this a very important cornerstone of the publications that people understand going in that they just can’t allocate at a level that isn’t hedged.
When we put on an unhedged trade, it is necessarily a small allocation trade.
Hi Sam,
On the topic of Investing Basics. Do you have an idea of what the content schedule will look like for the Investing Basics section? I can only speak for myself, but I find the material in the Investing Basics section greatly supplements my learning through the Daily Briefings. In a way I view the Investing Basics as the ‘theoretical textbook content”, although still grounded in reality, and the Daily Briefings as real world application of the content.
Thanks!
what I have to start doing is marrying what’s happening presently in the market to invest investing basics. The problem is it takes so much time and effort to get this content out in a polished way.
I’ve felt that practical education is probably the best way to approach teaching things in the market
So we’ve spent a lot of time on the daily briefing trying to explain whatever it is, that’s going on at the time in plain language
I was just thinking today that what I should be doing is trying to be a little more efficient in the daily briefings and then publish investing basic topics that will have some degree of permanency during the daily briefing sessions. That way instead of publishing the contents regarding why allocation is important in the daily briefing that allocation information would be published and investing basics with references to it in the daily briefing. I might start taking that approach. We would limit daily briefings, and instead, if there is important relevant information that should be easily referenced in the future we would add it as a chapter.
And right now, very relevant are the topics of allocation and market psychology.
This whole psychology of “this time is different” and how allocation impacts decision making needs to be addressed.
I’m totally on board with this. Alongside the permanency benefit I think doing the way you’re proposing provides long term benefits since Q&A can be referenced by future readers.
Sam we already had a 20% correction in April why do you think we will have another 8-10% correction?
So I’m not really sure how to really explain this as we’ve gone through it pretty thoroughly every day for the past few months.
To begin with, you should ask yourself how often do you believe corrections should occur and why do you believe that?
I answer that question by simply looking back to the past and counting the number of days between each market, rally and each correction
In fact, we have published a table on this exact issue. If you look at the navigation menu on this website, you should find a link called the NASDAQ 100 tables.
If you click on that link and scroll down, you’ll find table 4.0 and 4.1
Those tables list for you every rally in correction that we have seen in the market going all the way back to 1999
What the table show shows you is that on average there’s a stock market. Correction every 60 trading days which comes out to once a quarter.
Once every quarter of the year, we generally sustain a 10% correction
And really we count anything from 8% and above as a correction.
Now, as we showed above in the standard deviation analysis, roughly 1/3 of all rallies in the market last 80 days or longer.
That means one out of every three market rally lasts four months.
It has now been six months since the last correction occurred in April
So when you ask me why we believe a correction is about to happen well, the last one we received happened in April
Do you know how many rallies have lasted six months without a correction? None. Before this current rally, no rally has lasted six months without a correction.
So again, this is why we believe we’re gonna see a correction
BTC and Ethereum seem to be rebounding strongly as if nothing had happened…
And if it were the same on Monday, would that herald an other segment?
No, not at all. It doesn’t matter at this point because the QQQ pulled all the way back to the start of the rebound point, which is bearish no matter how you look at it
The start of the segment was at 588.50. The QQQ pulled back to 589 in one single day reversing all of the last 10 days of gains and more importantly, reversing the QQQ below the $600 level.
Even if the QQQ rebounds a percent or 2% even. It’s kind of set up to correct now.
Friday’s action is either the beginning of what will be an immediate correction or it starts the process no matter what if it’s one of those two things
We’ve topped
For example we could see the QQQ rebound for 1-2-3 days but it’s not gonna get back up to 613.
The rebound might get back up to like 599 or 602 or something like that, but I very highly doubt we see a print above 613 is the key.
From a data point of view, the top is in and we’re counting correction days right now
I think like Sam alluded to, it took 10 days to get to $613 and then a single session to lose all that. That move up to $613 was without significant bearish event (like Friday) in a while to bring down the mood and it was still a grind. With Friday’s gut punch it seems like it’s a tough ask to get back up there but who knows.
Futures green!
Let’s see what happens at market open. They were up going into Friday and we saw some gains at open before the downturn. Maybe we’ll see the same on Monday.