Samwise Quick Reference Handbook
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Sorry, Sam I’ll knock it off. Comments should be educational and a very valuable means of communication. Maybe Smiley will join me?
I’ve unironically kept my subscription (and sanity) because of smiley’s comments though. Hope you get your ???????? treated o7
I agree I like Smiley’s comments!! Please keep commenting Smiley!
If QQQ hits $630 and we see that 3–4% pullback, it should come back down to around $610. where we just enter. I’d look to put it
I think what likely happen is a pull-back to $600-$605. If the QQQ runs to $630-$640, it will test $600 a share as we’ve seen historically.
It’s usually a test of the century mark on the downside. So it’s likely to go a bit further than 4%. I’d say $630-$639 peak and a $600-$605 bottom for a near-term pull-back.
Thanks Sam! I think you have done a great job of presenting the info and being honest about not having a crystal ball and your just going off what you see and know.
That’s very unfortunate that you’re choosing to limit comments now. I highly disagree with your decision. I really enjoyed the comment section as part of my paid subscription. It’s probably going to go from 5 comments to 3 comments to no comments allowed in the future. Are you really that bothered by the comments?? Are people that fragile now? It’s not like people are threatening you. Maybe Reddit should of not allowed Diselcock’s comments. This is totally ridiculous to me as a paid subscriber
We’re merely doing our best to ensure the comment section doesn’t go off the rails. we’re not moderating for content at all. People can say whatever they want here and we haven’t really stopped that at all. We’ve never moderated even a single comment.
Not going to happen.
We’re temporarily limiting it to 5 comments per user per post. That’s a lot of comments and questions to each post and way north of the number of comments that 95%+ of users ever make on any one post.
Every discussion board has some form of moderation and here I’m heading off the discussion from potentially devolving without ever moderating for content at all.
These are minor temporary guardrails we can easily lift at any point.
Thank you Sam, and sorry again for putting you in this position.
That’s totally fair. I find that there’s always lots of valuable information in the comments especially from you. I would prefer that it continues. I appreciate your reply
Oh man. The puts are getting cooked. But how do you even open any bull positions right now? The market is so inflated. It’s nuts. It’s like the AI fever is now a full blown AI flu. This thing can blow at any point.
Aye, mate! Best to sail the markets with the wind at your back and a sharp eye on them charts, eh?
I trade me options like a pirate raids a merchant ship — swift, bold, and gone before the navy even knows what hit ‘em.
I take 10 contracts at a time, guided by me 70/30 RSI compass on the daily chart, and timed to thirty seconds, maybe a minute tops. Always cautious, mind you — greed be the siren song that sinks many a good sailor.
When I see a glint o’ profit, I scalp at 10–15%, take a fair bounty and if position looks juicy sell 7 or 8 and let the rest ride the storm to glory. Never, ever sleep with open positions — close the trade before the sun sets, or perhaps in the shadowy hours of after-market waters.
Since I charted this new course—after losin’ me 10/17 puts to Davy Jones—I’ve been up mostly and reclaimed nearly 70% of me lost treasure.
So, here’s to cunning, discipline, and just a dash o’ madness.
Cheers, and may your trades sail true!
credit to chatGPT for real jack sparrow style.
(we need some humor today)
So becuase the market isn’t really going very far, there isn’t a lot of opportunity cost here. Again, even up here at $618, the QQQ has rallied a mere 7.6% over three months or at a rate of 0.12% per day on average. That’s nearly a quarter of what we normally see as the average daily rate of return on the QQQ. The QQQ normally produces 0.4% per day on average. If you’re on teh sidelines for 100-days, the average return is 40% during that period. Here, at 60-days, the return rate is 7.6% when it should be closer to 24%.
So there’s not a huge reason to be in the market right now. Even just discounting all of that and look at the rally since August. IT’s no different. The QQQ has rallied only 5.8% over the past 45 days or 0.13%.
The key thing to ask is this. When the next correction happens, what is the likely lows of the correction and would getting long during that point be better than getting long here at $618.
For example, from a long-term point of view, if someone launches a new common stock portfolio today. Suppose they come into $100k in capital. Is it better to buy today at $618 or down the line at some point $XXX after a correction? What is lost having bought at $XXX instead of at $618.
The way we see it, the next correction probably runs 8-12%. More than likely, it will run in the 11.5-12% area as we’ve seen after most 30%+ rallies. I think it’s something ike 70-80% of past rallies like this were down in the 11.5%+ range.
So even measuring from $640 a share for example, an 11.5% correction puts the QQQ at $566. That means buying at $570, $580, $590, $600, $610, $620 all the way up to $640 resulted in a higher cost-bias than if one had waited for hte 11.5% correction,.
And when looking at it from the perspective of $618, for it to be a bad long-term decision, the QQQ will have to have rallied to $690 a share before sustaining a correction.
So for example, at $690, a 10% correction results in the QQQ falling $69 or down to $621 a share. That’s what it would take for waiting at $618 to be a bad decision. That or a rally to $680 and a smaller than 10% correction.
So that’s why we’re mostly in cash right now.
Thanks Sam. With SPY being so close to 580, is a run to 600 inevitable now?
Just more likely. Not inevitable. Though, I think with the QQQ likely running to $630, it’s probably inevitable because the QQQ isn’t going to run alone.
So $700 SPY & QQQ $630 makes sense as tops. Though again, there is the possibility that hte QQq could peak at $620. That is a key point of resistance for hte QQQ.
Anywhere at $619 to $623, the QQQ could very well peak. And it could end the rally right then and there.
I just think the most likely outcome now is $633 or thereabouts. Given the totality of the circumstances. overall, the chances are high that it reaches $633 and peaks in the next 20-days.
The rally will sit at 160-days as an odd rally. It will cause us to have to completely alter how we think about duration. We’ll have to adjust risk variables.
Most likely what will happen is we’ll have to sell covers calls at around Day 90-100 again and then use part of that covered call sale to buy near-term calls that produce returns if the rally continues. It’ll be some strategy liek that. But we’ll have to wait and see how this rally ends up topping out first before we can draft future strategies based on it as an outlier.
Just an insane rally: straight from 400 to 620 without a substantial pullback, let’s see what it does in the face of the Santa Rally
Last year the QQQ fell 7% on the Santa Rally. Seasonally is largely just a factor. September is the most bearish month of the year for stocks. It’s the only month of the year with average negative returns and it was the strongest month of hte last 4-months. One of the strongest months of the entire 7-month rally. We only had 5 red days in September. 2 in row and then three in row.
Last December, during the Santa rally, the QQQ peaked at $538 and then dropped to $505 a share. That’s how we entered that last half of December.
(3) The most likely scenario is the QQQ rallies to $620 by end of today’s session or gaps-up above $620 early next week, trades up to around $622-$623 a share, peaks and then pulls back to test today’s gap. After that, the QQQ rallies to $630-$639 a share, we add at around $632-$633, and the QQQ probably crashes to $600-$605 minimum on its largest short-term pull-back of 5% of the entire rally.
I feel like we have a clear picture here of what is likely to play out. We’d add about 20-days to the rally for 160-days total or 10-days past the previous record. At 60% on 160-days we have a 0.37% per day average. The key thing is $630 is the likely high resistance point for the QQQ. What we’re uncertain about is at which point the QQQ peaks between $630 and $639 a share.
If this is the belief then the spreads need to be exited in short order next opportunity, and this is what I’ve been alluding to the entire time, better to always have time on your side and yes, I am aware that max value is achieved being fully in the money at expiration which is a super slim window.
If our objective is never to get every last dollar out of a rally, but rather be OK with certain exits as good outcomes, it makes zero sense, regardless of allocation/total loss comments to hold on to such a thing. Sometimes a person needs to realize if it isn’t there, no reason to try and force it.
If it were me, I would be exiting on next pull back, taking what’s left. This is not hindsight analysis this is common sense and knowing that once you are within 30 dte you should look to exit at the next chance. This is what I have been suggesting for along time. You can absolutely still honor allocation rules.
$10,000 allocated to each trade *4 = $40K
Trade 1: allocate $10,000 close out $5,000 loss
Trade 2: allocate $10,000 close out $5,000 loss
Trade 3: allocate $10,000 close out $5,000 loss
Trade 4: allocate $10,000 close out $5,000 loss
Now you can enter a trade 5 and 6 where the odds are seemingly much higher and you still wouldn’t violate the allocation rules.
We had a day where the market was down and it was way to close to exp, what should’ve been done was exactly what we did with the NVDA spread in July, take it off the table if we get another setup, re enter, if not, who cares, there will be another chance.
To me, doesn’t matter that there is a hard cap at 12%, even 1%, it wouldn’t change the fact that there is no rational reason to ride something so close to exp.
If you enter a $550/$540 spread with Dec 19 exp with 56dte and market drops 4% that thing is gonna perform, and it’s gonna perform big. Today ~$0.65, 4% drop a trading day later is $1.50.
THIS IS HINDSIGHT analysis because you are basing every single point on information occurring AFTER each event. I will go through and explain the logic in a follow up comment. but first I’m going to illustrate quite clearly why this is all hindsight analysis. All of it.
You’re looking back to certain places where the market had sold-off and concluding ONLY AFTER THE FACT that we should have exited on the pull-back. We’ll explain why doing this as a general matter is not smart at all. It’s better to take on a smaller bet that pays if the correction happens because there’s no way to know whether any one particular pull-back will result in the roll over. There’s no way to know. October 10th illustrated that perfectly. But we’ll get into the logic soon. First, let’s me show you why it’s all hindsight analysis.
Let’s go back and look at your comments on the day the QQQ reversed course from $613 down to $590 on October 10th and see if you suggest “let’s close all of our positions right now, wait for a bounce and roll forward.” Let’s take a look:
You made that comment at 12:45 pm on October 10 on the QQQ when had it just reached the low $600’s. Suggesting that a drop of 9% in 6-days would actually restore value to the October 17th spreads. “I’m not saying NOT to pull the pug, but those can go over $3.00.
We suggested selling them at $0.20! TWNETY CENTS! We said, we’re taking the $0.20 if the market gives it to us. Here’s what we wrote on that very day with the QQQ having fully reversed 3.5% and sitting at $590 a share. We said this at $590:
October $550-$540 Spread To Be Closed AT The Open Monday
We’re going to close out the $550-$540 spread Monday morning at gap-down. Let’s hope we get more negative comments from President Trump over the weekend. That will get this correction going in full flex.
Monday morning we’re closing the $550-$540 spread at any value north of $0.20. Meaning, if we gap-down and they go to $0.37 we’re closing them. If we gap down and they’re at $0.22, we’re closing them.
Above you write:
Yes. We did. And on that day, what did you suggest? For us to close out our positions, take it off the table and get into another set-up.
Not at all. Here are the rest of your comments on October.
Curiously missing is this idea that we should close everything, wait for a bounce and roll to a later expiration. October 17th expiration was 6-days away… Not even for those are you suggesting we should close them:
In response to my comment that if this correction gets going, we may hold Oct 31 to expiration, here’s what you wrote;
Missing from that is any suggesting that we should close the positions This is what I mean when I say you’re using HINDSIGHT to draw your analysis.
YOU ARE ONLY now today claiming that we should have done X, when you’ve never suggested anything of the sort at the time that we had those apparent opportunities. That’s because there’s no way to know whether this precise pull-back will lead to an inevitable correction. A 3.5% pull-back historically has lead to deep sell-offs. So of course you did’t suggest this. You only suggested it after the bounce happened.
I know you think you’re not using hindsight. But you are from the mere fact that you’re not analyzing any of this from the perspective of where we were at the time each of those pull-backs occurred. You’re not looking at the risk of a correction happening at those points. You’re just disregarding that part of the equation completely.
If the QQQ had gapped down on Monday October 13 and then slid to the low $580’s you would NOT be making this comment right now. here are your most of your comments from October 10:
There are more like this with just quoting pricing. Now let’s get to the logic of your points and I’ll explain why what you’re suggesting DOES NOT WORK in practice. It sounds great in theory, but there’s a reason we allocate small and hold. I’ve tried explaining in several different ways. But I’ll make another attempt.
Sorry, I didn’t mean to upset you
Not at all. You presented a logical argument. I’m just outlining the counter argument. I may have presented it a little stronger than I might normally do, but I wouldn’t respond if I didn’t feel like there was a good reason to respond.
I think it’s very very easy to get trapped into creating a strategy that isn’t so easily executed in practice
I’ve tested so many different strats that sound good conceptually that only end up working based on certain non-repeating assumption. Back-tested, does this strategy you’ve outlined make sense? If you did this at day 90-100 at every previous rally top, how does it fare?
You see, the recent trend has been the QQQ has shown a lot of head fakes. Pulling back 4%, bottoming and then taking off. Reversing 3.5%, hard faking and going the other direction. So it’s say come up with this idea or cutting losses at 50% and rolling forward because you’re assuming we’re going to confront this same situation repeatedly in the future. Backrest it. Does it work north of day 90 because where we started trading.
From looking at just what occurred in this rally, it’s easy to conclude and even fully rationalize why it would have been better to exit,
The trick to testing your hypothesis. Any hypothesis. The trick is to test it assuming the exact opposite occurred. Would any of this made sense if the QQQ rather than bottoming at $580 in early September, it crashed. Would it have made sense to close out the Sep 30 in that situation thereby only holding the October 17 spread?
Especially seeing as how at the time, we had not seen a 115 day rally. 114 days was the max. In early September when the QQQ had pulled back 4% and showed correction it was sitting at day 103.
Now, knowing that we were at 103 days, does it make sense to close out September 30 put spreads when we’re sitting in early September, we just started the month and the QQQ is now hard pulling back as it normally would?
The longest rally we had ever seen is 114 days. We’re sitting there only 11 days shy of that and the QQQ is hard pulling back.
Just as it would after every other correction. And also after it has rallied some 50% now,
And September is also the most bearish month of the year.
And you have to consider the fact to that we’re making decisions based on how we are positioned in our portfolios and we’re holding what amounts to two separate 3% positions. These are very small positions that can have major impacts if the correction but minimal impact if it doesn’t.
That early September pullback would be the last opportunity to close out the September 30 put-spreads because the QQQ rallied for the entire month of September after that
This is what I mean when I say it’s a lot easier in theory than in actual practice
And does the strategy makes sense if the QQQ had crashed right there given what we knew at the time. Given everything we knew at the time, if the QQQ had crashed when it reached $580 — instead of rebound — would closing out the Sep 30 really had made sense? QQQ crashes and everyone says, “we were at Day 103 and the QQQ tested the $600 level and failed. All of the evidence suggestion crash and you close a potion times ti close right in the and you closed it to preserve 1.9%?”90% of the same situation we top before day 103 or if we reach day 103, we top within a week. 90% of the time that’s what’s going to happen.
Let’s consider the context first. For the November spread specifically, we may be closing them out on the next pull-back but for entirely different reasons than we had for the other three strikes however.
What we didn’t have in the other three that we have here is the QQQ breaking out above $613 to reach $620 which now puts the QQQ at potential risk of breaking out fully. Until this past Friday, the QQQ was still battling the $613’s. Again, of course this doesn’t figure in your analysis at all.
But that very fact is disoptivie here. With the QQQ breaking out above $613 paving a path to $630, the overall risk to the November’s have skyrocketed on Friday alone. That was not the case for October 31 or for the Novembers when the QQQ had first reached $613 several weeks head of time, peaked and then fully reversed course down to $590 a share. In fact, until the QQQ broke out above $613, the $600’s were under contest and the overall analysis points to a full correction from the low $600’s. That’s no longer the case. Now there’s risk of $630-$640 being the peak. It changes the entire analysis.
So November is a very different situation because the push to $617 changes things. The only way that gets undone is if the QQQ gaps down Monday morning and falls under $613 a share making Friday a one-off event. That happens, then we probably don’t close November.
Also, until this past week, the QQQ had shown a complex top at the $600 level which we’ve seen historically at the century mark. Totally normal for the QQQ to peak at $X00, $X03, $X08 or $X13. $X17 is high risk for breakout.
Notice how all of this is absent from your analysis of course. You post this analysis in vacuum of market related information. Like it’s a rigid analysis that you think should be applied to all situations. That’s just not the case.
Sorry, but this is just not correct at all. Not even close. As we pointed out, in every previous rally before THIS rally — again absent from your analysis — the QQQ peaked by Day 114. That’s an objective undisputed fact. That’s what we traded on ahead of time.
That means if someone put on this trade in every single previous high volatility rally of the last 26-years, they would have been in the money in 100% of those rallies. This trade would have worked in 100% of past rallies even though we are within 30 dte.
We leveraged this fact using shorter dated spreads to limit the cost of the trade. We put on the trades on the basis that the QQQ would follow the general trend and even added expirations that could allow the QQQ to rally to 150+ days even though there was no prior analog. This trade was contemplated as a short-term trade based on the QQQ’s trend of peaking at day 90-114. This is critical to the entire strategy and trade.
So this whole idea that once we hit 30 DTE we should exit at the next chance just isn’t correct. Not on a small allocation and on a thesis that corrections unfold quickly. We’re leveraging the short time duration to max out our spreads when in the money.
In 100% of past corrections, the is would have paid out. So no. Not correct at all.
There is a rational reason, you just refuse to see it even after we’ve explained repeatedly. You say that we shouldn’t ride something “so close to expiration” like it’s some simple straight forward process. It’s not.
We end up close to expiration because we started off close to expiration to begin with. The trade is a short-term measured bet of 3% per segment leveraging shorter duration spreads. We put on a shorter duration, smaller allocate trades so as to not pay premium for the extra time which would make the trade untenable in at least three ways. First, the return rate is lower, second it becomes appreciably more expensive by the week, and third, we don’t need that time anyway given the thesis at the time was based on the QQQ correcting in that short-period of time between Day 90 and 114 +/- 10-days. That’s how we set up the trade. That’s the thesis we based it on. We’re able to allocate so small because of the lower cost of $1.00.
We end up near expiration because when we get a sharp pull-back that masks as a the beginning of a correction that could put us close to expiation.
But you just make the magical leap from point A to point B. We entered the trade Day A and somehow we just magically ended up at Day Z without even considering an examination of how this could happen.
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Now let’s just consider the core of what your’e saying. Your’e saying that during each of these pull-backs, we should close out our trades, wait for a bounce and then re-enter on the rebound even though you yourself didn’t suggest such a thing during the “opportunity” to exit as you put it.
You believe that it doesn’t matter whether we put on a $0.01 allocation or a $10 million allocation, that it doesn’t’ change the strategy. WE should always exit when close to expiration regardless of whatever is going on in the market. So do we exist at 31-days. 32-days? 33-days? At what point exactly? 33-days? What is the dividing line?
As I understand it, your idea is when we bought spread #1 at $1.00 and the QQQ peaked and then pulled back causing spread #1 to rise to $0.60 (from $0.40), we should close out at $0.60, wait for the bounce and then re-enter yeah? That’s your general thesis. That no matter how much one allocates, there’s no rational reason to do it any other way.
How about all of the times the QQQ peaked and immediately crashed. WE exit $0.60 and we’ve just left 20x on the table. Over trying to preserve a very small allocation. I can undersatnd doing this if you’re allocated big. But if you’re allocated small and every previous set-up like this lead right into a correction, how does make sense to risk the entire trade by trying to preserve a small amount of capital. You don’t mention that at all. What is risked when you close out a position on a pull-back like that. You just assume the opportunity cost and risk is 0%.
Well let’s play out your “no rational reason” hypothesis and consider whether there are any other rational ways to do this.
The only rational way: Whether we allocate $10,000 or $20.00, there’s no rational reason to hold onto a position in the scenario drawn up above.
Scenario #1:
The QQQ peaks at $600 a share. It pulls back to $580. The Sep 30 spread we bought at $1.00 grinds lower to $0.40, but then bounces to $0.80. In this scenario, we invested $5,000.
ON the pull-back to $580, we do as you suggest and close out at $0.60. So our capital has dropped to $3,000. We preserve $3,000. The QQQ bounces and we roll forward to the next expiration. Now we have a $3k position. The QQQ pulls back again and goes thorugh the same scenario and we close out $1,800 and the same thing again. Finally, we exit at $900 on the third opportunity to exit and the QQQ crashes to $500 a share and we’re now on the sidelines with $900 because it never bounced giving you an opportunity to roll.
At some point, you have to just hold the position, but according to you, we should always exit at each of these pull-back opportunities right? And if not, on what basis are you holding the position on pull-back #3 versus pull-back #1? On what basis are you deciding to ultimately hold the position? If your plan is to always close out — no rational reason to do otherwise — then on what basis do you ever ultimately hold on pull-back? that’s a serious problem with what you outline.
Scenario #2:
The QQQ peaks at $600 a share. It pulls back to $580. The September spread we bought at $1.00 grinds lower to $0.40, but then bounces to $0.80. In this scenario, we invested $1,000.
On the pull-back we do nothing BECAUSE in 100% of past cases, the QQQ peaks at between day 90 and day 114. Not part of your analysis.
We take a loss this time. We stake the loss on trades 2 and 3 and even 4. But then the next 20 times this comes up, we don’t close and we make 10x on every one of those future trades.
Again, absent from the analysis. The point I’m making is that you think we should close out within 30dte just because the QQQ gave an opportunity to exit. What you miss is that when done repeatedly over long durations of time, the strategy that holds on the basis that the QQQ is going to top and correct will win out in the long-term. It will win out specifically because they don’t bail from the trade each time the opportunity emerges. You don’t consider the sample.
Now you can enter. NO YOU CANNOT! That is the fatal flaw in your reason. You assume that every time the QQQ reaches Day 90-114 like this it’s going go on giving you ENDLESS opportunity to exit and re-enter. 95% of the time, it won’t give you that opportunity.
Next time this happens it will end on TRADE #1 when exit at -$5,000, the QQQ doesn’t rebound and instead rolls over in corruption. You will end up with -$5000 and the strategy that remains short makes $95,000. That’s what you miss. That’s why allocations matter BIG TIME. They matter becuase the ability to make the decision to sit on -$5k is only going to happen if you’re allocated SMALL. That’s the entire point of the small allocation is so that we don’t have to go through this nonsense. I just hope you see it now.
I’ve done this before. I’ve done this exact thing you’re suggesting. Been there. Done that. It doesn’t work.
Hence why it sounds good in theory but is fatal in fact.
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The problem with what you’re suggesting is that you fail to mention the present situation or the market circumstances at all. You make zero mention of this and none of it is contemplated in the analysis your suggesting. But it is very critical to the analysis.
when we had entered the very first trade, we did so on the basis that the QQQ had peaked between day 90 and 114 in every single prior market environment. Do you know where it is that we put on Trade #1. It was at Day 90! That with the first trade. Day 90. So we were already at a very high probability of the market peaking on the first pull-back and in the very first trade. That’s what you’re missing here.
Executing the strategy the way you suggest would mean ending up in a scenario where we put on trade #1, the QQQ pulls back 4%, we close the position and end up missing every single future correction on the same set-up. That’s what it amounts to.
You just assume that every time the QQQ pulls back that it’s going to rebound. That doesn’t happen most of the time. In most cases, you get what we saw in August. A peak at $503, a pull-back of 4%, a rebound of 1% and then a crash.
In February, the QQQ made all time highs, peaked and then proceeded to fall 10% straight without even so much as a hiccup on the way down. IT went from $540 straight down to $480 before its first real bounce.
The only reason you even make these points at all is because the QQQ rebounded when it could have just as easily ended up rolling over as it had in every previous set-up.
That’s why this doesn’t work.
That’s why this is all hindsight. Because this analysis only works if hte QQQ rallies way way beyond day 100, shows correction three times and bounces instead. It only works under those circumstances which are extremely rare.
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Smaller allocations means we don’t have to sit there and debate whether any particular pull-back is THE pull-back that leads to correction. That’s where the allocation comes into discussion.
If we’re 1% invested, it affords us the ability to say, “we can hold this because it’s such a small allocation that if it works, we make out, if it’d doesn’t, it no big deal.”
A 30% allocation changes the calculous big time. We can no longer just say, “we can hold this because it’s a small allocation and if it works great, if not, no biggie.”
That’s why allocation does make a HUGE difference. It allows us to not have to debate whether any particular pull-back is THE pull-back. Whereas being heavily invested does FORCE you to exit on the basis of reaching risk limits.
Putting aside rally duration for now, I wonder how the general sentiment and fundamentals around today’s economic environment feels compared to the dot-com era? Even if the dot-com rally was not an outlier in terms of duration, it certainly was an outlier in terms of gains. From how much we have allocated to puts thus far, I understand that the portfolios can shrug off even a total loss. However, what I’m most afraid is that this rally ends up extending to percentages similar to the dot com rally, at which point the FOMO becomes unbearable. Even if unlikely, should we start genuinely factoring in the possibility of extending to dot-com rally-level gains?
So even if that happens, there’s a consequence to it. Do you feel confident you can trade the dot-com rally and it’s ensuing crash well? Because that’s what we’re talking about here.
Put it another way, what are your exit parameters?
Let’s suppose right now, we get long with the QQQ at $617. How do we enter and how do we hedge it exactly? And at what point do you sell it.
We’re talking in terms of leaps. If we decide let’s go long up here and buy leaps. How do we hedge it? And if we can’t hedge it, where do you sell?
Do you close it on a 4% pull-back on the QQQ? because the QQQ can easily pull-back 4%, shrug it off and rally back to new highs.
Do you wait for 5%? The QQQ is due for a 5% pull-back as we explained. Eventually, it’s going to see one in this rally. If this rally were to continue to dot-com status — that means rally to 100% — itw ould need to BOTH pick up to 0.4% per day average again and the rally would need to extend another 70-80 days to get there. To get to 100% returns, fore sample, the rally would need to produce 0.4% per day return s on average and rally to day 250 minimum. 250-days on 0.4% average high vol return rate = 100% returns.
Okay. So assuming we get a 250-day rally for 100% returns, we’re going to see a 5% pull-back for sure.
Do we close our position at 5%? That would be a drop from $617 down to $586 a share right now. But at 5%, our leaps would be down some 25% at that point. Do we hold it on the basis that we’re going to rally back to the highs or do we sell and take the 25% loss?
Suppose we buy at $617 and the QQQ rallies to $630. Do you sell and take the gains now that we’re at key resistance? And if you do and the QQQ just suggest ahead to $645 after that, do you buy back in?
You see these questions are really difficult to answer and that’s why we’ve generally chosen to get long in corrections, hedge on teh rebound and then attempt to stay long until the market reaches certain high risk limits. For us, that was the rally extended to a new record duration. That’s why we sold our September calls. Because at September expiration, the rally will have lasted a record 117-days.
But getting back in after that, for us, is waiting for a correction because it’s not so easy to re-enter as the QQQ climbs.
Right now, the CAPE ratio is north of 40. Same as it was in the dot-com rally indicating that we’re in a bubble right now. If the QQQ rallies to 100% returns, that number probably skyrockets to 47-50. North of what we saw in the dot-com bubble. So we’d be dealing with a bubble > crash situation.
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Finally, and this is the most important thing, when it comes to trading leaps, the underlying price doesn’t matter. What only matters is this. What price did you buy at and what price is the underlying at after the purchase.
If the QQQ rallies to $690, crashes to $600 and we get long leaps at $600, the next rally to $650 is all that matters for our returns. It only matters that we buy ahead of a sharp move higher as leaps are concerned. Whereas when you’re buying common stock, FOMO does matter a lot. Becuase you can’t buy back the same number of shares. With leaps you very much can buy back the same number of contracts you sold.
What if we had a common stock portfolio which was currently sitting in cash? What would you think is the best move in these circumstances? I wonder if the current approach of having a separate portfolios for common stock vs LEAPs may be too rigid given that the level of risk is also dependent on fundamental circumstances. For example, if we get into full blown bubble territory, it would be far more risky to go into LEAPs even on a full 15% pullback. Or during the COVID drop, when there were legitimate reasons for why that time was different.
Now on the topic of the current climate, I think that a reasonable strategy might be to enter into a hedged common stock position. Then, if the correction that we’ve been expecting happens, we can shift from common stock to LEAPs. This may be less profitable than the current pure LEAPs approach but it negates out the risk of FOMO setting in at the peak. I’m too young to know anything about what it was actually like during the dot com bubble but the famous Druckenmiller quote about him buying in at the top and learning nothing from it because he already knew he shouldn’t have done it is chilling.
The problem with the common stock perspective is the return rate is now way too low and will be from where we are right now. Like the QQQ return rate has completely plummeted and it’s not gonna to pick up anytime soon.
The reality is that from a percentage return point of views we’re at the end of the road.
The QQQ won’t can add 10% from here. A 10% move is $62 up to $680. The QQQ will never get there.
So there’s no big incentive for me to get long common stock.
We have common stock portfolios that are all still long Nvidia. Those portfolios closed out their common stock positions in the QQQ ar a $580 average exit.
Commenting from the app didn’t see to work so apologies if that does end up going through and this is a duplicate. Anyways I’m intrigued by the 12 day rally. What made it distinguished as a rally instead of just a blip in the correction? (Especially since the Covid rally had correction-size pullbacks) Were the gains high enough to offset the previous correction before correcting again? (Sort of like July/August 2024)
So that rally is no joke. It was a 17%+ returning rally. It was a bear market rally that lasted 2.5 weeks. 2.5 weeks is a long time when the market is rallying and putting up big numbers liek that.
Just to give you an idea of what 17% amounts to, this rally is larger than 33% of all rallies. It’s the 40th largest rally out of the 60 rallies we’ve posted. That’s how it ended up in the data set.
It was just a huge move up over 12-days or 2.5 weeks.
Then in Dec 2021 we also have another weird data point that doesn’t quite fit. We have have the smallest rally on record being 7.18%.
WE added that because the rally occurred after a technical correction, lasted 18-days and then lead to the top of the market ahead of hte 2022 bear market. It was hte last leg up before the market crashed.
We couldn’t add that to the precious rally because no new highs were made. And it didn’t seem right to add it to the correction either because 7% is a legit rally and bounce off of the lows. It’s kind of an in-between data point .
It’s not meaningful one way or the other to be honest.
Neither is the 12-day 17% bear market rally.
Hey Sam,
Two issues:
1. In terms of the market creating bubbles, doesn’t make sense to me to tie that to rally length when one rally adds 25% and another adds 100%, they are quite different aren’t they?
2. In the summer when people started to get worried about rally length you repeatedly said that we should not mix up meltup and highvol rallies. You said that they are completely different and just because meltups went to 150d we should not assume that for highvol rallies. I don’t know why you now mention them alongside each other like they are kinda the same with similar properties.
I get that makes this one seem less extreme but it seems like 2 different messages and is confusing to me.
Answer to Question #1:
So a couple of things before we even get to answering these questions.
First a melt-up rally is defined as a rally that produces average daily returns of 0.2% per day. It doesn’t necessarily mean a long rally we’ve had 80 day melt-ups before. It’s just that the longest rallies were all melt-up rallies and so that’s the association.
A high vol rally is defined as a rally that produces half a percent a day or around 0.40% per day on average.
So now that we have those two definitions clarified. Let’s answer these questions.
General Answer: It only doesn’t make sense to tie to rally length if the type of rally that extends longer than 180 or 200 days is a melt-up rally. Of course, if we have a 180 or 200 a rally that produces only 0.17% a day, then we only have a rally that totals 34%. So yeah of course it’s no bubble. But if we start seeing high volatility rallies like this one go on for 150-170-200 days then we start running creating bubbles.
For example, a 200 day high volatility rally would amount to an 80% return.
Duration can lead to bubbles if we’re talking about high volatility rallies specifically going on for a long period of time. Even now we only have two types of rallies — high vol at 0.4% per day average and melt-up at 0.2% per day average.
The point I was making is if we start seeing the market begin throwing up these 150 day 60% rallies we’re going to have bubbles because the cumulative total of all of these rallies are gonna start to really skyrocket valuations.
We’ve seen the market already tend to produce these 90 -100 day & 36+ rallies lately. Since this bull market started, we have now seen FOUR (4) different rallies extend to beyond 90-100 days when a 90-100 day rally used to be very rare. It has sort of became the new normal in this bull market. We’ve started to already expect rallies to reach 90-100-days which historically would have been a very long rally. A rally reaching 90-days used to mean it was at the end of the raod and we’d almost always top within the next 5-10 days after that. In fact, until THIS rally, anytime a rally reached 90-days, it topped a full 100% of the time within 24-days.
My point is if we start to see these long 90-110-days & 36-54% rallies become standard practice in the market; or if the new normal is hundred day 35% rally every time the QQQ rallies or if we start to see 160-170-200 day rallies and 70-80% returns, the cumulative impact of that is we’re going to be in a bubble. And some suggest that we already are deep in a bubble at the moment.
The Schiller PE ratio which usually reaches alarm bells at the 30 level is now above 40. And that is largely due to P/E expansion. The cumulative total of all of these big rallies we’ve seen is that we’re now at a peak in terms of valuations.
The Schiller PE ratio indicates we have a long-term problem. that at some point we’re eventually going to have a significant bear market to correct that P/E ratio. That’s all it can really tell you. And that’s pretty much true. The Schiller P/E ratio can’t make any sort of short term or even intermediate term prediction. It’s just outlining the bubble state of the market, which can go on for a long time.
The Schiller PE ratio last reached 40 during the.com rally and we don’t have many instances of it even reaching the 30-level. The only other time we’ve ever even seen it come close to 40 is the dot-com bubble.
The last time we saw 40 in the Schiller P/E, it led to a three year long bear market where the NASDAQ-100 crashed 90% and where the S&P 500 slid 55%.
It’s not always obvious that we’re gonna see a crash anytime there’s a bubble, however. Subscribers have brought up the Cape ratio (Schiller P/E) being in bubble territory as early as August 2024 when the QQQ was in the $400’s. This can go on for a long time, and I don’t even really figure this into my thinking at all. That’s because whatever the market does on the downside, we can always hedge for it. And most likely we’ll end up capitalizing indirectly when a bear market does happen. So not really worried about it, but I bring it up only to explain how and why long duration rallies can lead to bubble. We’re seeing the product of that right now — a 54% QQQ rally even as the CAPE ratio was already north of 30.
If these long duration high vol rallies become a thing of the Norm or if they get up to like 200 days then we start looking at bubble situations real fast.
And notice this rally is not a melt up at all and it doesn’t go into the meltdown category. It’s not some third category either. this rally is a high volatility rally that has extended to 140 days. Straight up that’s where we’re gonna put the data point. It will sit at the top of high volatility rallies as a 140-day outlier.
Answer to Question #2
In the summer “when people started to get worried about length,” we were sitting at day 80 (end of July) or day 90 (mid-August). Do you know how standard that is? How very common that is?
We get rallies reaching day 80-90 days ALL THE TIME. As we mentioned above, just in the 2023 bull market alone, we’ve had four rallies extend to day 80-90 and guess what? They all ended by day 100-110. Before that, they all mostly ended between day 90-114.
How else are we supposed to answer this question or even respond? Like I’m just a mouthpiece for the the data. I only outline what the data indicates. You tell me how we should respond.
26-years of data and some 45-50 rallies indicate that every previous high volatility rally had ended by Day 114. 80-90% all ended by day 100.
We’re sitting at Day 90. Someone says, “can this rally go to year end.” How do you answer. You tell me.
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You said that they are completely different and just because meltups went to 150d we should not assume that for highvol rallies
True and still true even today. They’re not the same thing. they don’t even unfold in the same way. As you saw in July 2006, for example, 60-days of that rally is the QQQ traded literally sideways. It rallied for 90-days and then traded in a sideways range for 61-days or thereabouts.
Other times you get a very slow grind with zero pull-backs. Just a slow daily move upward without any segments or any pull-backs of any kind. Just nonsense sideways or slow grind higher.
Again, every previous high vol rally ended by Day 114. Most of even the longer rallies end by day 80.
The largest melt-up rallies have tended to produce similar returns as the largest high vol rallies (expect for the outliers) with the key difference being that it took DOUBLE the time for the melt-ups to reach its target.
This is why they’re not comparable. And it’s also why ZERO evidence could lead anyone to conclude that a high vol rally is likely to last 150-days because a melt-up lasted that long. Notice how there would be ZERO basis for drawing that conclusion in the summer “when people started getting worried about rally length.”
If not, explain how one can even draw the comparison? Like when we’ve only ever seen high vol rallies last 114-days at the extreme end, on what basis can one conclude, “you know what, I think this rally is going to last 150+ days.”
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I don’t know why you now mention them alongside each other like they are kinda the same with similar properties.
They’re not the same at all. They don’t share any similar properties whatsoever. But what they do indicate is an absence of something. They speak to the distance in time between corrections. That’s why we mentioned them alongside each other right now.
It’s to highlight the fact that the longest period of time the market has gone without a correction is 151-days. That’s not the same as saying they’re the same. It’s saying here are the lengths of time between one correction and the next correction.
This is how long the market has been willing to entertain gains without retracement. That’s the point.
It’s only logical to draw that comparison the moment we have a high vol rally lasts 140-days.
What’s more, Table 4.0 contains ALL rallies for a reason. We separate out high vol rallies, but we also have a table that contains ALL rallies. It shows every move up rom 1999 to today. There is information to be drawn from the collection of all data points.
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I get it. The situation is frustrating. I can only drawing logical conclusion based on what the data is indicating. Inference that any rational person should be able to draw on their own.
When someone looks at any given rally and tries to determine “how long will this rally last?” The first logical place to look is how long previous rallies lasted. Have they lasted random amounts of time or is there any trend in teh data set? When you look at the data and It shows that every single previous rally that came before THIS rally has lasted between 60-days (on average) and 114-days (at the high end of the range), what dose that tell you about tis particular rally we’re on right now?
In teh future, after this rally ends. Suppose it ends at Day 150. For the sake of argument, let’s assume that’s true.
We get long in the next correction. The rally extends to day 90. What do we do? Do we add to our hedges? Do we sell covered calls now that the rally has lasted as long as it has?
Do we say, “well there’s this one single case where the market has rallied 150-days and all of the other data suggests it ends at day 90-114” do we toss out all of the other data points becuase of a single outlier or do we continue to make decision based on teh collection of data?
Suppose after the rally, the next 15 rallies end by day 80-90. What then?
Let’s suppose we have 27 more rallies and it’s now 2038 and all 27 ended by day 100. We get to rally 28 and someone in the summer says, “there’s this one rally way back in 2025 that lasted 150-days. Should we be concerned that this rally should last 274 days? Can this rally last until next year? I know the last 27 ended at day 90 and the record is Day 150. but can this one go to day 274? So we should be genuinely concerned about that?”
How do you answer that other than saying, “the market of course can create outlier situations at any time. Any one event can lead to an outlier. But the collection of data suggest that we’re more likely to see a peak in the next 20-days than we are to see a rally that extended even to the previous outlier at 150-days much less 274-days.”
How else do you respond to that under those conditions?
To give you a sense of what a melt up rally is truly like. We had a melt up that lasted 140 days a d 25%.
That would be like the QQQ having traded in tbe 400 s all this time and then just finally tested $500 this last Friday at day 140. Finally just bit $500 after rallying since April and imagine the biggest pull back since then was 1.8-2%.
That will give you a small sense of what a melt up rally is really like.
We had one rally produce 15% returns over 128 days. That’s like the QQQ finally reaching $461 a share 12-days ago. After all this time. It reached only $461….
We have 58-day, 74-day and a few 90-111 day melt ups.
There are a lot of melt up rallies we don’t really talk much about.
The only thing they really share in common with high vol rallies is that the longest the market has gone without a correction is 151 days. That’s the extent of their commonality.
Hi Sam, I have a couple feature requests for the phone app. First is the ability to sort comments by newest. The second is the ability to expand/collapse daily briefing updates for quicker scrolling.
Thank you.
Futures up big
At least we get some time to lube up before market open…
Wondering why closing out the Nov 21 wasn’t on the table once the outlook shifted to QQQ probably aiming for $630
Sam’s made some comments that are relevant to this below. The evidence only emerged on Friday so there hasn’t really been an opportunity to put it on the table or not. Maybe it is under the right circumstances; we’ll probably find out this week.
I mean at peak you wouldn’t want to, but we’ve carried multiple exp of spreads for weeks now. The duds should’ve been cut and kept the longer dated exp. We’ve held multiple different exp for many weeks now.
Sam is mad about my comments and claims “allocation” completely ignoring the math behind the remaining value. Cut the short, keep the long dated spread.
At this point I’d just subscribe to whatever Sam is saying, but in the future, no reason to hold multiple spread exp.
They shouldve been sold and not stacked. Judt my opinion.
The entire thesis was a 12% position and the multiple entries evolved out of that iirc. If it wasn’t executed that there would currently be no Nov 21 spreads to salvage (or profit off of, which is still a distinct possibility).
Hi Sam, if there’s follow through on this futures momentum, do we potentially see QQQ blow through $620 with little resistance and expedite the move to $630? If it’s seemingly inevitable, that almost feels like a best case scenario. Ignoring the fact that this whole ordeal is people solving a problem they literally just invented and getting us to net zero (i.e. just back to where we were literally 2 weeks ago), maybe this positive trade deal news over the course of the week just expedites the timetable.