When rats are leaving a sinking ship

Keep it simple: good news + bad market reaction = bearish

Thursday, 20 November — a beautiful winter day in Hong Kong. The sun pierces through the clouds, and the temperature sits at a comfortable 15 degrees. I review my portfolio, feeling confident in my open positions. The P&L has been strong this past week after a horrendous month. Drawdowns happen; they’re part of the game. But finally emerging from one and bringing the portfolio back to its high-water mark always feels amazing. We are so back!

The US market endured a tough period leading up to Nvidia’s earnings, with the VIX spiking to 25. That move gave us the chance to monetize some VIX hedges and tilt the portfolio long, positioning us to capture the expected Santa Claus rally.

9:29 p.m. HKT. I hold my breath one last time before the jobs report, the first widely anticipated print after three months of blackout.

9:30 p.m. The numbers hit. U3 at 4.4%, a touch above consensus; nonfarm payrolls +119K, crushing the expected +53K. Mixed signals, but the overall tone leans bullish.

I flip to the portfolio, heart racing harder than usual. Will this NFP beat finally smoke my long bond position?

A sigh of relief. The STIR market shrugs off the print; SOFR futures barely budge. My heavy long in 10-year bond futures is ticking slightly higher. Great, we live to fight another day.

Meanwhile, the S&P 500 is up 1.40% in pre-market. P&L looks solid; the portfolio is already +0.5%. I feel good about the setup. All these supposed catalysts turned into a snoozer, I expect stocks to stay elevated as systematic vol sellers do what they always do.

10:30 p.m. HKT. The US market opens with the S&P 500 now up 1.90%. Perfect. Time for bed.

…But while I was sleeping, this happened:

Friday, 21 November. 7 a.m. Hong Kong time—first thing I check the markets.

What the heck? I was promised a Santa Rally! Not a crash!

I open the portfolio: down 1.25% since bedtime. Not terrible when the S&P 500 is off 3.50%. Bonds cushioned the blow, and thankfully the short KOSPI and short Nikkei positions offset some of the damage from S&P 500 and BTC futures. To be fair, after so many years of trading, you also become pretty numb to pain. It comes as a package with the broker account. If you can’t deal with the pain, you will quit.

So what exactly happened? Why did markets collapse intraday?

I could spin a sophisticated tale with my indicators—hedging flows, deteriorating breadth, whatever. But it would be fiction. From a news/narrative standpoint, nothing happened yesterday. The market simply imploded under its own weight. That’s the frightening part. And it happened during a market priced for perfection.

A market priced for perfection [Week #30]

Keep it simple: we suffered a massive double news failure. Nvidia earnings and the jobs report were both unambiguously bullish for stocks, and the initial reaction reflected that. Then everything got faded hard. Now we’re all asking what comes next.

I don’t know what comes next, but I know what’s happening right now: the rats are abandoning ship. Retail traders are running out of dry powder, insiders are dumping stock with both hands, institutions sit on historically crowded longs, and systematic strategies still have plenty of embedded selling ahead.

It won’t be orderly. The tape has been in a relentless uptrend since April, and plenty of distributive price action still lies ahead. My base case is weeks or months of frustrating, choppy sideways action laced with violent swings. A paradise for mean-reversion traders, hell for breakout chasers and long-only investors.

Until clarity returns, rising volatility leaves only one rational response: degross. Any tactical trades get tight risk management, both hard stops and volatility-based sizing. The higher the vol, the less risk I carry. Non-negotiable 99% of the time. The remaining 1% is reserved for true liquidation events that reward the few still breathing. We’re not there yet.

I’m flat all tactical trades: closed the long E-mini (small loss), kept the winning KOSPI and Nikkei shorts until they hit targets at Asia open this morning, and cut half the BTC futures position.

There is a time to go long, a time to go short, and a time to go fishing.

Jesse Livermore

I’ll see you at the fish pond!