Gambler or Capital Allocator?
Weekly Plan 1.1.2025
When trading in the short term, such as intraday time frames, and in extremely thick markets like the ES, SPX, SPY, and so on, it’s crucial to grasp the concept of liquidity exceptionally well.
If you only trade longer-term time frames, you may not need to worry about this aspect; however, you’ll get roughed up without understanding the intraday liquidity game.
I’ll provide a more detailed explanation in a future post, but for now, let’s understand that when you buy or sell, you’re likely dealing with a dealer or a market maker. These guys are obligated by contract to provide you with an asset to buy or sell into.
Throughout the day, there will be pockets of imbalance where dealers accumulate too many long positions or too many short positions. To neutralize this imbalance, they seek the market to move to where there’s a natural wall of sell or buy orders. These often become intraday support and resistance levels.
For instance, on Friday, we experienced a sharp decline below 6050, but we then retraced up approximately 60 dollars, closing near 6040. Why? Because 6050 attracted traders who were stuck in long positions. Additionally, since the market sharply declined, the dealers were unable to balance their books either. Consequently, this gap near 6050 naturally attracted many traders who wanted to exit their positions, assisting the dealers in offloading some of their own longs.
Remember, as the market rises, the dealers accumulate more short positions. Conversely, as the market falls, the dealers accumulate more long positions. This phenomenon is the primary reason why all gaps eventually fill. As homework, consider what makes these gaps a magnet to price movement. Can you identify on a chart where there might be a significant number of traders stuck underwater in unfavorable longs and short positions?
Alright traders, let’s analyze the upcoming market-moving events between now and January 20th, and then the following month when tech earnings begin in earnest.
We have the nonfarm payrolls on the 10th and the CPI on the 15th. Between now and the 15th, there aren’t many other significant risk events planned.
With the new President taking office on the 20th, many people are wondering what this means for the markets.
During his second term, just like his first, Trump will enter the market at a time when it’s nearing record highs. However, we’re now about 300% higher than when he first took office in 2017. Will the markets behave similarly to 2020 and 2021, or will they be more like 2017 and 2019?
Remember, 2020 and 2021 weren’t solely influenced by Trump’s presidency and its aftereffects. We also had a major pandemic during those years, and most of the market action can be attributed to the fiscal and monetary policies implemented during those times.
I believe that the next four years will be more akin to 2017 or 2019 in terms of market tone, rather than 2021.
To better understand this tone, let’s first define the market’s tone over the past four years. It’s been mostly a steady upward trend with low volatility. For instance, since 2022, we’ve had almost zero days when the S&P 500 reached $100 range. Zero! Until the last few weeks after the Federal Open Market Committee (FOMC) meeting. The market has been steadily rising with remarkably low volatility.
Now, let’s contrast this with 2020 and 2021. Those were the years when everything went up. It was an upward crash where various assets experienced parabolic growth.
The three years before 2020 were vastly different from 2020 and 2021, and they’re also very different from what we’ve seen in the last four years. From 2017 to 2019, we had a two-way market. While stocks generally went up, there was significant volatility. One period you might see a 10% increase, and the next, a 10% decline. So, there was a lot of choppiness. That’s why we associate Trump with bullish stock markets, but 2020 was an exception, and it’s also because we tend to remember recent events more vividly.
In my opinion, 2020 and 2021 were unique years that are unlikely to be repeated in the near future.
So, traders are left to rely on the period between 2017 and 2019 to analyze and predict the market’s trajectory for the next four years.
The reason I bring this up is that trading strategies are constantly evolving. They don’t remain static because they are based on underlying volatility regimes. If volatility is extremely low, at 2% per month, a different approach is necessary. Conversely, if volatility is high, at 10% per month, traders must adapt or risk being overwhelmed.
I can already sense that the current market tone aligns with my views. The market has shifted from a one-way upward trend to a hit-and-run, pullback, and retracement pattern that we’ve witnessed this month. This shift is likely to persist. Just a few days ago, the SPX index came within 50-60 dollars of its election night lows, only to lose 300 points and then recover about 300 points within a week. This type of volatility is here to stay.
Given this volatility, which strategy is more effective?
In my opinion, the best approach in such an environment is to wait for pullbacks rather than attempting breakouts. Breakouts often fizzle out, leaving breakout traders holding the bag. However, those who are patient enough to wait for pullbacks will be rewarded. This strategy assumes that we don’t enter a bear market anytime soon. If this turns into a full-fledged bear market, we will need to adjust our approach.
This leads us into our weekly trading levels for the holiday-shortened week ahead.
Remember, Monday, Thursday, and Friday will be the only regular trading sessions next week.
Let us take first a 10000 feet view of things and then get into the weeds.
This 6170 level on the Emini S&P500 has been an important resistance which I first identified on the tape the week before Thanksgiving in November. I expected a sell off from this level and it turned to a rout of 300 points.
Back a week or so ago, I called for support to come in at 5900 which was a good level that led to about a 200 dollar rally in the emini/SPX.
On Friday, my main expectation was to sell down to 6040 BUT hold this level for a move back into 6092. The fact is we did not even present any sort of fight at this level and simply slid below 6000, only to claw back these loses in latter half of the session, and closed right below this 6040 level.
I will construe this last point above as a wild card which I think was truly unexplained. The market does not like things unexplained and hates uncertainty! If you are with me thus far, I am sharing my thought process how I derive my own support and resistance levels.
So we could say that the following week, this 6056 and 5984 could be an important inflection point for this market. Friday’s auction is also a bi-nodal auction from Volume profile perspective. Let us put together some potential support and resistance levels using this info.
Scenario 1: I will like to see the bulls take out this 6056 level early on in the cash session to make another swipe at 6092. Minus this, I think 6056 could be resistance for another test of 6012 and if 6012 were to fold, we could slide down into 5980s.
Scenario 2: I think Friday lows near 5984 is where rubber meets the road as far commitment for the bulls to defend this swing low in this cycle. If we are going to give up 5980s in the week, this confirms two things: a) we closed below 6170 in December and b) we closed below 6070 as well in December. If you recall my post earlier from December, this event calls for more volatility next month.
Now while I do not think this is a proper bear market yet, I do think it is an expensive Bull market. We are not able to find good setups for our folks at these inflated prices and a little bit of sell-off does not hurt anybody. A sell off is healthy and should lead to all sort of great setups which I think can then double or triple from nice lows. I just do not think we are there yet.
Sharing setups just for sake of them is not my thing. The publication pricing reflects that. It is priced optimally so when there are a few lean weeks and months, it’s not end of the world.
Anyways, I do wanna talk about a couple of potential setups where I think there is some semblance of value.
Let us start with the elephant in the room, the bond yields first.
So unless you have been living under a rock you know what’s going on with the yields on far end of the curve. The 10 year specifically crossing 4.6% last week. This was something I called for when this was around 3.5% in Summer. I called for the bonds to retreat and these yields to inch back above 4.2% before year end. We are there now. So what is next?
So recently you saw the FED cut rates by a 1% (cumulative) and these longer dated yields actually go up by a percent. This along with stronger Dollar is a harbinger that these yields may still be headed higher before subsiding. This is gonna be a problem for all sort of high flying tech stocks which are expensive to start with.
Specifically, if you look at yield products, I think on the Money market side both TTTXX and VMFXX is still nice at 4.5% just to park some unused cash. The downside of course is it has really no upside in terms of price. But then the advantage is that it stays at par and won’t break par. So the safety is there.
With respect to an ETF like TLT, if the 10 year is gonna be 5% next year, may be 6%, there could be more room to the downside, but I content the value is there so close to that $80. It is also yielding a nice $3.8 in dividends, but know my views on these longer term rates, which I think could be headed above 5% which may exert some more pressure on TLT. Personally I think we could see range bound action in TLT, with a low closer to 80 and then a high closer to 100 until we see some sort of breakout. This could be a multi year thing though, so anyone thinking TLT to make a fast move in a matter of days is gonna be disappointed.
Momentum
I am also sharing a new momentum idea today with RGTI. This stock could be setting up for a large move in 2025. It is 16 and change now.
My strategy on this will be to wait for a pullback into 13s, and buy some. If it falls further into 11s, I will add more.
Eventually I see this clear 20 and I think it’s gonna have a nice run above 20, if and when it gets there.
BABA
Then on the Value Side, I know the natural instinct is to fear a Trump Presidency when it comes to these Chinese stocks. However I think there is a compelling case to be made for these stocks.
If you are a regular reader, you know I have had a long term bullish view on BABA back when it was below 70.
It is now about 85 and change. Yes, there will be volatility in BABA. Can it move 20-30% in the short term? I think so. Can it go to 0? I highly doubt. Can it double here in next 4 years? I think so.
I would go on to argue that a Biden admin has been much more bearish for China stocks than a Trump Presidency.
This removes a large part of geopolitics tensions between China and Taiwan for atleast next 4 years. Yes, you have tariff drama looming but then you can argue tariffs never went away in past 4 years either. So a lot of this is probably baked into BABA here so close to $80. If you wanna look at and analyze some of these LEAPS, like 2 years out, even the ones AT the Money (ATM) rn, they are priced at like 20 bucks. If BABA slides about 10%, is a late 2026 BABA LEAP for $85 at $10 too expensive? I don’t think so.
Now I will say if we start to dip below $80 in the near term, it will VOID my thesis atleast temporarily. In other words, either I want the 80 level to hold, or $70 to hold below it. If we give up 80, then 70 could be a good support as well.
Now for someone who is super new to trading, they may think, “WTH, I just want something that is gonna go to 150 in one straight line. In one Week”.
Yes, me too.
But it does not really work that way in real life. You have a lot of nuance. A lot of back and forth in price action.
Based on my experience, what a lot of larger traders will do is set aside a part of their portfolio let us say a 5% to any one idea. And of that 5%, they will risk may be 30%. So you are looking at net total risk of about 1.5% risk on any one given idea. Very rarely do I see a great set up like we had in DOGE at 5 cents or a PLTR in 2022 when I feel like betting the farm on it.
This 1.5% risk could lead to a 3% or a 5% payout. In options this could be as high as 10-15%. You get 10 of these right every year. That’s all you need. On average one HIT a month! Generally all institutional traders will approach this problem this same way. If you come from a Reddit background where one risks 100% of the account on any one idea, this is probably gonna be a culture shock for you.
Broadly, you have Gamblers and Capital allocators in markets. Warren Buffett or an Amazon, are capital allocators. When Buffett buys half a billion dollars in OXY or when Bezos buys Whole Foods, remember he’s buying half a billion in OXY from a reserve of $325 billion he already has in the bank. He’s allocating less than a percent to an asset.
When Saylor goes all in on Bitcoin at 106 K, mortgaging his company’s stock, he’s a gambler.
I don’t have a personal opinion on merits of either, I tend to associate myself more with being an allocator but occasionally I like to speculate too.
But I will leave it at you wanna get out of the “Boom and Bust” business model of Gambling. Most Gamblers will Boom. And then Bust.
Most Capital allocators will end up creating generational wealth. Saylors come and go like the seasons, there is only one Warren Buffett, Lynch or a Munger.
TGT
Target is another great orderflow Substack calls from 2023-2024.
I shared this back when it was a 100 dollars before it rallied to 160s. This has now subdued and is now trading like 130 bucks.
Look coming fear years are going to be rough when it comes to affording basic necessities. You have also have an unwind of China trade, where many of the imports which made them so cheap, are down 30% from their peak in 2017 from China.
Then you have depletion of soil quality, famines, weather interruptions- all of these mean that inflation in some items, such as basics and foods, is here to stay elevated.
Costco and WMT and TGT tend to benefit from this.
WMT and Costco already have realized a lot of this value when it comes to their stock prices. TGT I think remains the underdog.
I like TGT here so close to 130. I think it remains a decent value play and could trade 170s followed by 200.
Folks, on an admin side note, some folks asked me for a discount. My view is clear on this topic- giving discounts is a disservice to those who have already subscribed before you. Why will I dilute the value of their subscription? Yes other publications give 50-60% off because a) their offerings are not really that good b) their price is already high. This service costs $49 and if you still need a discount, please consider that it is already at a huge discount relative to its future price which is soon gonna be $100! So stop waiting for discounts of 4-5% and subscribe now before price hikes of 100%! Options, stocks, futures, crypto, a chatroom! All in one!
XOM/XLE/VDE
These energy stocks have stagnated forever here which really makes little sense to me but its not end of the world, especially since many of these pay 4% in yield now and are yielding in excess of over $2 billion a month in free cash flow.
I own a part of my portfolio in these stocks and think over longer term they will do well. They won’t go up parabolic like NVDA but they have decent safety profile.
With respect to XOM, it is so close to that 102-105, if this holds, I think we may swipe at 120 again in near term.
In the short run, April 2025 MOPEX XOM $120 CALLS are like $1 apiece which look attractive if the stock recovers here above $110.
Bitcoin as Value or a Store of Value?
I have been a crypto Bull in general and specifically a Bitcoin Bull ever since the 2022 bear market ended. Most recently I have held on bullish view on Bitcoin at 59K, before it slammed higher into 107K.
My bullish view is unlikely to change any time soon but here is a tactical thesis I wanted to share with folks.
Most of Bitcoin gains have come from synthetic buying which is driven by one major player in this space- MicroStrategy. Their MO is to offer debt secured against the MSTR stock and then to go out in the market and buy more Bitcoin.
As such the company does not make any profit on its products or services, and has a significant interest cost due to various debt offerings they have made in 2024. If Bitcoin keeps going higher, they are not gonna be in any sort of trouble. Atleast for now. However, in the long run, this chicken is coming home to roost and it will be in form of MSTR investors calling their debt. The company leadership says that’s not the case, and they say the debt is un-callable which I extremely highly doubt.
I like Bitcoin. I do not like these shenanigans if you will which are used by some like MSTR to artificially prop up the prices.
Just like we had an accumulation phase in the stocks I gave throughout 2024, which have gone up parabolic now, for instance PLTR is up 15X, there is going to be a time in 2025 for Bitcoin to collapse and then accumulate before a 10X move. I don’t think that is today at 94K. I have those levels today with me. But I wanna share them at the most opportune time when no one literally is interested in the crypto currency. Once I start buying for a 10X move, I will be sharing this with my folks here in the Substack. The only reason I bring this up today is to highlight various forces that act on something like Bitcoin in the short term, and the long term. Now make no mistake, Bitcoin is a high BETA speculative asset. The moment we see Dollar clear above 110, the moment we have 5% prints on the 10 year, and new lows in the QQQ, I have reasonable confidence we are going to see extremely attractive levels in Bitcoin in 2025. Stay tuned.
Happy New Year BTW!
~ tic
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