We have recently had a large influx of new subscribers. Perhaps it is because they possess the same vision as I that we are in an extended bull market driven by hyper-accelerating technology that could continue for another five years, and that we will likely see the S&P 500 above 6,000 by year’s end.

Therefore, I am offering a refresher course on how to use the Mad Hedge Daily Position Sheet, which is included with your subscription. But first, let me dive back into the deep and dark primordial history of the Mad Hedge Fund Trader to learn its origins.

Because I missed the thrill and adrenaline of the financial markets, I started to launch a new hedge fund back in 2007. I had just spent six years in the oil & gas industry developing the new fracking technology, and it was just too slow and sedentary for me. Weeks were spent landing drilling rights in some of the most remote, dry, and desolate parts of the US, and some of the people you had to deal with you didn’t necessarily want to introduce to your mother.

So I took the software and spreadsheets developed by the hedge fund I ran and eventually sold during the 1990s, modernized them, added sophisticated new algorithms, and started raising money for a brand new hedge fund from high net worth individuals and institutions.

Then the 2008 financial crisis hit. Everyone, to a man, pulled out of my proposed fund, some losing their entire fortunes in the ensuing crash. One even gave me his place in line to buy the new Tesla Model S, which ended up becoming chassis number 125 off the assembly line in Fremont.

My new hedge fund would have to wait.

Then I wondered whether individual retail investors would have any interest in my services. My goal was to make available sophisticated trading strategies to individuals, usually only available to the wealthy with $5 million minimum investment in large hedge funds.

I took the updated software I created for my new hedge fund and offered it as the Mad Hedge Fund Trader in February 2008. It turned out that the public interest was overwhelming, and the rest is history.

The Diary of a Mad Hedge Fund Trader proved so exhilarating that I never did get around to launching that new hedge fund. It turns out there is far more satisfaction in turning a $50,000 into $500,000 than in converting a millionaire into a billionaire.

I promise to tell the rest of the story in a future letter.

In order to access the Mad Hedge Daily Position Sheet, do the following:

1) Log in to your account at www.madhedgefundtrader.com and click on “Member Login” in the upper right corner.

2) Type in your email address and password in the white boxes in the lower left corner.

3) A page with “Welcome Back” appears. Hover your cursor over the “My Account” tab in the upper right corner. A dropdown menu appears listing all of the Mad Hedge services you have purchased.

4) Click on GLOBAL TRADING DISPATCH.

5) Eight Blue and Red boxes will appear. Click on the Current Positions blue box.

6) In the lower left corner, you will find a piece of blue hypertext called “Download in Excel (XLSX) Updated for (today’s date). Click on this.

7) The new spreadsheet will appear in your “Downloads” folder. And here you have it to play with as you want.

Well, that was easy! You can now analyze your own positions, run your own market scenarios, adopt different assumptions, and so on. It’s yours to keep until tomorrow, when you get a new one.

Now that you’re in, there’s a lot here to digest. You are now officially a pro! At least a semi-pro.

First of all, make sure you have the correct Date in cell C2. We usually post an updated spreadsheet 30 minutes after the New York Stock Exchange closes at 4:00 PM EST (or 6:00 AM Sydney time the next day), but sometimes there are delays caused by chasing down errors.

If you are like me, the next cell you will want to jump to is the Month-to-Date Performance in cell F15. This determines whether you’ll be taking your wife or girlfriend out to an expensive dinner that night or spend the night tossing and turning in bed. Usually, it’s the former, but occasionally it’s the latter.

It’s an easy leap there to Year-to-Date Performance in cell F17 and Performance since the December 8, 2010 Inception in Cell F9.

Next, you will want to check my Asset Class Breakdown that starts in cell A11 to make sure you haven’t missed anything. Life happens, the Internet goes down, or emails can end up in SPAM folders, so it’s best to cross-check my trading book with yours. These are divided into Risk On and Risk Off positions. Risk On means that my global team’s exhaustive research has informed me that the underlying stock will rise. Risk Off means it will fall.

In an ideal world, Risk On and Risk Off balance each other out, generating a net risk of zero percent. This doesn’t actually happen very often (only in neutral market conditions, which are rare).

In reality, I am very heavy Risk On positions at market bottoms and very heavy Risk Off positions at market tops. And when the risk/reward is very everything is terrible, I will have no positions at all, as was the case at the end of June 2024. That is what you want. Always let the other guy unnecessarily stick their neck out.

Cell B23 will show the Total Net Position of all your longs and shorts. Cell B25 shows you the Total Aggregate Position, or the number of positions you have added up. That way, you know exactly how much free cash you have to spend on new positions.

To the right of the Asset Class Breakdown, you will see a multicolored pie chart showing the weightings of each individual position.

Next, we go to Current Positions in cell C30. Here is where you find the details of each individual position. Since I believe that the low-hanging fruit in the financial market is still in options spreads, where the risk-reward is overwhelmingly in your favor, these positions are presented in long and short pairs.

Column A – Date Opened
Column B – Date Closed
Column C – ticker symbol, maturity month, and option strike price
Column D – Asset Class
Column E – long or short
Column F – Underlying stop loss price (where you bail on a losing position)
Column G – Notional Cost
Column H – Current Market Price
Column I – Profit & Loss for the individual position
Column J – Profit & Loss for the spread pair of positions
Column K – Risk Weighting Metrics
Column L – Leverage
Column M – Portfolio Net Exposure
Column N – I keep open for future custom Algorithmic Analysis
Column O – I keep open for future custom Algorithmic Analysis
Column P – Number of options contracts per position. Negative numbers are short positions

In Cell C52, you will find a listing of all trades executed in 2023 along with their individual profit & loss. From Cell B125, you find a listing of all trades executed in 2024. We actually have records going back to 2010, but nobody cares about that except the SEC.

Well, that’s about it. If any of you have questions about the above explanation, please email me at support@madhedgefundtrader.com.

Welcome to the Mad Hedge Fund Trader community, and I look forward to working with all of you.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

What was the most important news event last week?

No, it doesn’t have anything to do with Jeffrey Epstein, the President’s visit to the Federal Reserve, or the Tesla (TSLA) earnings.

It was the market reaction to the earnings of homebuilder DH Horton (DHI) that took the shares up 20%. The earnings were good in this sector, beleaguered by high interest rates, slack demand, and sky-high tariffs for imported materials. But they weren’t that good. I had a LEAPS all written up to send on the announcement, but the stock ran away too fast.

It was the opening shot of the next leg in this bull market. Although the Federal Reserve is not likely to cut interest rates until year-end, or even next May, once the tariff mess becomes more transparent. But sectors will front-run fundamental developments six to nine months in advance, i.e., right now. That opens up a long-shut door for all the myriad interest rate plays, including not only the homebuilders, but also bonds, financials, small caps, REITs, and the ecosystem of all the downstream real estate plays like carpet Mohawk Industries (MHK), paint Sherwin-Williams (SHW), and Home Depot (HD).

The Fed has been tight and interest rates high for this entire post-pandemic 40-month bull market. This is about to end. Such a new leg could take the bull market well into 2026.

Not that the market isn’t clamoring for some type of summer correction. The Volatility Index hitting the $14 handle says it all. It’s a good rule of thumb that when ($VIX) gets this low, you want to ring the cash register and cut all your short-term risk to the bone.

Not only is the market currently dead as a doorknob, but there’s absolutely nothing you want to do. The risk/reward of entering a new position here is very high. Look at my own Mad Hedge AI Market Timing Index at 77, and it tells you that the probability of losing money on your next trade is a nosebleed 77%.

You know that when money-losing tech companies rise by 10X, it’s time to start edging towards the exit. Margin loans have rocketed by an incredible 20% in only two months. Robinhood (HOOD) clients have led the charge. High net worth individuals and institutions are hugging 90-day T-bills. I saw it all in 1999. Parabolic moves never correct by moving sideways.

In some ways, this time it’s different. It’s worse. In the year 2000, the top ten stocks accounted for 20% of total stock market capitalization. This time, it’s 40%. We haven’t reached the stage where secretaries are raising $50 million on a one-page business plan…yet. Give it time.

Yet, with trillions of dollars of borrowed government money for economic stimulus and stock buy-backs about to hit the market, it is not exactly a market you want to sell short, either. It’s the kind of spending you normally only saw during the Great Financial Crisis or the Great Depression, except that this time there’s no Depression or Crisis.

AI companies, especially, are receiving massive subsidies, even though they never asked for them and don’t need them. Expensing of capital spending in the year it is incurred, a creation of the new budget bill, is the gift of the century for big tech. About 46% of all US. Capital spending is by AI companies. No wonder their stocks have gone straight up!

What is next? Are we going to bail out the banks again, too?

Goldman Sachs (GS) put out an interesting report last week telling us that speculation is approaching a 24-year, Dotcom Bubble top (see chart). Can speculation continue? Absolutely, it can and did for years during the 1990s. Woe to the hedge fund that sold into speculative bubbles too early.

Long-term, AI is still the driver. In that respect, it feels like it is 1995 all over again. Well, maybe 1996.

 

If the Stock Market Keeps Going Up, This is Why

 

My July performance is running hot again with a +5.89% gain, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +51.06%. My trailing one-year return rose to +101.88%. That takes my average annualized return to +51.53%, and my performance since inception finally topped +802.95%. These are all non-compounded numbers.

It was another dead week of desultory summer trading. I am keeping my positions at a minimum, keeping lots of dry powder for the next market selloff.

That leaves me 70% cash, 10% short, and 20% long. With the Volatility Index hugging the $15 handle, we may be entering a trade drought. My only trade for the week occurred when I used a rally in Tesla (TSLA) to add a short position there. It’s been a good week to sit and wait for the profits to come to you on your existing positions.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-evens. That is a success rate of +78.72%.

Try beating that anywhere.

Speculative Activity Hits the Highest Level in History, greater than the Dotcom Bubble and the pre–Great Financial Crisis crash, says Goldman Sachs. But the latest advance for equities has come with another meme stock frenzy, causing many observers to worry it signals a blowout top is near. That’s why I am running 70% cash in my trading portfolio.

Stock Market Momentum is Stalling. U.S. stocks are trading near record highs heading into the thick of the second-quarter earnings season, but with markets historically expensive and reliant on the performance of tech stocks, some investors are starting to embrace a more cautious outlook.

The Largest Railroad in History may be the result of the Union Pacific (UNP)/Norfolk Southern (NCS) merger, worth $200 billion.  A merger would enable companies to ship coast to coast without having to interchange and could lead to more efficient loads and greater profit. It’s a distillation of 200 years of M&A that took the US down from 5,000 railroads to one. It will also be America’s first true Transcontinental railroad company.

US Fertility Hits All-Time Low, according to the CDC, at 1.66 children per couple, well below the 2.18 replacement rate. This bodes ill for the economy and financial markets as it means fewer future consumers and investors. But the hit won’t come for two decades. Here’s the proof: My mother had 20 grandchildren, while I have only two.

Tesla Drops a Bomb, with Q2 earnings out, and it couldn’t have been worse. On September 30, the company lost most of the green credit it sells to other car companies, the source of $2.7 billion in revenues over the last decade, thanks to the new Tax Bill. Tesla posted the worst quarterly sales decline in more than a decade. Almost every metric posted large YOY declines. Revenue fell to $22.5 billion for the April-June quarter from $25.50 billion a year earlier. Adjusted profit per share of 40 cents lagged the consensus of 43 cents per share. Avoid (TSLA).

New Home Sales Come in Weak, as builders’ heavier use of sales incentives failed to motivate buyers put off by high costs. Contract signings on new single-family homes increased 0.6% to an annualized rate of 627,000 last month. June’s results show US homebuilders are struggling to offset an ugly mix of high prices and borrowing costs by offering incentives and subsidizing customers’ mortgage rates, which risk eroding profit margins.

DH Horton Rockets 20% on Earnings Beat, as buyer incentives sustained home sales amid high interest rates and rising costs, sending shares of the homebuilder up more than 20%. The sector is grappling with weakening consumer sentiment, prompting builders to offer incentives such as mortgage rate buydowns and smaller, more affordable homes to stimulate demand. Interest rate plays are moving. Buy (DHI) on dips.

Existing Home Sales Drop 2.7% in June to an annualized rate of 3.93 million units. Sales are unchanged YOY on a closing basis. Some 1.35 million units are for sale, up 15.9% in a year, a 4.7-month supply.  The median price of a home sold is $435,000, up 2% YOY. Houses are spending 27 days on the market, with first-time buyers at 30%. All cash buyers are at 29%. High mortgage rates are still killing this market. Some 87% of current mortgage holders have interest rates lower than current levels.

Weekly Jobless Claims Drop to Three-Month Low, down 4,000 to 217,000. The lack of material labor market deterioration likely gives the Federal Reserve cover to keep interest rates unchanged next week amid signs that aggressive tariffs on imports were starting to lift inflation.

Meme Stocks are Back! OpenDoor rocketed 235% in a week and Kohl’s (KSS) 38% today. Traders are targeting the most heavily shorted stocks in the market, with Kohl’s at 49% of open interest. This is a GameStop (GME) replay from 2021. Watch, don’t play.

Nikkei Rockets on Japan Trade Deal, which dropped tariffs on Japanese cars to 15%. The index rose by 4% and Toyota (TM) popped 15%. Detroit says the US gave away the farm, allowing 100% Japanese content cars into the US too cheaply. (GM) dropped 10%. Avoid US car companies.

 

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.


On Monday, July 28, at 8:30 AM EST, the Dallas Fed Manufacturing Index takes place.

On Tuesday, July 29, at 7:30 AM, the JOLTS Job Openings Report is announced. Two days of the Fed meeting begin.

On Wednesday, July 30, at 7:00 AM, we get the Federal Reserve Interest Rate Decision. We also get the advanced read for Q2 GDP.

On Thursday, July 31, we get Weekly Jobless Claims. We also get the Core PCE Price Index and inflation indicator.

On Friday, August 1, at 8:30 AM, we get the Nonfarm Payroll Report for July.

As for me, I was recently in Los Angeles visiting old friends, and I am reminded of one of the weirdest chapters of my life.

There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included hours at night and free housing at the coroner’s department.

I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.

Noguchi was known as the “coroner to the stars,” having famously done the autopsies on Marilyn Monroe and Jane Mansfield. He did not disappoint.

For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.

Charles Manson had recently been arrested, and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed between his ankles.

The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.

Once, another driver and I were sent to pick up a teenage boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200?”, then an astronomical sum.

A few minutes later found a hearse driving down the Santa Monica Freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.

Once, I was sent to a cheap motel where a drug deal gone wrong had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. I didn’t.

The worst pickup of the summer was also the most disgusting and even made the old veterans sick. A 300-pound man had died of a heart attack and was not discovered for a month. We decided to each grab an arm or leg and all tug on the count of three. One, two, three, and all four limbs came off!

Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.

Still, I ended up with some of the best summer job stories ever.

Good luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

 

 

 

 

 

I recently had dinner with David Pogue, the Science and Technology writer for the New York Times. It was a night well spent.

David believes that climate change is no longer an “if” or a “maybe” but a certainty. The sooner we start adapting our lives to it, the better.

The bottom line is that a big piece of the world is about to become uninhabitable by humans, possibly as much as the 20% around the equator. The loss of life could be huge.

Raise sea levels by 20 feet and you lose all the coastal cities of China, a large part of the US East Coast, and most of Florida. The US government will have to end flood insurance or go bankrupt. It is already tearing down oceanfront homes that have filed two or three federal claims. Private insurers have already gone this route.

Many species of fish, animals, and birds have been migrating north and south for decades. Indeed, tropical game fish, like mahi mahi, have been showing up along the California coast in recent years, to the delight of local fishermen.

There has been a massive migration of hummingbirds north to Oregon. Global warming could be halted in decades. But to return to pre-1970 levels would be a century-long term project. Ironically, the coronavirus started on that work right after we met, bringing the global economy to a grinding halt and dramatically shrinking the population. US lifespans shrank in 2020 for the first time in 100 years, by one full year.

We spent a lot of time at Mad Hedge Fund Trader talking about future technologies. It will be a huge net job creator over time, but the disruptions to existing industries will be enormous. Steel workers don’t morph into computer programmers easily, although I’ve seen some of the younger ones do it with enthusiasm.

When I told him I was one of the first Tesla (TSLA) buyers 13 years ago and my name still stood on the factory wall, he reached out to shake my hand and say “thank you.” He was shocked when I told him most commercial pilots can’t safely fly a plane without a functioning autopilot.

I met David on his book tour for How to Prepare for Climate Change. There, he offers highly practical advice on preparing for an era of extreme weather events, possible famines and floods, and other climate-caused chaos. Click here for the Amazon link.

The 62-year-old Ohio native has an unusual, eclectic background not unlike my own. He graduated from Yale with a degree in music, summa cum laude. He went on to become an itinerant Broadway producer. It was probably his desire for a steady paycheck that drove him into writing, taking a 12-year job at Macworld magazine, of which I was a steady reader.

David published the first Mac for Dummies book in 1988. He went on to write six more of the original “Dummies” books, including those for iBooks, Opera, Classical Music, and Magic. He became the personal technology correspondent for the New York Times in 2000.

David has hosted the Nova TV series for PBS, programs for the Science and Discovery channels. A five-time Emmy winner for his stories on CBS Sunday Morning, Pogue has been at the forefront of new and emerging tech trends for decades and making him news. There, you can hugely benefit from his annual Christmas technology gift tips.

To learn more about David Pogue, please click here to visit his website.

 

You’ve spent vast amounts of time, money, and effort to become an options trading expert.

You know the difference between bids and offers, puts and calls, exercise prices, and expiration days.

And you still can’t make any money.

Now What?

Where do you apply your newfound expertise? How do you maximize your reward while minimizing your risk?

It is all very simple.

Stick to five basic disciplines, and you will suddenly find that the number of your new trades that are winners takes a quantum leap, and money will start pouring into your trading account.

It’s really not all that hard to do. So here we go!

1) Know the Macro Picture

If you have a handle on whether the economy is growing or shrinking, you have a major advantage in the options market.

In a growing economy, you only want to employ bullish strategies, like calls, call spreads, and short volatility plays.

In a shrinking economy, you want to execute bearish plays, like puts, put spreads, and long volatility plays.

Remember, the only thing that is useful for your options trading is a view on what the economy is going to do NEXT.

The government only publishes historical economic data, which is, for the most part, useless in predicting what is going to happen in the future.

The options market is all about discounting what is going to happen next.

And how do you find that out?

Well, you could hire your own in-house staff economist. Or you could rely on economic research from the largest brokerage houses.

Even the Federal Reserve puts out its own forecasts for economic growth prospects.

However, all of these sources have notoriously poor track records. Listening to them and placing bets on their advice CAN get you into a world of trouble.

For the best possible read on the future of the US and the global economy, there is no better place to go than Global Trading Dispatch, published by me, John Thomas, the Mad Hedge Fund Trader.

This is where the largest hedge funds and brokers go to find out what is really going to happen to the economy.

Do you want to give yourself another valuable edge?

There are over 100 different industries listed on the US stock markets. However, only about 5 or 10 are really growing decisively at any particular time. The rest are either going nowhere or are shrinking.

In fact, you can find a handful of sectors that are booming, while others are in outright recession.

If you are a major hedge fund, institution, or government, you may want to cover all 100 of those industries. Good luck with that.

If you are a small hedge fund or an individual working from home, you will want to conserve your time and resources, skip most of the US industry, and only focus on a handful.

Some traders take this a step further and only concentrate on a single high-growing, volatile industry, like technology or biotech, or even a single name, like Netflix (NFLX), Tesla (TSLA), or Amazon (AMZN).

How do you decide which industry to trade?

Brokerage houses pump out more free research than you could ever read in a lifetime. Government reports tend to be stodgy, boring, and out of date. Big hedge funds keep their in-house research confidential (although some of it leaks out to me).

The Mad Hedge Fund Trader solves this problem for you by limiting its scope to a small number of benchmark, pathfinder industries, like technology, banks, energy, consumer cyclicals, biotech, and cybersecurity.

In this way, we gain a handle on what is happening in the economy as a whole, while lining up rifle shots on the best options trades out there.

We want to direct you where the action is and where we have a good handle on future earnings prospects.

It doesn’t hurt that we live on the edge of Silicon Valley and get invited to test out many new technologies before they are made public. My Tesla Model S1 is a perfect example.

That encouraged me to recommend Tesla stock at $16 before it began its historic run to $295. It was the best short squeeze ever.

2) The Micro Picture is Ideal

Once you have a handle on the economy and the best industries, it’s time to zero in on the best company to trade in, or the “MICRO” selection.

It’s always great to find a good target to trade in because positions in single companies can deliver double or even triple the returns compared to stock indexes.

That is because the market will pay a far higher implied volatility for a single company than for a large basket of companies.

Remember also that you are taking a greater risk in trading individual companies. The options market will pay you for that extra risk.

If the earnings come through as expected, everything is hunky dory. If they don’t, the shares can drop by half in a heartbeat. Large indexes buffer this effect, which is why they have far lower volatility.

Of course, there are gobs of market research about individual companies out there from brokers. Some of it is right, some of it is wrong, but all of it is conflicted. Recommendations are either “BUY” or “HOLD”.

Brokers are loath to issue a “SELL” recommendation for a stock because it will eliminate any chance of that firm obtaining new issue business. Who wants to hire a broker to sell new stock when their analyst has already dissed the company?

And brokerage firms don’t make their bread and butter on those piddling little discount commissions you have been paying them. They make it on new, highly lucrative new issues business. In fact, a new issue can earn as much as $100 million for one firm. I know because I’ve done it.

I have been following about 100 companies in the leading market sectors for nearly half a century. Some of the management of these firms have become close friends over the decades. So, I get some really first-class information.

When markets rotate to sectors and companies that I already know, I have a huge advantage. Needless to say, this gives me a massive head start when selecting individual names for the options Trade Alerts.

3) The Technicals Line Up

I have never been a huge fan of technical analysis.

Most technical advice boils down to “if it’s gone up, it will go up more” or “If it’s gone down, it will go down more.”

Over time, the recommendations are accurate 50% of the time, which is about equal to a coin toss.

However, the shorter the time frame, the more useful technical analysis becomes.

If you analyze intraday trading, almost all very short-term movements can be explained in technical terms. This is entirely how day traders make their living.

It’s a classic case of if enough people believe something, it becomes true, no matter how dubious the underlying facts may be.

So it does behoove us to pay some attention to the charts when executing our trades.

Talk to old-time investors, and you will find that they use fundamentals for long-term stock selection and technicals for short-term order execution.

Talk to them some more, and you find the best fundamentalists sound like technicians, while savvy technicians refer to underlying fundamentals.

Get the technicals right, and you can provide one additional reason for your trade to work.

4) The Calendar is Favorable

There is one more means of assuring your trades turn into winners.

I am a big fan of buying straw hats in the dead of winter and umbrellas in the sizzling heat of the summer.

There IS a method to my madness.

Have you heard of “Sell in May and go away?”

According to the Stock Trader’s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today.

This is despite the fact that the Dow Average rocketed from $409 to $18,300 during the same time period, a gain of 44.74 times!

Amazingly, $10,000 invested every November and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.

It gets better.

Of the 62 years under study, the market was down in 25 of the May to October periods, but negative in only 13 of the November to April periods.

What’s more, the market has been down only three times from November to April in the last 20 years!

There have been just three times when the “good 6 months” have lost more than 10% (1969, 1973, and 2008), but with the “bad six months” time period, there have been 11 losses of 10% or more.

So it’s clear that trading according to the calendar can have a significant impact on your profitability.

Being a long-time student of the American and, indeed, the global economy, I have long had a theory behind the regularity of this cycle. It’s enough to base a pagan religion around, like the ones practicing Druids at Stonehenge.

Up until the 1920s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were the greatest, but they had yet to earn any income from the sale of their crops.

So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October.

Once the system swallows this lump, it’s nothing but green lights for six months.

After the cycle was set and was easily identifiable by computer algorithms, the trend became a self-fulfilling prophecy.

Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

It is important to remember that this cyclicality is not 100% accurate, and you know the one time you bet the ranch, it won’t work.

Benefits of the Tailwinds

So there we have it.

Adopt these five simple disciplines, and you will find your success rate on trades jumps from a mere coin toss to 70%, 80%, or even 90%.

In other words, you convert your trading from an endless series of frustrations to a reliable source of income.

If a potential trade meets only four of these five criteria, please do it with your money and not mine. Your chances of making money have just declined.

And I bet a lot of you poor souls execute trades all the time that meet NONE of these criteria. No wonder you’re losing money hand over fist!

Get the tailwinds of the economy, your industrial call, your company pick, the market technicals, and the calendar working for you, and all of a sudden, you’re a trading genius.

It only took me half a century to pull all this together. Hopefully, you can learn a little bit faster than me.

I hope it all works for you.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

Your Guide to Winning Trades