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The Market Outlook for the Week Ahead, or Sell First and Ask Questions Later

I have been learning a new language over the past few weeks (I already speak six).

And like learning any new language, it has been a bumpy road.

I remember a family dinner I had in Tuscany in 1968. The dessert was chocolate cake. I didn’t know how to say “cake” in Italian, so I made up one. I said “Questo e una cacca magnifico”. The entire table burst into laughter. Then my host told me, “You just said this is wonderful shit.”

Oops.

Investors lately have been suffering their own “cacca” moment.

The administration’s economic policies were obscure before the election but very clear now. Pain first, pleasure later….maybe. But they run a great risk that we get into the pain stage and can’t get out with a severe austerity budget during a recession. Investors' response has been to sell now and buy back later when the upside resumes, if and when that ever happens.

Warning: uncertain stock markets trade at big discounts, not the paltry 10% haircut we have seen so far over the past month. They drop by half. (SPY) price earnings multiples have just dropped from 22X to 20X in four weeks. 18X, where we fell to in 2018, gets you to my down 20% bear market.

Half done….half to go.

Welcome to the brave new world. A “transition” means either a “recession” or “depression,” I’m not sure which yet.

So does “disruption.”

I think that a lot of businesses are going to be committing their own errors of translation in the coming months. For example, is this a recession, or a depression? Let me know when you figure that one out.

In fact, after speaking to clients over the past week, my own vocabulary has been vastly expanded.

It turns out that if you’ve been running a successful business since the pandemic, the last thing in the world you want is for it to be disrupted.

FOMO, or fear of missing out, is long gone. Fear alone is here. Sell first and ask questions later. Market sentiment is horrible and getting worse by the day.

Delta Airlines (DAL) warned us last week that sales may dramatically fall in the coming months, taking the stock down 7%. Consumers dial back discretionary spending during recessions, and at the top of that list are vacation and business travel. With that comment, you can write off the entire travel sector, including all the airlines, hotels, online travel apps, cruise lines, and rental car companies.

And other than that, how was the play Mrs. Lincoln?

And you wanted uncertainty? This is the Golden Age of Uncertainty.

The steel tariff rose from 25% to 50%, on Tuesday, then Ontario imposed a 25% duty on electricity exports to the US, then the US cut their steel tariff back to 25% and the electricity tariff went away. Every American car requires 1,000 pounds of steel and Michigan, Minnesota, and New York get the bulk of their electricity from Canada, which has abundant hydro.

An intraday trade war?

I love following anecdotal recession indicators and one is no farther than your own television set.

When CNBC runs back-to-back promotions of its own programs, it means they haven’t been able to sell those slots. Brokers greatly dial back their advertising because customers only open new accounts in rising markets, not falling ones. Greed is gone. And you see a lot of new companies ramp up ads because the price has fallen to where they can afford them. Notice the constant ads these days from eBay and Mark Cuban?

And what is the most common expression in the English language right now? “I don’t know.”

Three places to keep an eagle eye on right now for short-term market direction and risk-taking: Tesla (TSLA), Nvidia (NVDA), and the Volatility Index ($VIX). Watch the movement of these three bellwether stocks and you can guess where the rest of the market is going right now.

And just a reminder, the average recession performance of the S&P 500 (SPY) for the past 80 years is a decline of 34%. It backs my own forecast of a 20% decline looks positively bullish and the current level of a 10% pullback looks insanely optimistic.

Yes, even down here stocks are still expensive.

And here is the cruelest math of all.

The Average American now has to work an extra seven years, to get their retirement fund back to where they were at the market top on February 19, assuming a 45-year work life. With the S&P 500 now down 10%, the typical retirement fund is off 15%, since they were overweight technology stocks. That is especially true if they were just about to retire. That is unless they have been following Mad Hedge Fund Trader, in which case they are probably up on the year like I am.

How bad can it get?

The Bull Case

We are now in a recession that will probably
cost us -6% to -7% over two to three quarters like it did during the pandemic and then
ends with a $5 trillion tax cut for 2026
(SPY) down 20%-30%, and then we recover

The Bear Case

No tax cut means we enter a depression
and lose 25% of GDP over 4 years
(SPY) down 60%, and then we recover

March is now up a spectacular +10.21% return so far. That takes us to a year-to-date profit of +19.68% so far in 2025. That means Mad Hedge has been operating as a perfect -2X short S&P 500 ETF since the February top. My trailing one-year return stands at a spectacular +92.10%. That takes my average annualized return to +50.59% and my performance since inception to +771.57%.

It has been another busy week for trading. I stopped out of my last longs in (IBKR) and (TSLA) for small losses. I added new short positions in (GM), (NVDA), (SH), and (TSLA). I took profits on a short position in (NVDA). I also strapped on a (TLT) trade betting that interest falls going into a recession.

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

Try beating that anywhere.

Stocks Suffer Worst Day in 3 Years but bounced off the 10% correction level at $5,550 for the (SPX). The government has abandoned Keynesianism, the principal economic model for the country for 90 years. It’s cutting spending as we head into recession. We now have a reverse hockey stick on share price valuations, with sales falling and multiples shrinking at the same time. Lower lows for everything beckon.

University of Michigan Consumer Confidence Collapses, at 57.0 versus an estimated 63.2, a four-year low. Expectations were already low, taking the Dow Average on a 300-point swoosh down, which it immediately recovered. Remember, this is a lagging indicator, and that confidence is likely much lower now.

Fed Interest Rate Cut is Back on the Table, 25 basis points on June 18, as recession fears explode. A recession will drop overnight rates to 3%, and eventually 2%.

Ceding US Leadership Will Send Stocks to Big Discounts, the guaranteed result of Trump's new foreign policies. That’s the opposite of the existing order which sent American stocks to big premiums for 80 Years. That’s why there is a massive outpouring of capital from the US to Europe causing the huge outperformance of the German stock market, up 28% YTD.

Yen Carry Trade unwind sends Japanese currency soaring, as hedge funds de-gross or reduce overall positions. That means a lot of yen buying and US dollar selling. The Japanese currency has risen by 10% against the US dollar this year.

Trump Administration to Pursue Alphabet Breakup, continuing Biden era policy. The good news? The move could enrich investors, as a breakup would double the value of the individual parts, as it did with AT&T. Buy (GOOGL) on dips.

Government to Change GDP Calculations, knocking out government spending, about a quarter of the total. The goal is to create artificially high GDP numbers and obscure the negative impact of government spending cuts. Expect multiple GDP estimates to proliferate soon from the private sector using the old model. This is against a backdrop of the sudden end of many government data services, from demographics to the weather.

Chaos Hits Economy, forcing businesses to forestall decisions and market down earnings. Job security has vaporized, forcing consumers to dial back on spending. Virtually every economic data point has rolled over and turned negative. The share buyers strike continues, with every client I have only looking to sell rallies. The Volatility Index ($VIX) hits a six-month high at $29. And we have four more years of this?

Delta Airlines Slashes Earnings Forecast, on trade wars and recession scares, taking the shares down 7%. Travel is particularly sensitive to economic slowdowns and declining discretionary spending. Cruise lines have also been hammered. For “Transition” read “Recession”. Avoid all travel plays.

Who is Sitting Pretty Now? Warren Buffet’s Berkshire Hathaway, with $335 billion in cash. Has he started buying yet? No!

US Deficit Hits New All-Time High, in February. The deficit totaled just over $307 billion for the month, nearly 2½ times what it was in January and 3.7% higher than February 2024. Five months into the government fiscal year, the national debt has grown by $5 trillion. Where are those promised savings?

Gold Hits New All-Time High, as Recession Fears Tank Interest Rates, cutting the opportunity cost of holding the Yellow Metal. Mad Hedge is already long and looking to add on dips. The central bank and Chinese retail buying continue unabated.

Tesla to Face Punitive Export Tariffs, as the trade war impact widens. Tesla warned that even with aggressive localization of the supply chain, certain parts and components are difficult or impossible to source within the United States, like large format Panasonic screens. Keep selling Telsa rallies. I’m looking for $160 by summer.

Stock Market Loses $5 Trillion in Market Value, in less than two months, a record loss. Thursday’s decline put the index’s market value down to $46.78 trillion. The decline has come in the shadow of President the expanding trade war with several of the United States’ major trading partners, with headlines about tariffs at times seeming to drive market moves. There have also been signs of slowing economic growth, with weak consumer sentiment surveys and tepid outlooks from retailers like Wal-Mart (WMT).

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, March 17, at 8:30 AM EST, Retail Sales are announced.

On Tuesday, March 18, at 8:30 AM, the Housing Starts and Building Perm are released. The Federal Reserve begins its two-day Open Market Committee Meeting.

On Wednesday, March 19, at 1:00 PM, the Federal Reserve announces its interest rate decision.

On Thursday, March 20, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get the Existing Homes Sales.

On Friday, March 21, at 2:00 PM the Baker Hughes Rig Count is printed.

As for me, I was sent reeling with the passing of my old friend, comedian Robin Williams. His mother lived directly next door to my family for many years. A petite widow in her late seventies, we often looked in on her and invited her into our community social group. More than once, I came home to find my late wife chatting with her in the living room over a cup of tea.

Robin, ever the dutiful son, thanked me on many occasions. He volunteered to appear at school fundraisers for my kids. Needless to say, he was a huge hit and brought in buckets of money.

To describe Robin as a giant in his industry would be an understatement. No one could match his stream-of-consciousness outpouring of originality. I know some Disney people who worked with him on the Aladdin animated film where Robin played the genie, and he drove them nuts.

The script was just a starting point for him. You just turned him on, and it was all peripatetic improvisation after that. This forced the ultra-controlling producers to draw the animation around his monologue, no easy trick and the reverse of the usual practice.

When I attended the London premiere of Aladdin, the audience sat with there with their jaws dropped, trying to decode cultural references that were being fired at them a dozen a minute.

It was safe to say that Robin fought a lifetime battle with drug addiction. He only got out of rehab a year earlier for the umpteenth time.

His depression had to be severe. People who knew him well believed that his comedy evolved as a way of dealing with it. He used jokes as weapons to keep the demons at bay. Perhaps that is the price of true genius. In the end, it was probably genetic.

This has been reaffirmed by the many comedians I have met during my life, including Groucho Marx, Bob Hope, George Burns, Jay Leno, Chris Rock, and many others. I see Jay every year at the Pebble Beach Concourse d’Elegance vintage car show where he usually has a prime entrant, who reminds me that over the past 40 years investing in his vintage cars has done better than stocks.

Robin was a very wealthy man, at one point owning a $25 million mansion in San Francisco’s tony Pacifica district. He left behind a wife and a young child. He was at the peak of his career, with another movie coming out at Christmas, A Night at the Museum III, and a sequel to Mrs. Doubtfire in the works.

These are not normally the circumstances where one takes his own life. One can only assume that to do what he did he had to be suffering immense pain.

He will be missed.

Good Luck and Good Trading,

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

How to Handle the Friday February 21 Options Expiration

Diary, Homepage Posts, Newsletter

Followers of the Mad Hedge Fund Trader alert service have the good fortune to own three in-the-money options positions that expires on Friday, February 21, and I just want to explain to the newbies how to best maximize their profits.

This involves the:

Current Capital at Risk

Risk On

(NVDA) 2/$90-$95 call spread 10.00%

(VST) 2/$100-$110 call spread 10.00%

Risk Off

(TSLA) 2/$540-$550 put spread -10.00%

Total Net Position 10.00%

Total Aggregate Position 30.00%

Provided that we don’t have a monster move down in the market in two trading days, these positions should expire at their maximum profit points.

So far, so good.

I’ll take the example of the (TSLA) 2/$540-$550 put spread.

Your profit can be calculated as follows:

Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit

(12 contracts X 100 contracts per option X $1.20 profit per option)

= $1,440 or 13.64% in 22 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning, February 24, and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, occasionally, machines do make mistakes. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next quarter end.

Take your winnings and go out and buy yourself a well-earned dinner.

Well done, and on to the next trade.

You Can’t Do Enough Research

And My Prediction Is . . .

Diary, Homepage Posts, Newsletter, Research

Take those predictions, forecasts, and prognostications with so many grains of salt. They have a notorious track record for being completely wrong, even when made by the leading experts in their fields. In preparing for my autumn lecture series, I came across the following nuggets and thought I’d share them with you. There are some real howlers.

1876 “This 'telephone' has too many shortcomings to
be seriously considered as a means of communication.”
--Western Union internal memo.

1895 “Heavier than air flying machines are impossible.”
--Lord Kelvin, president of the Royal Society.

1927 "Who the hell wants to hear actors talk?"
--H.M. Warner, founder of Warner Brothers.

1943 “I think there is a world market for maybe five computers.”
--Thomas Watson, Chairman of IBM.

1962 “We don't like their sound, and guitar music
is on the way out.”
--Decca Recording Co. rejecting the Beatles, 1962.

1981 “640 kilobytes of memory ought to be enough for anybody.”
--Bill Gates, founder of Microsoft.

Thomas Watson of IBM

The Beatles

A Younger Bill Gates

The Market Outlook for the Week Ahead, or The Tale of Two Markets

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While trading one market is hard enough, two is almost more than one can bear. In fact, we have all been trading two markets since 2025 began.

On the up days, it appears that the indexes are about to break out of a tediously narrow trading range. The market’s inability to go down is proof that it has to go up. Thursday was one of those days.

These are followed by down days, it appears that the indexes are about to break down. The market’s inability to stay up is proof that it has to go down. Wednesday was one of those days.

Up….down….up….down. Please excuse me if I get dizzy, which I shouldn’t, as I am a former combat pilot.

The market is calling Trump's bluff, rising in the face of threatened whopping great tariff increases against most of the world. So far, lots of noise, no action. The bark is worse than the bite. As I have been saying all year, ignore the noise and don’t fight the tape.

Which brings me to the price of copper.

Look at the ten-year chart of the red metal below, and you see a pretty positive formation is taking place. You have a similar set up in the chart of Freeport McMoRan, the world’s largest producer of copper.

This is in the face of huge negatives, like the failure of the Chinese economy to recover, the end of all alternative energy subsidies, the government announcing that it will no longer mint pennies, and the ongoing recession in residential real estate.

The seasoned trader in me knows that when you throw bad news on a commodity and it fails to go down, you buy the heck out of it. Is copper discounting the expansion of the grid independent of government assistance? There is more than meets the eye here.

What if the end of the Ukraine War is the big black swan of 2025? The best estimate for the cost of the reconstruction of Ukraine is $1 trillion. That would require a lot of copper, maybe a China’s worth.

It would also present major positives for the global economy. It would give us a peace dividend on the scale of the last one that started in 1991. For a start, energy prices would collapse as restrictions on the export of 10 million barrels a day of Russian oil come off. Ukraine would reclaim its position as one of the world’s largest food exporters, especially wheat and sunflower oil.

I know that Russia is close to running out of weapons. Some two-thirds of Russia’s tanks and planes have been destroyed, and they don’t have the parts to build new ones. That is forcing them to draw on military stockpiles from the 1950s.

I have first-hand knowledge of this. I learned from the Pentagon that the Russian missile fired at me on the eastern front lines failed to explode because it was 55 years old. The best estimate is that Russia will completely run out of some kinds of weapons by this summer.

February has started with a respectable +2.73% return so far. That takes us to a year-to-date profit of +8.53% so far in 2025. My trailing one-year return stands at a spectacular +86.48% as a bad trade a year ago fell off the one-year record. That takes my average annualized return to +50.14% and my performance since inception to +759.42%.

I used the brief weakness in Goldman Sachs (GS) to add a new long. I took profits on my two longs in Tesla on a bounce. That tops up our portfolio with a remaining short in (TSLA) and longs in (NVDA) and (VST). These latter positions expire in three trading days at max profit.

Try beating that anywhere.

US Q4 Profits Hit Three-Year High. With reports in from nearly 70% of the S&P 500 companies as of Wednesday, fourth-quarter earnings are estimated to have risen 15.1% from a year earlier, up from an estimate of 9.6% growth at the start of January. The S&P 500 communication services sector, which includes companies such as Meta Platforms (META), is leading estimated fourth-quarter earnings gains among sectors, with year-over-year growth of 32.2%.

Core Inflation Rate Comes in Red Hot at 0.50%. Overall, advance was broad, led by shelter, food, and medicine. Shelter accounted for nearly 30% of the advance, according to the report from the Bureau of Labor Statistics out Wednesday. The so-called core CPI also climbed by more than forecast. That reflected higher prices for car insurance, airfares, and a record monthly increase in the cost of prescription drugs. It looks like no interest rate cuts for 2025.

PPI comes in Hot, reversing the gains on inflation of the past two years. The Producer Price Index, a measurement of average price changes seen by producers and manufacturers, rose 0.4% on a monthly basis and 3.5% for the 12 months ended in January. That held steady with December, which was upwardly revised to 3.5% according to Bureau of Labor Statistics data released Thursday.

US announced European Tariffs this Week, tanking stocks on Friday. Steel and metals shares are surging this morning. It’s pretty clear that markets hate all things tariff-related. Can we talk more about deregulation, which markets love? The reality is that markets don’t know how to price in Trump, swinging back and forth between euphoria one moment to Armageddon another. Best case, markets flatline. Worst case, they crash.

Gold (GLD) is headed for $3,000, my long-term target, on central bank and flight to safety buying. What’s the next target? $5,000 is the current turmoil in Washington continues. Notice that it’s the physical metal that’s moving, not the miners.

Foreign Investors Continue to Soak Up US Debt, seeking higher interest rates in an appreciating currency. Americans own 55% of the outstanding $36 trillion in US debt, while foreign investors own 24%, and the Federal Reserve 13%.

Wall Street Souring on Magnificent Seven. The market stronghold has diminished slightly, as the cohort struggles to meet ever-loftier expectations, and investors rotate into other parts of the market such as small caps. Tech titans also took a hit in late January after the emergence of Chinese startup DeepSeek raised concerns over how much spending will be needed to implement AI capabilities.

Market is Giving Up on any Interest Rate Cuts this Year, as the prospects of rising inflation from trade wars weigh on the market. Economists have warned that a wide-scale trade war could significantly raise prices, and consumers appear to be worried as well. Respondents to the University of Michigan’s consumer sentiment poll released Friday indicated they expect inflation to run at a 4.3% rate a year from now, up a full percentage point from the January reading.

Tesla Tanks 7%, and down 34% since December after Chinese competitor BYD announces a partnership with DeepSeek. The move is expected to accelerate BYD’s move into full self-driving. Tesla sales are falling in all major markets. Call it DeepSeek hit part 2.

Weekly Jobless Claims Fall. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 213,000 for the week ended February 8, the Labor Department said on Thursday. Economists polled by Reuters had forecast 215,000 claims for the latest week.

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. Technological 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, February 17, markets are closed for President's Day.

On Tuesday, February 18 at 8:30 AM EST, the New York Empire State Manufacturing Index is released.

On Wednesday, February 19 at 8:30 AM EST, the New Housing Starts are printed.

On Thursday, February 20 at 8:30 AM, the Weekly Jobless Claims are disclosed.

On Friday, February 21 at 8:30 AM, the Existing Home Sales are announced. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, I was having lunch at the Paris France casino in Las Vegas at Mon Ami Gabi, one of the top ten grossing restaurants in the United States. My usual waiter, Pierre from Bordeaux, took care of me in his typical ebullient way, graciously letting me practice my rusty French.

As I finished an excellent but calorie-packed breakfast (eggs Benedict, caramelized bacon, hash browns, and a café au lait), I noticed an elderly couple sitting at the table next to me. Easily in their 80s, they were dressed to the nines and out on the town.

I told them I wanted to be like them when I grew up.

Then I asked when they first went to Paris, expecting a date sometime after WWII. The gentleman responded, “Seven years ago”.

And what brought them to France?

“My father is buried there. He’s at the American Military Cemetery at Colleville-sur-Mer along with 9,386 other Americans. He died on Omaha Beach on D-Day. I went for the D-Day 70^th anniversary.” He also mentioned that he never met his dad, as he was killed in action weeks after he was born.

I reeled with the possibilities. First, I mentioned that I participated in the 40-year D-Day anniversary with my uncle, Medal of Honor winner Mitchell Paige, and met with President Ronald Reagan.

We joined the RAF fly-past in my own private plane and flew low over the invasion beaches at 200 feet, spotting the remaining bunkers and the rusted-out remains of the once floating pier. Pont du Hoc is a sight to behold from above, pockmarked with shell craters like the moon. When we landed at a nearby airport, I taxied over railroad tracks that were the launch site for the German V1 “buzz bomb” rockets.

D-Day was a close-run thing and was nearly lost. Only the determination of individual American soldiers saved the day. The US Navy helped too, bringing destroyers right to the shoreline to pummel the German defenses with their five-inch guns. Eventually, battleships working in concert with very lightweight Stinson L5 spotter planes made sure that anything the Germans brought to within 20 miles of the coast was destroyed.

Then the gentleman noticed the gold Marine Corps pin on my lapel and volunteered that he had been with the Third Marine Division in Vietnam. I replied that my father had been with the Third Marine Division during WWII at Bougainville and Guadalcanal and that I had been with the Third Marine Air Wing during Desert Storm.

I also informed him that I had led an expedition to Guadalcanal two years ago looking for some of the 400 Marines still missing in action. We found 30 dog tags and sent them to the Marine Historical Division at Quantico, Virginia, for tracing. I proudly showed them my pictures.

When the stories came back, it turned out that many survivors were children now in their 80s who had never met their fathers because they were killed in action on Guadalcanal.

Small world.

I didn’t want to infringe any further on their fine morning out, so I excused myself. He said Semper Fi, the Marine Corps motto, thanked me for my service, and gave me a fist pump and a smile. I responded in kind and made my way home.

Oh, and say “Hi” when you visit Mon Ami Gabi. Tell Pierre that John Thomas sent you and give him a big tip. It’s not easy for a Frenchman to cater to all these loud Americans.

Third Marine Air Wing

The D-Day Couple

The American Military Cemetery at Colleville-sur-Mer

Stay Healthy,

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

Revisiting the Great Depression

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When I first arrived on Wall Street during the early 1980s, some of the old veterans who worked through the 1929 stock market crash were just retiring and passed their stories on to me before they left.

One was my old friend, Sir John Templeton, founder of the Templeton funds, who often hosted me for dinner at his antebellum-style mansion at Lyford Cay in the Bahamas. John told me he was really excited when hired in ‘29 to handle the surge of brokerage business. After that, things got really boring for a decade.

The volatility we are experiencing now has many similarities to that epic event. In some ways, it's far worse. The 1929 downturn was spread over 34 months.

We all know about the Roaring Twenties, with flappers, bathtub gin, and a soaring stock market. Then, individuals could buy on ten to one margin. The high-flying tech stocks of the day, like RCA Radio, General Motors (GM), and Ford (F), soared. From 1921 to 1929, the Dow Average rocketed six-fold. The working class was sucked in.

Industry followed suit, taking the sign of rising stocks as proof of an economic boom. They massively boosted production in all sectors. That meant they went into the Great Depression loaded to the gills with inventory.

The Dow Average peaked on September 3, 1929, at 381. A slow burn of profit-taking ensued. Suddenly, a cascading waterfall of SELL orders hugely accelerated on “Black Monday” when the Dow plunged by 13%. It was followed by “Black Tuesday” when stocks lost another 13%.

Margin calls triggered a run on the banks as investors tried to withdraw cash to cover rampant cash calls. This spawned a financial crisis where eventually 4,000 banks went under.

By November, the Dow had fallen by 48% to 198. JP Morgan stepped in to stabilize the market, prompting a short-term rally. It was to no avail, with many retail investors seeing this as their last chance to sell. The market continued its slide, eventually hitting bottom at 41, or down an astonishing 89% from the top by July 8, 1932. The market then moved sideways in a wide 150-point range until the outbreak of WWII. It didn’t recover its 1929 peak until 1959.

A few years ago, I had lunch with the former governor of the Federal Reserve (click here), who did his PhD dissertation on the causes of the Great Depression. The big mistake the Fed made then was to raise interest rates to damp down stock speculation. They ended up destroying the economy, inadvertently making the depression far deeper and longer.

The world has learned a lot about central banking since those dark days. For a start, the theory of Keynesianism has been adopted whereby governments borrow and spend during economic downturns and run balanced budgets or surpluses during good times.

The modern Fed won’t be making the same mistake twice. During the last bear market, the Fed almost immediately took interest rates down to zero. Our central bank has also responded with monetary stimulus that is a large multiple of what we saw in 2008-09, essentially buying everything that was out there in fixed-income land.

My grandfather never participated in the stock boom of the 1920’s. He never found a broker he could trust. When the market crashed, he had to finish his basement in Brooklyn, New York, so that several relatives who had lost their homes could move in. We lost many equity investors for good in the 2008-09 crash. No doubt we will lose many more in this cycle.

What did Grandpa do with his money? He poured it all into real estate, including the land on which the Bellagio Hotel was eventually built, which he picked up for $500 an acre. His estate sold it in the 1970’s for $10 million.

Grandpa never bought a stock during his entire life.

Grandpa on Right

Exploring my New York Roots

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While in New York waiting to board Cunard’s Queen Mary 2 to sail for Southampton, England, a few years ago, I decided to check out the Bay Ridge address near the Verrazano Bridge where my father grew up. I took a limo over to Brooklyn and knocked on the front door.

I told the owner about my family history with the property, but I could see from the expression on his face that he didn’t believe a single word. Then I told him about the relatives moving into the basement during the Great Depression.

He immediately let me in and gave me a tour of the house. He told me that he had just purchased the home and had extensively refurbished it. When they tore out the walls in the basement, he discovered that the insulation was composed of crumpled-up newspapers from the 1930s, so he knew I was telling the truth.

I told him that grandpa would be glad that the house was still in Italian hands. Could I enquire what he had paid for the house that sold in 1923 for $3,000? He said he bought it as a broken-down fixer upper for a mere $775,000. After he put $500,000 into the property, it is now worth $2 million.

I’ll recite one story that took place at this address which has been passed down through the generations. By the end of 1945, the family had not seen my father for nearly four years, who was off fighting in the Pacific with the Marine Corps.

Then a telegram arrived informing the family of the date of my father’s return after a five-day train ride from Los Angeles. As only two daughters remained at home, he warned everyone not to cry.

Then the doorbell rang and there was Dad, 40 pounds lighter with a yellowish tinge to his skin from malaria but smiling. My grandfather burst into tears and wouldn’t stop bawling for an hour.

As I passed under the Verrazano Bridge on the Queen Mary II later that day, I contemplated how much smarter grandpa became the older I got.

I hope the same is true with my kids.

Queen Mary II Passing Under the Verrazano Bridge

The Market Outlook for the Week Ahead, or Back to Boot Camp

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I have a new outlook for the US stock markets.

The current government's economic policy reminds me a lot about the Marine Corps boot camp. Through harsh treatment and rigorous training, the Marines seek to destroy incoming recruits. They then spend 13 weeks rebuilding a new soldier from scratch who is obedient, respectful, follows orders, and is in much better physical condition. He is also a pretty good shot.

Since Trump inherited an almost perfect economy, with 3% real GDP growth, 2.8% inflation, and 4% unemployment, he has to break it first. Then he can spend the next four years rebuilding it and take credit for the recovery.

It looks like we are going to get more on the destruction front this week, with the US announcing European tariffs, which tanked stocks on Friday. We could remain in the destruction phase for the rest of the year. It sets up nicely at least a 20% correction sometime in 2025. Oh, and never buy on a Friday. All of the “shock and awe” announcements are occurring on the weekends. Wait for the Monday morning opening and buy the collapse.

It’s pretty clear that markets hate all things tariff-related. Can we please talk more about deregulation, which markets love? The reality is that markets don’t know how to price in Trump, swinging back and forth between euphoria one moment to Armageddon another. Best case, markets flat line. Worst case, they crash.

Here are some additional causes for concern. Big Tech was the only stock market sector that saw net inflows in 2024. It was also the only down sector in January. It just so happens to be the most overweight sector among almost all individuals and institutions, including yours. Big Tech now accounts for 35% of stock market capitalization. It is a concentration on steroids. So when we finally DO get a correction, it will be a big one, easily more than 10%.

Looking at stock market performance around the world since the 2008-09 financial crisis, it’s easy to see where the idea of American exceptionalism comes from. Since 2010, the German stock market (EWG) is up by 142% and the UK (EWU) by 112%. During the same 15-year period, the S&P 500 (SPY) soared by 1,112%, an outperformance of an eye-popping 8:1.

Since the beginning of 2025, the German stock market (EWG) is up by 12.7% and the UK (EWU) by 9%. In the meantime, the S&P 500 has managed a mere 3.5% gain. What has happened? Has something changed? Is American exceptionalism a thing of the past? If so, it would be terrible news for stocks.

In the rest of the world, 26% of corporate cash flow is reinvested in the company. In the US, it’s 42%, and for the Magnificent Seven, it’s 57%. This is American Exceptionalism distilled by a single driver. If this continues, that’s great. If rampant uncertainty drives US companies into hiding, it won’t. 90-day US Treasury bills yielding a risk-free 4.2% look pretty good in this new chaotic world, especially if you are still sitting on the gigantic profits of the past two years.

This is why Foreigners have been pouring money into the US as fast as possible and has been a major factor in our price appreciation until now. Foreign investors now own $23 trillion worth of American debt, equities, and real estate today versus only $8 trillion in 2017.

As I mentioned last week, when I suggest a European investment idea to a European, they tell me I am out of my mind and beg for more US investment ideas. I know this because about one-third of the Mad Hedge subscribers are aboard in 134 countries.

And this is why markets are so jittery. Some 23% of all the completed cars sold in the US are actually made in Mexico and Canada. For auto parts, the figure is more than 50%. The US sold 3.7 million vehicles made in Mexico and Canada. The new 25% tariff will increase prices by $6,300 per vehicle. Average car prices are now at $50,000 and are already at all-time highs. That works out to a $22.7 billion tax on the buyers of new cars who are mostly middle class.

My bet? That the prices of used cars soar, which aren’t subject to any such taxes.

Turn off the TV. Ignore the noise. Buy the down days and sell the up days. It’s no more complicated than that. If you want to play headline ping pong with the president, be my guest. But you’ll lose your shirt.

February has started with a breakeven +0.57% return so far.
That takes us to a year-to-date profit of +6.25% so far in 2025. My trailing one-year return stands at +83.45% as a bad trade a year ago fell off the one-year record. That takes my average annualized return to +5.23% and my performance since inception to +757.12%.

I used the weakness in Tesla to double up my long there. That tops up our portfolio to a long in (TSLA), a short in (TSLA), and longs in (NVDA) and (VST).

Try beating that anywhere.

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, February 10, nothing of note takes place.

On Tuesday, February 11, at 8:30 AM EST, the NFIB Business Optimism Index is released.

On Wednesday, February 12 at 8:30 AM, the Core Inflation Rate is printed.

On Thursday, February 13 at 8:30 AM, the Weekly Jobless Claims are disclosed.

On Friday, February 14 at 8:30 AM, the Producer Price Index is announced. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, it was with a heavy heart that I boarded a plane for Los Angeles to attend a funeral for Bob, the former scoutmaster of Boy Scout Troop 108.

The event brought a convocation of ex-scouts from up and down the West coast and said much about our age.

Bob, 85, called me two weeks ago to tell me his CAT scan had just revealed advanced metastatic lung cancer. I said, “Congratulations Bob, you just made your life span.”

It was our last conversation.

He spent only a week in bed and then was gone. As a samurai warrior might have said, it was a good death. Some thought it was the smoking he quit 20 years ago.

Others speculated that it was his close work with uranium during WWII. I chalked it up to a half-century of breathing the air in Los Angeles.

Bob originally hailed from Bloomfield, New Jersey. After WWII, every East Coast college was jammed with returning vets on the GI bill. So he enrolled in a small, well-regarded engineering school in New Mexico in a remote place called Alamogordo.

His first job after graduation was testing V2 rockets newly captured from the Germans at the White Sands Missile Test Range. He graduated to design ignition systems for atomic bombs. A boom in defense spending during the fifties swept him up to the Greater Los Angeles area.

Scouts I last saw at age 13 or 14 were now 60, while the surviving dads were well into their 80s. Everyone was in great shape, those endless miles lugging heavy packs over High Sierra passes obviously yielding lifetime benefits.

Hybrid cars lined both sides of the street. A tag-along guest called out for a cigarette, and a hush came over a crowd numbering over 100.

Apparently, some things stuck. It was a real cycle of life weekend. While the elders spoke about blood pressure and golf handicaps, the next generation of scouts played in the backyard or picked lemons off a ripening tree.

Bob was the guy who taught me how to ski, cast rainbow trout in mountain lakes, transmit Morse code, and survive in the wilderness. He used to scrawl schematic diagrams for simple radios and binary computers on a piece of paper, usually built around a single tube or transistor.

I would run off to Radio Shack to buy WWII surplus parts for pennies on the pound and spend long nights attempting to decode impossibly fast Navy ship-to-ship transmissions. He was also the man who pinned an Eagle Scout badge on my uniform in front of beaming parents when I turned 15.

While in the neighborhood, I thought I would drive by the house in which I grew up, once a modest 1,800 square foot ranch-style home to a happy family of nine. I was horrified to find that it had been torn down, and the majestic maple tree that I planted 40 years ago had been removed.

In its place was a giant, 6,000-square-foot marble and granite monstrosity under construction for a wealthy family from China.

Profits from the enormous China-America trade have been pouring into my hometown from the Middle Kingdom for the last decade, and mine was one of the last houses to go.

When I was class president of the high school here, there were 3,000 white kids and one Chinese. Today, those numbers are reversed. Such is the price of globalization.

I guess you really can’t go home again.

At the request of the family, I assisted in the liquidation of his investment portfolio. Bob had been an avid reader of the Diary of a Mad Hedge Fund Trader since its inception, and he had attended my Los Angeles lunches.

It seems he listened well. There was Apple (AAPL) in all its glory at a cost of $21. I laughed to myself. The master had become the student, and the student had become the master.

Like I said, it was a real circle of life weekend.

Scoutmaster Bob

1965 Scout John Thomas

The Mad Hedge Fund Trader at Age 11 in 1963

Stay Healthy,

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

A Note on Assigned Options, or Options Called Away

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I just received an excited text message from an excited Concierge client. His short position in the (TSLA) February 2025 $540-$550 vertical bear put debit spread had just been called away. That meant he would receive the maximum profit a full 11 trading days before the February 21 option expiration.

With the heightened volatility this week, I am seeing an increasing number of options positions assigned or called away.

I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

I still have five positions left in my model trading portfolio that is deep in-the-money, and about to expire in 9 trading days on the February 21 options expiration day. Those are the

Current Capital at Risk

Risk On

(TSLA) 2/$300-$310 call spread 10.00%

(TSLA) 2/$310-$320 call spread 10.00%

(NVDA) 2/$90-$95 call spread 10.00%

(VST) 2/$100-$110 call spread 10.00%

Risk Off

(TSLA) 2/$540-$550 spread -10.00%

Total Net Position 30.00%

Total Aggregate Position 50.00%

That opens up a set of risks unique to these positions.

I call it the “Screw up risk.”

As long as the markets maintain current levels, this position will expire at its maximum profit value.

There is a heightened probability that your short position in the options may get called away.

Although the return for those calling away your options is very small, this is how to handle these events.

If exercised, brokers are required by law to email you immediately, and I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.

The short options can get “assigned” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.

Let’s say you get an email from your broker telling you that your call options have been assigned away.

I’ll use the example of the Berkshire Hathaway (BRK/B) August 2024 $405-$415 in-the-money vertical Bull Call spread since so many of you had these.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 11 days before the August 16 expiration date.

In other words, what you bought for $8.70 on July 12 is now worth $10.00, giving you a near-instant profit of $1,300 or 14.94% in only 11 trading days.

All you had to do was to call your broker to instruct them to “exercise your long position in your (BRK/B) August 16 $405 calls to close out your short position in the (BRK/B) August 2024 $410 calls.”

You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.

You also must do this the same day that you receive the exercise notice.

This is a perfectly hedged position. The name, the ticker symbol, number of shares, and number of contracts are all identical, so you have no exposure at all.

Call options are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (BRK/B). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.

Weird stuff like this happens in the run-up to options expirations like we have coming.

A call owner may need to sell a long (BRK/B) position after the close, and exercising his long (BRK/B) call, which you are short, is the only way to execute it.

Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.

There are thousands of algorithms out there that may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day, which can be achieved through option exercises.

And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away and then give you the wrong advice on what to do about it.

There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.

They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.

Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long, and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

Calling All Options!

They’re Not Making Americans Anymore

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You can count on a bear market hitting some time in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 and would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, nor examine animal entrails in order to predict the future. It’s much easier than that.

I simply read the data that was just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for the link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest number since WWII, when 17 million men were away in the military, a crucial part of the equation.

Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020’s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened was during the 1980’s and 19990’s stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind, when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash, and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The Great Recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.

Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year were born to women over the age of 35, a new high.

This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017 the birth rates for Hispanics have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asians 4%.

Europe has long had the same problem with plunging growth rates but only much worse. Historically the US has made up for the shortfall with immigration, but that is now falling thanks to the current administration policies. Restricting immigration now is a guarantee of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 15-34, and my life is only half over. Where did you say they keep the Pampers?

I’m Doing My Part

Learning the Art of Risk Control

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Now that you know how to make money in the market, I’m going to teach you how to hang on to it. There is no point in booking winning trades only to lose money by making careless beginner’s mistakes. So today, I am going to talk about risk control.

The first goal of risk control is to conserve whatever capital you have. I tell people that I am too old to start over again as a junior trader at Morgan Stanley if I lose all my money. With my attitude, nobody would hire me anyway. So, I’m pretty careful when it comes to risk control.

The art of risk control is to make sure your portfolio is profitable, no matter what happens to the market. You want to be a winner, whether the market goes up, down, or sideways. This is what I do.

Remember, we are not trying to beat an index here. Our goal is to make actual dollars at all times, to keep the P&L chart always moving from the lower left to the upper right. You can’t eat relative performance, nor can you use it to pay your bills.

The second goal of a portfolio manager is to make your portfolio bomb-proof. You never know when a flock of black swans is about to alight on the market, or a geopolitical shock comes out of the blue causing markets to crash.

The biggest mistake I see beginning traders make is that they are in too much of a hurry to get rich. As a result, they make too much money too soon. I can’t tell you how many times I have heard of first-time traders losing all their money on their first trade, well before they got a handle on the basics.

I’m usually right 80% to 90% of the time (this year it’s 95%). That means I’m wrong 10% to 20% of the time. If you bet the ranch on one of my losing trades, you’ll get taken to the cleaners. Never bet the ranch.

If you do, you are turning a calculated list into random risk, or throwing darts at a dartboard and hoping for the best. It is akin to buying a lottery ticket. I often tell clients they have gambling addictions. Make sure you’re not one of them. You can’t trade yourself back from zero with no money.

If you can master the skills I'm teaching you, you can make a living at this FOREVER! So, what’s the hurry? As my old trading mentor used to tell me, the late Barton Biggs of Morgan Stanley, “Invest in haste, repent in leisure,” a time-tested nostrum that is always true in this business.

I recommend that you use NO real money on your first few trades. Start with paper trading only. All of the online trading platforms offer wonderful tools that allow you to practice trading before you try the real thing. If you lose in their “pretend money”, no harm, no foul. They don’t want you to go broke either. Broke customers don’t pay commissions. They also sue.

The more time you spend learning to trade, the more money you will get out of it. Remember, work in, money out. Spend at least an hour or two getting to know your own trading platform well.

Once you start trading will real money it will become a totally different experience. Your heart rate steps up. Your hands get sweaty. You start checking your watch. It’s a lot like going into combat. In fact, combat veterans make great traders, which is why the military recruits so actively from the military. I think all these instincts trace back to our Neanderthal days when our main concern was being chased by a saber-toothed tiger.

The time to learn a trading discipline is NOW. All of a sudden, your opinions, your ego, and your savings are on the line. It’s crucial for you to always start small when using real money.

That way, making a beginner’s mistake, like confusing “BUY” and “SELL” (I see it every day) will only cost you a cup of coffee at Starbucks, and not your kid's college education, your house, or your retirement. It won’t take long for you to grow from one contract to thousands, as I have done myself for many years.

It’s all about finding your comfort level and risk tolerance. You never want to have a position that is so large that you can’t sleep at night, or worse, call me in the middle of the night and ask what to do with it. My answer is always the same. Cut your position in half. If you still can’t sleep, cut it in half again.

I make a bold prediction here. The more experience you gain, the faster your risk tolerance goes up.

I’ll give you one more piece of advice. Take your broker's technical support phone number and paste it to the top of your computer monitor. You don’t want to go look for it when you can’t figure out how to get out of a position, or your platform breaks. These are machines. It happens. As they teach in flight school, it’s not a matter of if but when a machine breaks.

There’s one more thing. When you’re ready to commit real money, don’t forget to take your account off of paper trading. The profits you make there can’t be spent.

Risk management is an important part of the position sheet I update every day.

Take a look below at a past position sheet I sent out during sharply rising markets.

The important thing to look at here is my long/short balance. On the left is the position name and on the right is the position weighting. I usually run 10% positions so I don’t have all my eggs in one basket. Maybe twice a year, I’ll run a 20% position in a single stock, and once a year I’ll have a 30% weighting. Above that, I start to lose sleep.

I have further subdivided the portfolio into “RISK ON” and “RISK OFF.” “RISK ON” means the world is getting better, while “RISK OFF” means the world is getting worse. The long positions have positive numbers, while the short positions have negative ones.

I like to balance “RISK ON” and “RISK OFF” to remove overall market risk from the portfolio. When markets are rising, I turn positive. When markets are falling, I tilt negative. At the bottom, I have my total net exposure. On this particular day, I was running 60% in long and 20% in shorts, for a total net position of 40% long. This is an aggressively bullish portfolio.

When I’m bullish, the net position is positive. When I’m bearish the net position is negative. When I have no strong views, the net position is zero. That way, if nothing happens you still get to rake the money in.

I have no positions at all only a few days a year. I only play when the risk/reward is overwhelmingly in my favor, and sometimes that is just not possible.

One more warning to the wise. There are literally hundreds of gurus out there marketing services promising 100% a year, if not 100% a month, or even 100% a day. They are all fake, created by 20-year-old marketing types who have never worked in the stock market, or even traded. Unfortunately, I work in an industry where almost everyone else is a crook.

I have worked in the markets for more than 50 years and have seen everything. Ray Dalio is the top-performing hedge fund manager in history and he only averages 35% a year. The number of real traders who are right more than 80% of the time you can almost count on one hand. If returns sound too good to be true, they never are.

I want to offer special caution about naked put shorting strategies which are promoted by 90% of these letters. This is where a trader sells short a put position without any accompanying hedge, hence the word “naked.” This is an unlimited-risk position.

You might take in a $1 premium with this approach, but if the market turns against you, and implied volatilities go through the roof, your losses could balloon exponentially to $100 or more, wiping you out. The newsletters recommending these have absolutely no idea when or if this is going to happen.

I call this the “picking up the pennies in front of the steamroller strategy.” No professional trader worth his salt will put money into it. It is banned by most investing institutions. And only a few brokers will still let you do this, and then only with 100% margin requirements, because when losses exceed 100% of capital, they’re left carrying the bag.

Many of those strategies you see being hawked online look great on paper but can’t actually be executed. In other words, you just paid thousands of dollars for a service that is utterly useless. Sounds like a “No Go” to me.

Stop losses are an important part of any trading strategy. No one is right 100% of the time. If they claim so they are lying. The best way to avoid a big loss is to take a small one.

There are many possible places to use stop losses. I use 2% of my total capital. If I start to lose more than that I am out of there. It’s easy for me to do this because 90% of the time the next trade will be a winner and I’ll make back all the money I just lost.

Others use a 10% decline in the underlying stock as a good arbitrary point to limit losses. Others rely on Fibonacci levels (I’ll get to him later). Many traders rely on key moving averages, like the 50-day or the 200-day.

The problem with this is that high-frequency traders have access to the same charting data as you do. They’ll program their algorithms to quickly take a stock through your stop loss level, buy your stock for cheap, and then take it right back up again to book a quick profit. You are left with a “SELL” confirmation in your inbox and no position in a rising market. No wonder people think Wall Street is rigged.

Another concept is the “trailing stop”. That’s when after an initial rise, you place a stop-loss order at your cost. That way you CAN’T lose money. This is known as “playing with the house's money.” This approach has one shortfall. You can’t place stop losses in the options market that are executed automatically. The same is true for options spreads.

In this case, you use what is known as a “pocket stop loss” where you set your mental level on when to get out. Also, these are not automatic, they do establish a trading discipline. Caution: You can’t execute a pock-stop loss when you’re playing gold or on a one-week cruise in the Caribbean.

So, there you have it. By managing your risk prudently, you can tip the risk/reward balance in your favor.

I hope this helps.