Market Pulse Premium: Happy Friday from FinanceTLDR

Reviewing the past week and preparing for next week.

I shared this annotated daily chart of the S&P 500 in Sunday’s inaugural Market Pulse Premium issue.

How did the market move this week?

Looks like the annotated arrow was very prescient.

I mentioned that we were likely going to see the S&P 500 move up to the mid Bollinger Band line and that was exactly what it did (see the top wick in the last candle).

Sweet, this was a good probabilistic call for the past week.

Now it’s time to focus on the future.

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ℹ️ Aside: Overall Framework

The overall trading framework that this issue is based on can be summarized as:

1. Having a point-of-view, with probabilities, is better than no point-of-view.

2. You cannot predict the future, so you must be okay with making wrong decisions.

3. Lean into the arithmetic mean over the geometric mean through fractionalization of bets.

   1. Each idea gets a small portion of capital dedicated to it. Ideas with more conviction get more capital. Ideas with less conviction get less capital.

   2. Concurrent bets should have minimal correlation so that a single market event doesn’t break several ideas at the same time and significantly hurt the overall portfolio.

4. Lean into asymmetrical risk-rewards.

   1. In other words, the pay-off for being right should be significantly larger than the loss for being wrong.

   2. If you’re only 10% better at coming up with right ideas than wrong ideas, with reasonable bet sizing and asymmetrical risk-rewards, you can generate significant returns.

   3. Options is an example of an asset with asymmetrical risk-rewards. When an idea is expressed as an options position, it can pay off tremendously if you’re right (Keith Gill turned $53,000 to $50 million in two years) while if you’re wrong, you’ll at most only lost 1x.

5. Iterate fast.

   1. Iterate fast on idea generation and trade execution. Fail fast, succeed fast, and review results often.

For more details, check out these two prior newsletter issues:

1. Two Key Principles of Effective Investing

2. Thinking In Probabilities

For premium subscribers, I elaborated on this framework in the document “Retail Multi-Strat Hedge Fund Emulation” that I’ve shared in the Premium Subscribers spreadsheet.

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ℹ️ Aside: Determining Probabilities

I will share a series of probabilities below. You may be wondering how I came up with them.

They represent quick and rough point-of-views based on the qualitative aspects of the market’s recent historical behaviors.

One should interpret them as, “this is more likely to happen, here’s why”, instead of, “here’s a mathematical framework to show why the probability for this happening should be exactly X”.

Every new market environment is different from past environments with many unknown unknowns, so any process to quantify exact probabilities could itself be wildly wrong.

In the face of many unknown unknowns, I find it often better to rely on intuition (Daoism) rather than complicated and time-consuming processes to determine event probabilities.

However, I’m not saying that one should entirely eschew complicated and time-consuming processes. They have their place and I’ll use them when I feel that they’re appropriate.

As Charles de Gaulle observed in his meditation on leadership, The Edge of the Sword (1932), the artist ‘does not renounce the use of his intelligence’ – which is, after all, the source of ‘lessons, methods, and knowledge’. Instead, the artist adds to these foundations ‘a certain instinctive faculty which we call inspiration’, which alone can provide the ‘direct contact with nature from which the vital spark must leap’."

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ℹ️ Aside: Fiscal Dominance

Don’t miss the latest newsletter issue on Fiscal Dominance.

I think it’s a very important concept for understanding what’s going on in the market. The Federal Reserve’s economic influence, although still significant, has become increasingly less relevant in this environment of Fiscal Dominance.

In the parting wake of the Federal Reserve emerges the US Treasury which is now dictating the tempo of markets and the economy.

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Thoughts On Next Week

So where do I think the market is headed next week?

I think the probabilities are in favor of sideways consolidation around the mid Bollinger Band line towards the top BB band (2 standard deviation move from the 20 simple moving average).

Why do I think so?