Year of the Rabbit - Short-tailed Trading
CME: E-Mini Select Sector Futures (
XAZ1!, CME:SOX1!, BIO1!, XAV1!, XAB1!, 
XAK1!, 
XAI1!)
According to Chinese Zodiac, tigers are vigorous, daring, competitive and unpredictable. 2022, the Year of Tiger, was symbolized by these bursts of power:
• First war in Europe after World War II (Russia-Ukraine)
• Highest inflation rates in US and Europe in four decades
• Seven consecutive interest rate hikes by the US Federal Reserve
• Crypto market crash wiped out $2 trillion and FTX, its 2nd largest Exchange
• Artic storms swept North America like the Sci-Fi movie The Day After Tomorrow
• China ended Zero-Covid and brought 1.4 billion people back to normal lives
Enter the Year of the Rabbit on January 22nd, the lunar Chinese New Year, it will be a long year with 384 days. Why? Every few years, a leap month is added in to bring the 360-day lunar year to align with the 365-day solar calendar.
Chinese astrology characterized rabbits as gentle, quiet, elegant, alert, quick, and skillful. While it might appear absurd to relate trading to a Zodiac sign, I would like to give my main investing theme a memorable name, Short-tailed Trading.
As we switch gears in the new year, I want to first review what happened in the past year, before discussing forward-looking new ideas. Today we focus on equities and equity indexes and discuss interest rates, foreign exchanges, energy, metals, agricultural commodities, and cryptocurrencies in the follow-ups.
US Equity Indexes in Negative Territory All Year Long
What happened in a year: In Q1, geopolitical crisis drove stocks down from record-high. In Q2 and Q3, Fed rate hikes pushed stocks deep in the red. In Q4, Fed Pivot helped pare some losses.
Major US indexes post their worst year since 2008. The Dow Jones Industrial Average closed at 33,147.25 on December 30th, down 8.8% for the year. The S&P 500 shed 19.4% to end at 3,839.50. At 10,466.88, the Nasdaq Composite lost a third of its value in 2022. The small-cap Russell 2000 closed at 1,765.25, down 21.7%.
In the new year, uncertainties will remain the key price drivers of global stock markets: central bank policy, inflation, economic growth, geopolitical crisis, and China reopening. Depending on the specific outcome, the impact of a given factor could range from very positive to very negative, and anything in between.
• The Fed: dovish (tailwind) or hawkish (headwind)
• Inflation: stable to low (tailwind) or high (headwind)
• Growth: soft landing (tailwind) or hard landing (headwind)
• Geopolitical crisis: peace deal (tailwind) or escalating conflict (headwind)
• China: growth engine (tailwind) or Covid 2.0 (headwind)
Fundamentally, stock value continues to be pressurized by elevated interest rates and the high costs of rent, labor, and fuels. However, market price could diverge from economic value if some of the above factors reshape investor expectations.
Short Range Trading Horizon
Last year, many of my trading strategies stayed on the book for several months.
• Short RBOB Gasoline Futures (July-September)
• Strangle Options on CBOT Wheat (June-August)
• Short Russell 2000 Futures (August-October)
This year, I prefer shorter-range strategies that open and close in days instead of months. It’s one thing to nail down a single factor while holding all else constant. It’s another to analyze several moving targets with uncharted trajectories.
Global events that have temporarily dislocated prices create trading opportunities. Take advantage of the shorter-term impact but avoid trying to stack one inflammable factor on top of another. Simple is often the best. For me, it’s quite difficult to analyze the net impact of China reopening and Fed rate hikes together with any precision.
“Alert and quick”, a short-tailed rabbit focuses on one thing at a time and acts quickly.
Pick Stocks and Protect Your Positions
Many stocks were beaten down sharply. The chart below contains a list of the worst performing sectors and the biggest losers in the S&P 500. Data source: FactSet.
In the Tech-heavy Nasdaq 100, some of the biggest losers were (data source: Nasdaq):
• Rivian Automotive, $18.43 (-82.1%)
• Tesla, $123.18 (-68.9%)
• PayPal, $71.22 (-64.4%)
• Warner Brothers, $9.48 (-62.8%)
• Marvell Technology, $30.04 (-60.0%)
• Netflix, $294.88 (-54.7%)
• Intel, $26.43 (-50.7%)
• Micro Technology, $49.98 (-48.9%)
Today, the once overpriced Big Techs are now a bargain. My reasoning: many troubles facing Big Techs are non-recurring and already priced in. Those companies going through strategic changes and large layoffs may be positioned to survive in leaner years ahead. There are many of them, including those in the above lists. Some are S&P 500 component companies, while others are in the Nasdaq 100.
I would, however, caution betting on any single stock. It’s a good idea to put our eggs in more than one basket and spread our investment in several sectors.
As I discussed earlier, the stock market is not out of the woods yet. It would be wise to protect our long positions on the downside using precision hedging tools such as CME Select Sector Futures.
• E-Mini S&P Communication Services Select Sector (XAZ)
• E-Mini PHLX Semiconductor Sector (SOX)
• E-mini Nasdaq Biotechnology Index (BIO)
• E-mini S&P Health Care Select Sector (XAV)
• E-mini S&P Materials Select Sector (XAB)
• E-mini S&P Technology Select Sector (XAK)
• E-mini S&P Industrial Select Sector (XAI)
Trade Idea (For Illustration Only)
Tesla (TLSA) lost 66% YoY while the S&P Tech Sector (XAK) was down only 25%. I think TLSA is oversold and want to buy some on the cheap. However, I am concerned that a recession would push the Tech sector down further, dragging TLSA along with it.
As a hedge, I would place a short futures contract on XAK for each 100 shares of TLSA. Initial investments are:
• 100 shares of TLSA @123.18, $12,318
• 1 XAK short futures contract with initial margin of $11,000
Happy trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs tradingview.com/gopro/
XAZ1!, CME:SOX1!, BIO1!, XAV1!, XAB1!, XAK1!, XAI1!)According to Chinese Zodiac, tigers are vigorous, daring, competitive and unpredictable. 2022, the Year of Tiger, was symbolized by these bursts of power:
• First war in Europe after World War II (Russia-Ukraine)
• Highest inflation rates in US and Europe in four decades
• Seven consecutive interest rate hikes by the US Federal Reserve
• Crypto market crash wiped out $2 trillion and FTX, its 2nd largest Exchange
• Artic storms swept North America like the Sci-Fi movie The Day After Tomorrow
• China ended Zero-Covid and brought 1.4 billion people back to normal lives
Enter the Year of the Rabbit on January 22nd, the lunar Chinese New Year, it will be a long year with 384 days. Why? Every few years, a leap month is added in to bring the 360-day lunar year to align with the 365-day solar calendar.
Chinese astrology characterized rabbits as gentle, quiet, elegant, alert, quick, and skillful. While it might appear absurd to relate trading to a Zodiac sign, I would like to give my main investing theme a memorable name, Short-tailed Trading.
As we switch gears in the new year, I want to first review what happened in the past year, before discussing forward-looking new ideas. Today we focus on equities and equity indexes and discuss interest rates, foreign exchanges, energy, metals, agricultural commodities, and cryptocurrencies in the follow-ups.
US Equity Indexes in Negative Territory All Year Long
What happened in a year: In Q1, geopolitical crisis drove stocks down from record-high. In Q2 and Q3, Fed rate hikes pushed stocks deep in the red. In Q4, Fed Pivot helped pare some losses.
Major US indexes post their worst year since 2008. The Dow Jones Industrial Average closed at 33,147.25 on December 30th, down 8.8% for the year. The S&P 500 shed 19.4% to end at 3,839.50. At 10,466.88, the Nasdaq Composite lost a third of its value in 2022. The small-cap Russell 2000 closed at 1,765.25, down 21.7%.
In the new year, uncertainties will remain the key price drivers of global stock markets: central bank policy, inflation, economic growth, geopolitical crisis, and China reopening. Depending on the specific outcome, the impact of a given factor could range from very positive to very negative, and anything in between.
• The Fed: dovish (tailwind) or hawkish (headwind)
• Inflation: stable to low (tailwind) or high (headwind)
• Growth: soft landing (tailwind) or hard landing (headwind)
• Geopolitical crisis: peace deal (tailwind) or escalating conflict (headwind)
• China: growth engine (tailwind) or Covid 2.0 (headwind)
Fundamentally, stock value continues to be pressurized by elevated interest rates and the high costs of rent, labor, and fuels. However, market price could diverge from economic value if some of the above factors reshape investor expectations.
Short Range Trading Horizon
Last year, many of my trading strategies stayed on the book for several months.
• Short RBOB Gasoline Futures (July-September)
• Strangle Options on CBOT Wheat (June-August)
• Short Russell 2000 Futures (August-October)
This year, I prefer shorter-range strategies that open and close in days instead of months. It’s one thing to nail down a single factor while holding all else constant. It’s another to analyze several moving targets with uncharted trajectories.
Global events that have temporarily dislocated prices create trading opportunities. Take advantage of the shorter-term impact but avoid trying to stack one inflammable factor on top of another. Simple is often the best. For me, it’s quite difficult to analyze the net impact of China reopening and Fed rate hikes together with any precision.
“Alert and quick”, a short-tailed rabbit focuses on one thing at a time and acts quickly.
Pick Stocks and Protect Your Positions
Many stocks were beaten down sharply. The chart below contains a list of the worst performing sectors and the biggest losers in the S&P 500. Data source: FactSet.
In the Tech-heavy Nasdaq 100, some of the biggest losers were (data source: Nasdaq):
• Rivian Automotive, $18.43 (-82.1%)
• Tesla, $123.18 (-68.9%)
• PayPal, $71.22 (-64.4%)
• Warner Brothers, $9.48 (-62.8%)
• Marvell Technology, $30.04 (-60.0%)
• Netflix, $294.88 (-54.7%)
• Intel, $26.43 (-50.7%)
• Micro Technology, $49.98 (-48.9%)
Today, the once overpriced Big Techs are now a bargain. My reasoning: many troubles facing Big Techs are non-recurring and already priced in. Those companies going through strategic changes and large layoffs may be positioned to survive in leaner years ahead. There are many of them, including those in the above lists. Some are S&P 500 component companies, while others are in the Nasdaq 100.
I would, however, caution betting on any single stock. It’s a good idea to put our eggs in more than one basket and spread our investment in several sectors.
As I discussed earlier, the stock market is not out of the woods yet. It would be wise to protect our long positions on the downside using precision hedging tools such as CME Select Sector Futures.
• E-Mini S&P Communication Services Select Sector (XAZ)
• E-Mini PHLX Semiconductor Sector (SOX)
• E-mini Nasdaq Biotechnology Index (BIO)
• E-mini S&P Health Care Select Sector (XAV)
• E-mini S&P Materials Select Sector (XAB)
• E-mini S&P Technology Select Sector (XAK)
• E-mini S&P Industrial Select Sector (XAI)
Trade Idea (For Illustration Only)
Tesla (TLSA) lost 66% YoY while the S&P Tech Sector (XAK) was down only 25%. I think TLSA is oversold and want to buy some on the cheap. However, I am concerned that a recession would push the Tech sector down further, dragging TLSA along with it.
As a hedge, I would place a short futures contract on XAK for each 100 shares of TLSA. Initial investments are:
• 100 shares of TLSA @123.18, $12,318
• 1 XAK short futures contract with initial margin of $11,000
Happy trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trade set-ups and express my market views. If you have futures in your trading portfolio, check out on CME Group data plans in TradingView that suit your trading needs tradingview.com/gopro/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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