“Idle hands are the devil’s workshop.” Chaucer’s haunting words echoing from the 14th-century may aptly describe the current reasoning behind the unprecedented number of remote, under and unemployed workers who have opened trading accounts over the last several months. Major online brokers including Charles Schwab, TD Ameritrade, E-Trade (which is soon to be acquired by Morgan Stanley) and relative newcomer and millennial favorite, Robinhood, have all recently reported record new account openings and a surge in the total number of stock positions.
Take boredom, mix it with commission-free trading, fractional shares (which means one can trade any dollar amount regardless of the high per share price), a narrow big-name tech rally and conviction that the stock market is a guaranteed road to riches and you have a recipe for irrational exuberance that closely resembles the late 1990’s dot com run-up. Those of us over the age of forty remember when every investor was a genius and the stock market could only go in one direction: up…and forever, right? Some may remember the TV commercials with hairdressers getting Blackberry trade alerts and bragging about their trading profits while cutting a client’s hair. Most were convinced that it was “the new economy”, far different from what their parents invested in. Sadly only a few seasoned experts, those keenly aware of the inevitable, planned for something catastrophic.
Fast forward to today and a similar blind exuberance is fueling the equity markets. This time, however, it’s an unwavering conviction that the Federal Reserve and governments all over the world will from now until eternity funnel endless amounts of stimulus into the economy, moral hazard be damned. So currently the market is like having a license to print money in which any inexperienced participant can generate a return. However, as with the now infamous tech bubble, the housing market collapse and the many other boom and bust scenarios that have played out throughout the years (and even centuries), euphoric investors seldom anticipate an end to the bullish long-only game. Bubble-bursting catalysts can come in the most unimaginable forms. And what looms on the horizon will likely result in severe pain for the average retail investor.
Rather than continue to party…err, trade…like it’s 1999 with reckless abandon, we choose to trade methodically and objectively while positioning ourselves to profit when the music does finally stop. And history tells us that it will.
Forte Strategy Update
We executed five trades this week using both the Nasdaq 3X leveraged ETF (TQQQ) and the 1.5X leveraged VIX index ETF (UVXY) for a net gain of 3.3% compared to a gain of 1.7% by the S&P 500. Our YTD net results are a 2.7% gain compared to a 0.5% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% vs 33.9% for the market and the correlation between the two data sets is 0.154 – so essentially no correlation. For the month of July, the Forte Strategy generated a gain of 5.4% compared to a gain of 3.7% for the S&P 500.
We made a lot of progress this week moving the Forte Strategy to the more robust TradeStation platform currently being employed by the Forte Futures Strategy. This was a key step in enabling the auto-trading functionality needed to consistently execute the 15-min trading models (These were not used this week due to business travel, but will be auto-traded and/or professionally executed soon. The respective math models continue to show that adding these short-cycle models into the arsenal will improve returns and reduce the magnitude of drawdowns.)
Forte Futures Update
Our Forte Futures strategy ended the month of July with a 4.1% gain and a cumulative 5.7% return and 4.6% drawdown since May 2020 inception. We continue to be optimistic that we can sustain and even further improve these returns. Stay tuned!