#115: Felt Like a Punch in the Face

I am not referring to the man who punched the women in the face in the Olympic finals yesterday.

The chart below shows my last two short trades. The first trade was profitable. I lowered my stop loss and got stopped out. Yesterday I went short again and had my stop at the previous high. I went to sleep, and the market took out my stop and then collapsed. I woke up gutted, as if I had just been hit in the face.

This is not a story about me. It is rather about what is required to be a champion. On Sunday night, I stayed up well past midnight to watch Jessica Fox, the Australian team torch bearer at the Olympics, compete in the semi-finals of her one event. She bombed in it but still managed to qualify for the finals. I went to sleep and woke up to discover she had won gold.

This is what winners do. They shake off the disappointment that comes with underperformance or bad luck and get on with the job they are experts in. This is the best advice I can give to myself and anyone else suffering from a setback.

A friend of mine shared a similar plot from a long / short hedge fund in their monthly commentary. The underperformance of the S&P 500 Equal Weight Index (purple) in the chart below is a sign of something unusual. I am plotting the before and after of the last 5 bull cycles. The last 4 out of 5 bull cycles have seen the Equal Weighted Index outperform the Market Cap Index. A simple way one could trade this idea would be to go long the equal weight index and short the market cap index.

The chart below of the US 10-year Treasury yield is full of information. The 50-day moving average has crossed the 200-day moving average, broken through an upward trend line, and dipped below 4% almost all on the same day. Yesterday, the Bank of England cut interest rates, and it looks like the US will commence its first cut in September. If I put aside my inflation fears, the chart certainly looks like we will see further drops in yield, which is 10-year bond strength.

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