I was considering doing a more comprehensive year in review, but the beauty of my monthly retrospectives is I’ve effectively already done that. My “year in review” would merely be a re-hash of the tales I’ve already laid bare on a monthly basis anyway. The key lessons have been chronicled, my highs and lows spelled out. If you’re a newcomer and missed any one of the eleven look-backs, you’ll find links to them below. Today’s piece is the closing chapter, the final hurrah for a profitable 2017.
Those that have been following along will remember I found myself ending November in the midst of a rut. We’re talking a three-month malaise where mother market was acting mean-like and profits were elusive. Well, I’m happy to report I spent the bulk of December filling that dastardly trench with greenbacks and ended the month well in the green. In fact, December was my third best month of the year.
Redemption and resurrection are my twin themes. While the former describes my trading performance, the latter points toward a few industries ramming into year-end. One of my favorite writers is Morgan Housel. Years ago when I was crafting a presentation on passive investing, I came across an interesting article of his titled “The Most Inevitable Headline of All Time.” Within he references a Wall Street Journal article titled, Market Rewarded Those Who Stuck it Out and goes on to discuss how that particular headline is inevitable. I feel the same could be said about any good trading system. They are designed to reward those who stick with it, who keep fighting during adverse conditions, who are unwilling to give up when the chips are down and losing streaks keep streaking.
So, yeah, December was a redemption month for me, but it would have been a redemption month for anyone in my shoes. Really, I had nothing to do with it. I simply kept executing my systems, following my rules, and the market finally played ball. If your system is sound, every losing streak eventually gives way to a winning streak. It is, dare I say it, inevitable.
As for resurrection, well, take a gander at retail (XRT) and the metals & mining space (XME). Both scoured rousing rallies throughout December and are now in excellent uptrends. Keep an eye on them moving forward.
What I Did Wrong
As my month end P/L will attest, I sidestep any major blunders. But, that doesn’t mean I didn’t have any losing trades. One of the worst was Netflix. Heading into the close of November, NFLX formed a classic triangle breakout pattern. In anticipation of its resolution higher I entered a January $210/$230 bull call spread for $3.17 on November 27th. One day later, I looked like a handsome genius when a perfect breakout candle formed. Then, on Nov 29th a hold-me-mommy bearish candle struck with heavy volume. I had the chance to bail at a small loss but elected to let it ride due to the hefty amount of time remaining to expiration.
I always tell students that’s the dumbest reason ever to hold onto a trade. It turns out; I’m a dummy. I should have exited when the chart pattern that served as my reason for entering failed. Since then NFLX has floundered and time decay has continued to chip away at my call spread value. Only a Hail Mary will save me at this point, what with the call spread a substantial 20% OTM now. The only saving grace (and this should always be the saving grace) is that my position size was appropriate and I’m losing well under 1% of my portfolio size. But, whatever, unnecessary losses are stupid no matter the size.
What I Did Right
I echo my earlier monthly theme. By exhibiting sticktoitiveness, I ultimately prevailed. What made this doable was sizing appropriately. Bouncing back from a three-month losing streak that takes your account down 30% is challenging. But recovering from a three-month slide that takes your account down a mere 5%, well, that’s not so bad!
Trade of the Month
Emerging markets ended up being the gift that kept on giving this year. I used the late-November pullback to sell naked puts. Here’s how. On Nov 28th after a small retreat EEM started to pop again, and I was looking to sell some January puts (I had previously taken profits on my December position). Not wanting to miss a decent entry if the fund started to run again, I sold a half-size of Jan $45 puts for 49 cents. It turns out I was early, and EEM took a nosedive over the next few days. This is where my scaling in came in handy. Because I started with a half-size, I could sell the rest of the puts at a far better price. On Nov 30th when we finally reached the 50-day moving average I sold my second half. But since EEM had fallen so far I elected to sell the Jan 44 puts for 53 cents.
Fast forward to today. The dip in EEM was eventually bought (shocker!) and the puts promptly fell in value to 10 cents allowing me to take profits. This particular trade illustrates the power of trading with the trend, scaling-in, and taking partial profits.
Check out the entire 2017 retrospective series:
- The January that was
- The February that was
- The March that was
- The April that was
- The May that was
- The June that was
- The July that was
- The August that was
- The September that was
- The October that was
- The November that was
- The December that was
Financial freedom is a journey
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