Reflections of a Macro Equity PM – Don’t short this Market

These are just my views. I can totally be wrong, but what I will try to do is lay out my market psychology and if it can help anyone else put the pieces together then I'll be delighted.

Stocks move higher or lower based on 1 thing. Supply and Demand. If there is more selling pressure for a stock on any given day, it will go down. The market does not care how low the Forward PE or how incredible the guidance was. To put this into context, the best traders I have met at discretionary macro equity hedge funds primarily build models as a way to understand their stocks and the factors that drive them. The models can be simple, or they can be complicated. (In my experience the simpler models tended to have better track records than fancy ones). Of course we are humans and we override the models all the time. When earnings release, the models get updated and orders get sent once the boxes are checked off. Let's say a stock is trading at 100 and the estimate is for 2$s in EPS guidance and has already been revised up from 1.5 The number comes in at 3.5. Unfortunately most analysts across the street already had numbers as high as 4 penciled into their model. Thats what allowed them to convince their PM to run an oversized position for the last 6 months. The incentive was that by the end of the year a larger dollar amount of PNL would translate into a higher bonus. The Excel file now says 95. What was initially a 5% pop in the first few minutes turns into a 10% dump from the highs.

There is something profound about price. When price moves higher despite negative headlines and what is obviously bad news, I always stop and ask myself, why am I not long. Is there some bias thats anchoring me in a way that I'm seeing. Is it some common take in the media thats being repeated over and over again to the point where you don't even realize it's influencing your views? The best traders I've met are incredible at dissecting these biases and recognizing what drives their own sentiment.

Secondly, All time highs are NOT bearish. How else does a stock go from 150 to 250? its not getting there by being in a 10% correction the whole way! If you want to short something, please do not try to short the stuff that made all time highs before the indexes did. Back to my first point, the demand for that stock relative to supply outpaced the average stock in the index for a reason.

Try to take a step back and remember what past bull cycles felt like. If this is your first, then this post is likely not for you. I hope you bookmark it and come back in a few years. But if you remember what trading coming out of Covid was like, that is the best proxy to dig into. Every Sunday evening, some piece of bad news would have us gapping lower only to reverse higher and maybe even end up green. Sound familiar? Every time theres some 'escalation', the market shrugs it off and rallies back to highs. Part of this is because everyone already has one foot out the door. It's just math. The same supply pushing the market lower then has to come back in as demand and push the stock even higher than it was before. All because there was a quiet bid in the background coming from some factor other than the geopolitical one.

Lastly, figure out the dominant fundamental factor aka the DFF. Theres always a bull case and a bear case, but the only one that matters is the one that lines up with the DFF. To me the DFF is currently AI. This might sound counter intuitive, but I think the market would be lower right now if Iran did not happen. The Iran war provided a much needed reset to market sentiment. Markets are like Rubber Bands. It's been stretched lower and the snap back is more violent the more it gets stretched.

Look for the stocks that are giving clues. Theres a group of stocks that isnt much of a secret at this point, that barely got hit in march. Those same ones were the first stocks to make new highs and continue to make new highs after the fact. These are the same stocks that will blow out earnings, and continue to surprise to the upside. Figure out the ones that have a story. Understand that story and then line it up with the chart. If the stock is making new highs while everything else is down.. you have a winner. It happens every single cycle .. over and over. Ive seen it so many times now.

Good things happen in this world. It is in everyone's incentive that the good outcomes are the ones that play out. It may feel like theres forces in this world that want bad things to happen, but that never happens to be the case.

Be ware of posts "famous economist predicts 30% downturn..". For starters, these guys are usually wrong and just upset they missed out on some rally from 10 years ago. A broken clock is right twice a day. The more you see these type of headlines, and the more attention they get, the easier it is recognize the bias. The media's job is to entertain you and get clicks. They do it with fear.