Big Water, Small Hose

What to do when you're itching to short "overbought" stocks, and where the markets are headed into the end of the year.

I still have PTSD from January 2021.

Gamestop was having its moment. Not only shorts were getting blown out, but the entire liquidity structure of the market got weird. The entire plumbing of the stock market was stress tested by a bunch of bored apes with stimmy checks.

I started noticing squeezes forming in an entire ecosystem of stocks. Market makers were stuck on a lot of positions. I created a scanner that picked out names that were seeing aggressive weekly call option flow.

I started buying max strike weeklies on everything.

Most people remember GME and AMC.

I remember making bank on Kroger (KR) and National Beverage Corp (FIZZ):

I’ve been chasing that high… and we haven’t seen a market environment like this since.

This past week there were hints of 2021. I’m not exactly sure what happened, but it feels like there was a heavy offer that lifted on entire baskets of stocks.

Quantum names blasted off higher, like IONQ:

Self-driving names like PONY started to stampede:

And China internet stocks like BIDU are having their AI moment:

And don’t get me started on the quantum trade.

Here at ConvexSpaces, we’ve been riding these names… most are multi-baggers at this point.

Given the price action it can be tempting to call a top. Maybe the Fed cut (and guidance) caused some kind of a squeeze that’s bound to unwind in the upcoming week, and it turns out to be a cyclical top.

Or we just continue to rip.

At this point, it’s unknowable! It’s sheer hubris to say “this is it.” Maybe if price action starts to fail you can make that case. But we aren’t there yet.

This is why they call it “the hard right edge.” It’s easy to see charts in hindsight and how obvious the top was… but let’s look at an example in OKLO:

It could be another 50 points before the stock finally rolls. And the short will be juicy and could make some months (or years) for some traders… but for most people I’d advise against it.

Allow me to explain.

Discover The Risk You’re Not Managing

Have you ever been stuck in a trade gone bad? Maybe you tried to take a trade in UNH that turned into an investment. Or perhaps you’ve tried to nail the next breakout in NVDA that never happened.

For me, it’s usually when I get caught in a bad option position. I have to roll, hedge deltas, and eventually trade out of the position.

Can I end up turning a profit? Sure. But in the meantime, about 20 stocks had breakouts and ran 100% without me.

There’s three kinds of capital you have to work with in the markets.

The first is financial capital. That’s obvious.

The second is psychological capital. If you manage a bad trade, you end up depleting this account and you miss out on the best trades in the market.

The third is mimetic capital, or focus. If you’re “dialed in” on trying to nail the top on some parabolic stock for two weeks, then you’re neglecting the rest of the names on your watchlist.

You can skyrocket your edge if you learn how to manage the risk to your psychological and mimetic accounts.

I’m telling you this right now because for the rest of the year, your mental capital is at risk.

Shorting the frontside parabolic on APP may reward you with some profits, but it’s going to be a tough trade!

Next Up For CS Clients

I’ll share with Clients a game plan if you do want to look for some fades in this market… but at this point I’d view them more as a way to sleep at night so I can keep playing momentum stocks.

And we’ve got those, too. The FutureTech space has been scorching hot with breakouts. We’ve played AI proxies, power, quantum, autonomous vehicles, and now there’s another space that looks ready for an end of year run.

Not a Client yet? You can get started today.